Thursday, October 27, 2016

William Hague on 'quantitative easing'

  1. Savers find it impossible to earn a worthwhile return, which drives them into riskier assets, thus causing the price of houses and shares to be inflated ever higher.
  2. Higher asset prices make people who own them much richer while leaving out many others, seriously exacerbating social and political divides and fueling the anger behind “populist” campaigns.
  3. Pension funds have poor returns and therefore suffer huge deficits, causing businesses to have to put more money into them rather than use it for expansion.
  4. Banks find it harder to run a viable business, contributing to the banking crisis now visibly widespread in Italy and Germany, in particular.
  5. Those people who are able to save more do so because they need a bigger pot of savings to get an equivalent return, so low interest rates cause those people to spend less, not more.
  6. Companies have an incentive to use borrowed money to buy back shares – which they are doing on a big scale – rather than spend the money on new and productive investments.
  7. Central banks are starting to buy up corporate bonds, not just government bonds, to keep the system inflated – so they are acquiring risky assets themselves and giving preference to some companies over others.
  8. “Zombie companies,” which can only stay in business because they can borrow so cheaply, are kept going even though they would not normally be successful – dragging down long-term productivity.
  9. Pumping up the prices of stock markets and houses without an underlying improvement in economic performance becomes ever more difficult to unwind and ultimately threatens an almighty crash whenever it does come to an end – wiping out business and home buyers who got used to ultra-low rates for too long.
  10. People are not stupid; when they see emergency measures going on for nearly a decade, it undermines their confidence in authorities who they think have lost the plot.

From the delightful pen of Bill Bonner