"The biggest monetary policy experiment in the history of the planet": The end of QE
The coming year will see the beginning of the end of “the biggest monetary policy experiment in the history of the planet,” as Richard Lambert, a former member of the Bank of England’s Monetary Policy Committee has called it. Quantitative easing (QE), the injection of money into the economy by central banks in the US, UK and the rest of Europe, was an attempt to stimulate activity when it was impossible to cut interest rates any further.
The sums deployed are remarkable: £375bn by the Bank of England, and $85bn a month by the US’s Federal Reserve Bank, which has run a series of QE programmes since 2008. The total now stands at over $3 trillion. But what happens when it stops?
The Federal Reserve warned in the spring that it was preparing to reduce (or, as its Chairman Ben Bernanke put it, “taper”) its stimulus. Global alarm followed. Pier Carlo Padoan, Chief Economist at the OECD (which represents developed economies) says, “Market reactions in May at the announcement that the Fed might consider tapering were extremely violent and unexpected.” He warns that tapering, “when it comes, will require extreme caution.”
According to George Magnus, senior independent advisor at UBS, “there [will be] a low risk of a re-run of the systemic crisis of 2008-09.” It will cause interest rates to rise and this “will weaken housing and other interest rate sensitive parts of the economy.” The value of European government debt will fall, he says, “putting pressure on banks, especially in countries bordering the Mediterranean, where the ratio of government debt holdings to capital is very high.”
Not everyone agrees. Barry Eichengreen, professor of economics and political science at University of California Berkeley, says that “if the Fed waits to taper until the US economy shows signs of greater strength, then that greater strength should offset any adverse impact of higher interest rates on the rest of the world.” Nick Carn, of Carn Macro Advisors, also doubts that another crisis is in the offing. “For the US and the UK the short answer is no,” says Carn. “The previous [crisis] is too fresh in everyone’s minds and their central banks are still on red alert.”
He does worry, however, that emerging economies such as China and Russia would come under strain, a view shared by Padoan, who says that “emerging markets in particular may witness further slowdowns as capital flows out.” Lambert identifies “the fragile five”: “India, Indonesia, Turkey, Brazil and South Africa.” All of these “have big current account deficits and could be badly affected by a reversal in capital flows.”
QE was an experiment extraordinary for its scale and global effects. As Andrew Balls, head of European portfolio management at PIMCO, says: “Given the huge size of the interventions and the impact on financial markets and corporate behaviour there is no guarantee that the process of unwinding will be a smooth one.”
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The coming year will see the beginning of the end of “the biggest monetary policy experiment in the history of the planet,” as Richard Lambert, a former member of the Bank of England’s Monetary Policy Committee has called it. Quantitative easing (QE), the injection of money into the economy by central banks in the US, UK and the rest of Europe, was an attempt to stimulate activity when it was impossible to cut interest rates any further.
The sums deployed are remarkable: £375bn by the Bank of England, and $85bn a month by the US’s Federal Reserve Bank, which has run a series of QE programmes since 2008. The total now stands at over $3 trillion. But what happens when it stops?
The Federal Reserve warned in the spring that it was preparing to reduce (or, as its Chairman Ben Bernanke put it, “taper”) its stimulus. Global alarm followed. Pier Carlo Padoan, Chief Economist at the OECD (which represents developed economies) says, “Market reactions in May at the announcement that the Fed might consider tapering were extremely violent and unexpected.” He warns that tapering, “when it comes, will require extreme caution.”
According to George Magnus, senior independent advisor at UBS, “there [will be] a low risk of a re-run of the systemic crisis of 2008-09.” It will cause interest rates to rise and this “will weaken housing and other interest rate sensitive parts of the economy.” The value of European government debt will fall, he says, “putting pressure on banks, especially in countries bordering the Mediterranean, where the ratio of government debt holdings to capital is very high.”
Not everyone agrees. Barry Eichengreen, professor of economics and political science at University of California Berkeley, says that “if the Fed waits to taper until the US economy shows signs of greater strength, then that greater strength should offset any adverse impact of higher interest rates on the rest of the world.” Nick Carn, of Carn Macro Advisors, also doubts that another crisis is in the offing. “For the US and the UK the short answer is no,” says Carn. “The previous [crisis] is too fresh in everyone’s minds and their central banks are still on red alert.”
He does worry, however, that emerging economies such as China and Russia would come under strain, a view shared by Padoan, who says that “emerging markets in particular may witness further slowdowns as capital flows out.” Lambert identifies “the fragile five”: “India, Indonesia, Turkey, Brazil and South Africa.” All of these “have big current account deficits and could be badly affected by a reversal in capital flows.”
QE was an experiment extraordinary for its scale and global effects. As Andrew Balls, head of European portfolio management at PIMCO, says: “Given the huge size of the interventions and the impact on financial markets and corporate behaviour there is no guarantee that the process of unwinding will be a smooth one.”
Read more big ideas;
Rejectionist politicsThe politics of resentment will be a powerful, destabilising force in 2014
Secular stagnation The global economy might have been in trouble long before 2008
The new cold war US negotiations are stirring up tensions between two clusters of allies
Coalitions of the willing As more countries wield more power, bilateral deals and pacts between allies will become the norm
Growth leaves wages behind It's not the size of the economy that counts, it's what you do with it
Boom Cities Cities, rather than nation states, are proving increasingly adept at meeting the challenges of the 21st century
Personalised Medicine Genetic testing will make treating illnesses cheaper and more efficient
Cloud Scepticism Public concern about government surveillance will make users and regulators wary of remote data storage
The new news Online media brands have changed the way we consume and produce journalism, and that's no bad thing
Peer to peer living Disruptive marketplaces like Airbnb are shifting power away from hierarchies and towards networks of individuals
Pop up everything Temporary venues have altered urban lifestyles forever
