The West looks East

Certainly, it does seem that many people now recognise or ‘know’ that current economic policy regimes are neither sustainable nor likely to create the types of economic recoveries that people would like; it certainly seems that more people are prepared to acknowledge that all is not well within the current global system. For example, a year ago, it was borderline heretical and certainly unpopular to suggest that negative rates would hurt banks and drive up household savings rates but today these points are readily accepted.

People are increasingly coming to understand that the effectiveness or otherwise of any country’s quantitative easing (QE) depends on the structural nature of the economy concerned and we suspect that over time people will also come to accept that QE only stands any chance of working if it is accompanied by large fiscal deficits or if the population is already ‘overweight’ risk assets and therefore in a position in which it can realise holding gains during any QE-inspired asset price bubble.

Rising equity prices have provided a benefit to that particular subset of the US population that was already overweight equities, and therefore could ‘afford’ to realise its profits, but for the majority of the world that does not own excess equity holdings that can be sold, all that this particular aspect of QE has done is to make it more expensive to save at a time in which, for demographic and other reasons, many simply must save more.

Perhaps the best thing that we have seen in the press over recent days was Ed Chancellor’s Breaking Views commentary, in which he noted that when he first suggested the use of zero coupon perpetual bonds as policy option for governments on the 1st April 2006 in a WSJ article, it was meant only as an April Fools’ joke but a decade later such a policy is being touted as a ‘serious option’ (Breaking Views, No Longer Laughing) by such luminaries as Bernanke (who of course brought us much of the madness in the first place) and Rogoff (the sponsor of European austerity).