The world’s central banks – with the Fed, the Bank of
England, the ECB and the Japanese to the fore – have been throwing a party for some
of us for the last few years. It may not always have seemed like it, but look
at the facts. After the world’s economies exploded in a mess of debt in 2008,
we saw stock indices and asset prices take a tumble. Policy makers could have
taken various roads to try and rebuild confidence and economic security, and
indeed they did mix and match. If you were Greece, not a large or strong
economy, you found yourself with an imposed technocratic (for which read ‘part
of the complacent euro-bureaucracy’) government, a currency straitjacket,
soaring unemployment and an increasing migration of the young and smart. Iceland? Well,
there you found bankrupt institutions allowed to fail, some of those guilty
gaoled and a massive depreciation; by now, though, a stabilised economy with
the potential to grow.
Propping up Failed Institutions
But if you were one of the privileged, it wasn’t quite the
same. Those governments - or strictly, their “independent” Central Banks –
chose a different route. They decided that the best policy to follow was
Quantitative Easing, or the same thing under another confusing name, which
would allow them to prop up failed institutions by the simple mechanism of
creating ever more money to keep them alive. At the same time, of course, they
injected large amounts of taxpayer funds directly into the same institutions to
bolster balance sheets ravaged by years of profligacy. Up to a point, it’s
worked. True, Lehmann Brothers folded, as did Northern Rock in the UK, but the
major banks were all saved (apologies to Lehmann: great name, big market
presence but not quite in the Goldman Sachs/Morgan Stanley league and therefore
not protected). Now, clearly, it would have been extremely difficult not to
support such institutions, and I fully acknowledge that the Central Banks had
to act quickly and decisively; the debate here is not whether or not QE was
necessary – that’s now a discussion for historians and theoretical economists.
What is relevant now outside academia are the effects of the policy.
Asset Price Party
And that’s why I say we’ve all been treated to a party. Since
the crisis, and I would argue principally stimulated by QE, asset prices have
been on a roll. The Dow hit new all-time highs, the FTSE not quite, but
nevertheless surged, the Nikkei near enough doubled; hard assets as well have
performed strongly (one exception of course being aluminium, but that’s a story
all of its own), which is not only due to recovering economic growth.
Politicians may talk about austerity, but it is in many ways just talk; I’ve
yet to see figures from any of the major economies showing substantial sums of
government spending cuts. Those of us who are in the fortunate position of
being employed and/or being investors have been enjoying that increase in asset
prices. A while ago I was speaking to a (pretty well-heeled) friend of mine and
asked him if he had suffered from the economic crisis. Did he take less
holidays, go to restaurants less? Had he had to sell one of his cars? No, was
his answer, but he had had to cancel his NetJets subscription; austerity,
twenty-first century style.
Price versus Value
But that’s just part of the story; the privileged part, if
you like. Outside that, there is genuine difficulty. Those without access to
those appreciating asset values have been suffering. The UK is fortunate in that employment has held up
well, but that is not the case everywhere – look at France
or Spain,
for example. But that difference in outcomes is part of the pernicious effect
of QE. It polarises the difference between prices and values. Those with access
to the increasing asset prices – broadly speaking, that means people with
investments or property, for example – have up to now been cushioned from the
effects of the bubble prior to 2008. Values, actually, have not really changed;
the increase in price has been a direct consequence of the way QE devalues
money. If you don’t hold hard assets, all you experience is the pain of
reducing purchasing power. QE has a lot to answer for here, because of where
the newly-created money went.
Preparing to Bite
It potentially gets worse though; as QE is unwound, and
let’s remember the Fed’s tapering has now begun, without new money to support
them, the prices of assets – hard or financial – will almost inevitably drop.
Look at the action on the major equity markets since tapering began. Some will
say: “Good, let the richer elements of
society suffer as well.” Well, personally, I’d rather try and lift the bottom
rather than force down the top, but that’s for another debate. The problem for
policy makers is that after a good party, normally those who enjoyed it the
most have the worst hangover. QE has always threatened to turn round and bite
us; perhaps now it’s just sharpening its teeth in readiness.