I have a question for you, dear reader.
It is a question that I’ve been pondering for weeks now. One that seems to be at heart of the market insanity recently. Or at least, the perceived insanity.
See, all around the world, economies are taking a beating. By now you’re likely well aware of this. After all, you’re living through this pandemic just like everyone else.
What most people are far less aware of though, is the response this pandemic elicited. Particularly within the financial sector.
Central bankers have swooped in to save the day. Deploying quantitative easing strategies that are simply staggering.
If you’re unaware, quantitative easing or QE is a way for central banks to pump money into an economy. They buy assets (good or bad) from institutions in order to keep liquidity going. Greasing the wheels, to keep the economic machine working as it were.
That’s a very simplified overview, but it should give you the gist. Effectively, it’s a way for the central bank to ‘influence’ the economy that doesn’t rely on moving interest rates.
And when it comes to the amount of QE, well the figures just keep getting bigger.
On Thursday we saw the European Central Bank (ECB) announce a fresh round of stimulus. Their ‘emergency purchase programme’, which is just QE without calling it QE, will get a €600 billion top up. Bringing the programme’s total to €1.35 trillion so far.
Furthermore, this cash splash won’t stop until the crisis is over. As Christine Lagarde noted in her press conference:
‘We continue to expect monthly net asset purchases under the APP [asset purchase program] to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates.’
In other words, until they decide to lift interest rates, the QE will continue. And Lagarde added that rates will only be lifted when inflation gets closer to their target of 2%. You can watch her admit as much in her speech.
Which brings me to my question: Is QE actually inflationary?
Now I don’t expect you to actually answer this question. Though if you want to have a crack, be my guest.
No, what I really want you to do is just mull it over.
Because logically and historically most people’s immediate answer would probably be yes. Pumping all this money, made from thin air might I add, into banks and other institutions sounds like inflation.
Hell, back when the US started using QE back in 2008 people expected hyperinflation. That is, that all this excess money would feed into higher prices for everyday goods.
Except, that never happened.
Inflation in the US, following QE, didn’t really take off all that much. In fact, the average monthly rate for 2009 was -0.4%.
The highest US inflation ever got was 3.9% during September 2011. A year that achieved higher than usual inflation, but nowhere near ‘hyperinflation’.
Whether or not QE was totally responsible though, is impossible to confirm. I imagine it would have played some part, but it wasn’t the only factor.
The price of oil, for example, was at its highest ever during 2011. Averaging US$111.26 per barrel for the entire year, the only time it has exceeded the US$100 benchmark in history.
My point is, QE hasn’t really proven to be all that inflationary.
You just have to look at Japan for clear proof of that. They’ve struggled to lift inflation for decades. Despite the fact (or perhaps because) they were the first to implement QE.
Even the man who coined the term QE, Richard Werner, knows it doesn’t lead to inflation. All it does is shift some numbers around on balance sheets. It doesn’t actually ‘create money’ according to him.
This is because QE as we know it isn’t the QE that Werner apparently had in mind.
Originally, the idea behind QE was to incentivise credit creation. Werner believed that by having a government borrow from banks instead of issuing bonds, it would lead to more lending. Giving banks more money, to give to people, to spend on goods.
Instead, what we got is the asset purchasing nightmare we now know today…
Werner knew and has known that the bastardisation of his original plan was never going to work. He commented as much back in 2015:
‘What asset purchases do, however, is increase financial speculation, inflate asset prices and boost profits for the financial elite, thus exacerbating inequality. So of course they are a favourite policy of central banks.
‘As I feared, the ECB has stuck to the pre-ordained script previously worked out in Japan. The ECB did so, because it was not modelled on the accountable and highly successful Bundesbank, as has been claimed, but instead is more like a revived Reichsbank, the world’s least accountable, most independent and powerful – as well as the most disastrous central bank.’
As of this week, that very same ECB has now doubled down, again.
The only thing that is likely to be inflated is assets, not goods. Something that without any change or oversight will mean keeping both interest rates and inflation low.
It’s a puzzling and frustrating scenario. One that only serves to distort markets even more than they already are.
Worse still, it’s not just a Europe problem. Jerome Powell has helped put Wall Street into overdrive as well. Using the same asset buying strategy that only serves to help stock markets.
Hell, even the RBA is in on the game now as well. This pandemic was the perfect opportunity for them to give QE a whirl. And while their policies look like a drop in the ocean compared to others, who knows what the future may bring.
If recent years have shown us anything, it is that weaning an economy off of QE is not easy.
So, what are everyday people like you and I to do about it?
Well, I wish I had a good answer for you. Sadly though, I don’t think there is a good answer.
The only thing we can really do is play along. Investing in assets like stocks in the hopes of making a buck or two for ourselves. Going along for the ride in this wild asset inflation bonanza.
Where, when, or how it will end though, remains to be seen.
I think we should all be concerned about that. Because no one, not even the central bankers, know how bad the hangover from this party could be.
At that point, inflation may be the least of our worries.
Editor, Money Weekend
Ryan is also the Analyst of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.