The Essence Of QE: Taxing Savers, Subsidizing Debtors, Wrecking Markets

By John Morgan

Quantitative easing (QE) — the monetary elixir administered in huge doses by the Federal Reserve and now copied by central banks the world over — is going to lower living standards for generations to come, according to Scott Minerd, global chief investment officer at Guggenheim Partners.

Improved economic growth in the U.S. and elsewhere amounts to a "monetary illusion," he wrote in an article for the Financial Times.

"With politicians lacking the willingness or ability to implement labor and tax reforms, monetary policy has perversely morphed into a new orthodoxy where even central bankers admittedly view it as their job to use their balance sheets as a tool to implement fiscal policy," he noted.

Minerd called attention to a Bank of America Merrill Lynch research note that projected global economic growth will fall in 2015 for the first time since 2009, the peak of the financial crisis.

In his view, the kinds of risk appropriate for a central bank include maintaining a nation's banking system and defense of the nation's currency. However, critics say central banks have now also usurped broader fiscal policy — long the domain of elected officials — as well.

"The depressed returns available on fixed-income securities, largely as a result of QE, are acting as a tax on investors, including individual savers, pension funds and insurance companies," Minerd argued.

"Essentially, monetary authorities around the globe are levying a tax on investors and providing a subsidy to borrowers."

According to Minerd, the consequence of surrendering fiscal policy to non-elected officials at the Fed and other central banks is still not fully understood by many.

While QE programs may prop up financial markets, interest rates and currencies for the moment, in the long run "pricing distortions created by the current global regimes of QE will lead to a suboptimal allocation of capital and investment, which will result in lower output and lower standards of living over time," he predicted.

He noted U.S. stock prices are setting record high, even as real median household incomes are 9 percent beneath their 1999 highs. And he cited Bank of America Merrill Lynch's conclusion that QE and currency depreciations are not leading to higher global output.

"The cost of QE is greater than the income lost to savers and investors. The long-term consequence of the new monetary orthodoxy is likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity," Minerd claimed.

Investopedia columnist Adam Hayes noted the euro has fallen dramatically since the advent of QE by the European Central Bank, but he suggested other factors, such as the potential exit of Greece from the European Union may also be at fault.

Credit ratings agency Standard & Poor's has concluded that QE in Europe will not revive growth unless the continent also addresses other economic problems.

An S&P report listed those problems as an aging population, slowing globalization, falling productivity and low investment due to the region's high debts.

"Unless the eurozone tackles those structural issues that have dogged growth for several years now, and addresses building headwinds, those hopes [of reviving growth] may eventually be dashed," the report asserted.

Guggenheim Partners' Minerd: QE Decreasing Global Living Standards.

 

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