Quantitative easing (QE) is becoming a firm feature in my life. Not only is it dominating headlines, I am embarking on some easing of my own. With Baby Two due in a couple of months, I find easing the quantity of elastic in my waistband a necessary policy tool. However, in contrast to central banks around the world, my easing is brought on by a staggering rate of growth, not just in my girth, but also in terms of the money I am pumping into the domestic economy (especially the cake shop).
Yet, despite the pick-up in investor sentiment, the latest round of effectively unlimited quantitative easing by the Fed and ECB bodes ill for UK institutions on two fronts. Firstly, the Bank of England will feel pressure to ease further come November to weaken sterling, which is already edging up against other major currencies. That would be unhelpful for the economy as further manipulation adds to the uncertainty preventing companies increasing employment, but would also prove negative for institutional investors’ funding status. But the real problem QE creates is in generating a short-term sugar rush for asset prices. When it becomes fully clear that central banks alone cannot solve the global economic problems, QE will not only grind to a halt, investors will suffer badly. Experience has shown that QE does not generate economic growth, but instead pushes asset prices higher than they should be, ensuring future returns will be depressed as markets recalibrate downwards.
So while things may look rosy in the short-term, the full scale of the problem is likely to come to the fore in 2013, when the effects of QE (or lack of them) become clear, central banks have nothing left in their arsenal and politicians are forced to push through unpopular structural change. At that point, investors must surely realise significant losses are imminent and the longed-for secular growth trend is not only over, it is unlikely to return any time soon. I can at least say with absolute confidence that my family’s secular growth trend is now only weeks from ending. Given this robs my husband of the chance of a son, he may take this news as somewhat of a hard landing. At least he can rest reasonably well-assured that another secular growth trend will arise in around 30 years’ time, which will no doubt result in us pumping more money into the system, pushing us further into deficit.
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