Time up for QE

No one really understands it and because of this opinions are all the more divided and intransigent. Despite this incoherence the market has understood enough to know that it drives asset prices and confidence in future prices.  It is QE – quantitative easing.

Ben Bernanke - the Godfather of QE

QE is where Central Banks print themselves some money to buy bonds and other instruments from the banks, the idea is that this puts cash / liquidity into the economy increasing the money supply and making credit more freely available.  Under “normal” conditions of growth (+2-3% annually)and inflation (around 2% annually) equilibrium this would drive up aggregate demand (growth)  and inflation as the banks push this extra liquidity out into the market in the form of loans.

Emerging market emergency?

The mere thought of the US Federal Reserve tapering their asset purchase programme (QE) in May last year put the world into a spin.  As sellers sold out their positions, currencies were devalued and Central Banks had to step in with higher interest rates.  Nine months on and the Fed has begun to taper by $10 billion a month and the impact on emerging markets is ratcheting-up.  This time last year the Fed started buying $85bn of asset purchases a month they and least we forget they are still pouring $65 billion a month into the world economy?  On the face of it this is a small reduction, $20bn a month after $2tn or more of asset purchases in four years, but it is having a material effect in emerging markets and may well come home to haunt us in the West .

The QE 1 - just a good excuse to remember this grand ship

Where have all the bubbles gone

The UK economy may be in the midst of a stellar year in which growth has returned, most unexpectedly, but there are special circumstances that have benefited us.  Elsewhere in the developed world, we face a persistent economic stagnation. Across the developed world employment rates are low, wages and disposable income are depressed; real interest are still negative; government debt is staggeringly high and rising; companies and individuals prefer to hoard cash than invest and to cap it all it looks like deflation is now stalking the planet. 

Despite extraordinary efforts by the world’s central bankers in the aftermath of the Lehman’s default, which has included the massive increase of liquidity (QE) and negative real interest rates, five years on the outlook is pretty poor.  Larry Summers re-coined the term secular stagnation to characterise the economic landscape and went on to float the idea that the west has grown on the back of asset bubbles for the last 20 years (Property, DotCom, Emerging markets, Sub-prime, etc) and that any return to pre-2008 levels of growth will demand some new bubble to help us along.  Larry Summers suggests the level of real interest rates required to generate full employment might be, say, -2 or -3 per cent.  More practically bankers in both the Fed and the ECB are now contemplating negative interest rates on short term money they hold over-night as a way of stimulating demand.  

Where have all the bubbles gone

Starman Waiting in the Sky

Britain’s star man central banker, Mark Carney, has hardly blown our minds, getting off to a pretty slow start.

Apologies to David Bowie

Since he arrived in July the economy has continued to recover and all the attention has been on Ben Bernanke at the Fed - and the talk of tapering QE in the US.  In his first few months he has taken the first tentative steps – issuing some forward guidance, taking on the funding for lending scheme and the Help to Buy scheme.  But today for the first time Mr Carney stepped out from the shaddows.  The occasion was a 125th birthday party for the Financial Times, so Mr Carney was able to talk to a well-informed audience rather than having to sound bite for the benefit of the BBC’s simple minded economics experts.  The back drop to his speech is that the UK is the best performing economy in the G7 with annual growth of about 2% and rising, relatively low unemployment and no prospect of a deflationary bust - that is still a possibility in Europe, Japan or even in the US.

Janet Yellen - she's a pussycat

In the UK there has been a major row about the politics of the leader of the opposition’s father and the fact that he was a communist.  Clearly the background of important politicians and officials is in the public interest, whether they like it or not.  In the US, Obama has nominated Janet Yellen to be Chairman of the Federal Reserve and whilst she is not a communist for some Republicans that fact that she is a self-confessed Keynesian is even worse than being a Marxist!  And as Gavyn Davies says “A 67-year old leopard is unlikely to change its spots”.

Janet Yellen - she's a pussycat

The Rate Debate Gets Interesting

Five years ago today Lehman Brothers the Wall Street Investment Bank went bust and for a few days the world held its breath to see what other banking titans might fall.  In the nick of time a new breed of super-hero was to step into the breach and save the day; central bankers arrived at the scene of the crash their pockets bulging with credit and cash for bail-outs and thank God they did.

Since the emergence of this new class of super-hero we have all be enthralled to the charms of negative real interest rates, quantitative easing and other creative policies for easing the money supply.  A new arrival on planet earth might be forgiven for thinking that messrs Carney, Bernanke and Kuroda actually are the people who rule the world and in fact they probably do!

Bernanke Vernacular

Ben Bernanke the Chairman of the Federal Reserve Bank has been on quite a journey since 2007, having saved the world after the Lehman's default he has nursed the US economy back to health quicker than anyone would have dared to hope.  The soon to be retiring Chairman of the Fed  warned us this week that over the next year he would start tapering off the amount of money the Fed pours into quantitative easing, which is currently running at $85bn a month.  This effectively signals the end of ‘near zero’ interest rates in the US and around the world.