Last Updated : 30 April 2013 at 05:25 IST
Quantitative Easing is deemed the holy grail of monetary policy. Unconventional, out-of-the-box, revolutionary and least of all evolutionary, the QE measures are something that everybody looks forward to these days; investors, traders, hedge funds, in short all market participants.
The markets have become QE fetish to such an extent that QE is now deemed the new-normal in monetary policy. It has become an addiction: QE is the market version of cocaine! No QE, no feel good.
Now we also know there is a widespread consensus that politicians are a lazy lot. They always seem to find the populist DNA of things that would significantly contribute to their account balance in electoral banks.
Building and constructing one’s way out of a recession is tough and warrants industrious days and sleepless nights from the people (and hence the least populist), but floating a QE and creating a feel good is easier. You just have to keep the Mints busy, as simple as that!
In a QE measure, the governments often buy back the debts they have issued. These debts are often borne by the financial behemoths in the first place. They often happen to be banks. What they are supposed to do with the money is to enhance lending.
But, in a crisis that has been sparked by reckless lending, these banks would find it prohibitive to lend. Besides, it is easy money that they have got in their kitty as the central bank would have bought back the debt paying a premium so as to incentivise a debt sale by these financial institutions.
In other words, the price you have to pay to own some debt would have significantly gone up in the market place when Bernanke, or for that matter any other central bank chief, begins to discuss this initiative.
What these banks do is, they invest this cheap money in equities and commodities and whatever other lucrative investments they can put their hands on.
When billions in money hit the markets, markets invariably go up; there is a feel-good everywhere. Bulls go for their victory lap and bears retreat. Everybody makes a kill.
Not bad!
But the feel good has a dangerous political side to it. When people mistakenly feel that a single dose of QE is capable to address their issues, the issue on the other hand remains unaddressed. It would lie dormant for a while or simply changes its status to stealth mode.
Hence, once the first round of QE waves subside, it so happens that the market loses momentum. The core reason behind the financial crisis once again tumbles out of the closet. And that is ugly. So there is clamour for the next round of shot. And governments dance to the tune. QE2 follows!
This serial killing or slow poisoning continues until the economy would turn hyper inflationary.
Now that the price of gold has come down significantly along with all other commodities, except for agriculture commodities, there are hopes of QE measures to be maintained by the markets. But the said need is not presented in the way people would understand.
It reads like this: “futures on the Comex climbed on speculation that the US Federal Reserve would continue to maintain aggressive buying of bonds and securities…” we know the language; we have been here before. We know that another shot is necessary, we crave for it, and we are just infants who want to be spoon-fed.
The bulls who snort.
What a pity!
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