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Endless QE $6 Trillion and Counting
Many more years of money printing from the world’s big four central banks now look destined to add to the $6 trillion already created since 2008 and may transform the relationship between the once fiercely-independent banks and governments.
As rich economies sink deeper into a slough of debt after yet another wave of euro financial and banking stress and U.S. hiring hesitancy, everyone is looking back to the U.S. Federal Reserve, European Central Bank, Bank of England, and Bank of Japan to stabilize the situation once more.
What’s for sure is that quantitative easing, whereby the “Big Four” central banks have for four years effectively created new money by expanding their balance sheets and buying mostly government bonds from their banks, is back on the agenda for all their upcoming policy meetings.
Government credit cards are all but maxed out and commercial banks’ persistent instability, existential fears, and reluctance to lend mean the explosion of newly minted cash has yet to spark the broad money supply growth needed to generate more goods and services.
In other words, electronic money creation to date — whether directly through bond buying in the United States or Britain or in a more oblique form of cheap long-term lending by the ECB — is not even replacing what commercial banks are removing by shoring up their own balance sheets and winding down loan books.
Global investors appear convinced that more QE is in the pipe.
“It is almost as if investors are saying QE will happen no matter what,” said Bank of America Merrill Lynch’s Gary Baker.
BoA Merrill’s latest monthly survey of 260 fund managers showed nearly three in four expect the ECB to proceed with another liquidity operation by October. Almost half expected the Fed to return to the pumps over the same period.
The BoJ has already upped asset purchases yet again this year and Bank of England policy dove Adam Posen said on Monday the bank should not only buy more government bonds but target small business loans too.
But aside from investor hopes of a market-based call and response, is there any evidence that QE actually helps the underlying problem and what are the risks from all this?
The “counterfactual,” to use an economics wonk’s term, is the most powerful argument in QE’s favor — what would have happened if they didn’t print at all and broad money supply collapsed?
But after four years in which, according to HSBC, the balance sheets of the Big Four have collectively more than tripled to $9 trillion and still not generated self-sustaining recoveries, the question is how long this can keep going on without creating bigger problems for the future.
For a start, there is no quick solution to the problem of mountainous indebtedness.
Recapitalizing banks; stabilizing housing and mortgage markets responsible for deteriorating loan quality; further deep integration of euro fiscal links to support the shared currency; and capping government debt piles in the United States, Japan, and Britain will — even for optimists — take many years.
On top of that the rich economies face gale force headwinds over the next decade from aging and retiring populations.
In the interim, the job of central banks looks increasingly like a blended mix of monetary policy and sovereign debt management. And that’s on top of recently acquired roles as guardians of financial and banking system stability.
The concern is that monetary authorities are increasingly acting as government agents responsible as much for stabilizing bond markets and keeping banks clean as for fighting inflation.
The question is not whether central banks can withdraw this money again once broad money growth gains traction — most think that’s mechanically easy — it’s whether they will be able to resist pressure to carry on underwriting government deficits.
A series of papers prepared for a Bank for International Settlements workshop in May certainly saw the problem.
“Whatever view is taken of this, the boundary between monetary policy and government debt management has become increasingly blurred. Policy interactions have changed in ways that are difficult to understand,” the BIS overview concluded.
The papers also made clear that this form of monetary policy has plenty of precedents throughout the earlier part of the 20th century during the gold standard. It’s only since the 1980s and 1990s that consensus shifted squarely behind the idea of highly independent central banks pursuing narrow price stability and even strict inflation targets.
And given the level of credit chaos that ultimately emanated from the so-called Great Moderation, it’s possible that history will see that system as the aberration rather than norm.
HSBC economists Karen Ward and Simon Wells reckon central bank independence is the biggest impact from ever-more QE and fear that, as in Japan, the price will be paid by persistently high if sustainable government deficits that stifle growth.
“The heyday of independent central banking could be drawing to a close,” they wrote in a wide-ranging report on QE.
Hedge fund manager Stephen Jen said he thinks the temporary benefits of QE are outweighed by long-term costs such as removing pressure for fiscal reform and market volatility. “At some point,” Jen said, “the benefit-cost balance flips.”
Then again, not everyone bemoans the greater responsiveness of central banks to the will of elected governments.
“The source of central bank independence is public support from elected officials that the central bank is pursuing desirable social goals,” BoE’s Posen said Monday.