By John Richardson
AT long last! Mario Draghi, president of the European Central Bank (ECB), said in a speech to the IMF last week:
We have to be mindful that too prolonged a period of very low real rates can have undesirable consequences in the context of ageing societies, where many households save not just to smooth consumption over the cycle, but to smooth consumption over their lifetime.
For pensioners, and for those saving ahead of retirement, low interest rates may not be an inducement to bring consumption forward. They may on the contrary become an inducement to save more, to compensate for a slower rate of accumulation of pension assets.
Draghi thus became the first Western central banker that I can recall who has publicly recognised that demographics might, indeed, after all, drive demand.
But he then sadly blew it when he indicated that Europe’s quantitative easing (QE) programme, which was launched earlier this year, would not be brought to an end anytime soon.
The reason he gave for persisting with QE was that it would eventually boost “productive parts” of the European economy.
But six years after QE started in the US, the evidence that this kind of monetary stimulus can achieve a sustained improvement in the productive parts of an economy is a long, long way from being conclusive.
To date all that QE in the States appears to have achieved is this:
- The rise in equity markets to stratospheric levels, way beyond what is justified by the earnings of the companies who are listed on those markets.
- $1.2 trillion of investment in shale oil and gas over the last five years alone. Much of this debt will now have to be restructured as it becomes apparent that too much energy supply is chasing too little demand. US energy markets are now likely to see the kind of boom and bust cycles that characterised the Pennsylvania oil industry in the 19th century. This threatens employment and thus housing and consumer markets. Oil producers during mini booms will be acutely aware that another bust will be just around the corner. So they will learn to do with “more with less”, which means fewer employees on long term contracts and a lower number of workers in general.
Pension fund managers and speculators poured into US shares, and into oil and gas, in a search for yield in response to the record-low interest rates resulting from QE.
Meanwhile, middle America has continued to stagnate. If the US is going to make up for lost demand resulting from the retirement of its Babyboomers, it simply must tackle income inequality. This is not socialism. Instead, it is plain and simple common sense, no matter what your politics.
And as US QE is unwound, volatility in interest rates, the dollar, equity markets, and again of course oil prices, threaten to more than cancel out the limited benefits of the Fed’s monetary policy.
You still don’t buy any of this? Then take a look at the two charts above, which show recent US retail sales and factory orders. Where is the real, sustained, broad-based recovery which QE was supposed to deliver?
And, surely, if QE had been successful, the Fed would not still be hesitating over when to raise interest rates.
The longer that the ECB continues with its own version QE, the greater the risk Europe will also see similar financial imbalances, with no major gains for the millions of people still out of work.
In Europe, also, policies need to be introduced in Europe that reduce income inequality rather than make it worse. The trouble is that QE actually makes income inequality worse, wherever it takes place.
To be fair to central bankers in the US and Europe, they are not being helped by fractious, partisan and short term politics on both sides of the Atlantic. Political leaders with vision are in desperate short supply.
But bad monetary policy is hardly a sensible way to compensate for bad fiscal policy.