Editor's letter

The answer to our woes is to reverse quantitative easing

Quantitative easing isn't doing what it is supposed to do. Reversing it might, says Merryn Somerset Webb.

Kristalina Georgieva  © MICHAEL REYNOLDS/EPA-EFE/Shutterstock

A few months ago in an article headlined "15 business and finance writers this billionaire always reads", US columnist and asset manager Ken Fisher noted that he always reads me, for the simple reason that "Merryn Somerset Webb attacks virtually everything I believe in". Everyone likes a challenge. He will be surprised then to find that I agree with much of what he has written in a Financial Times article this week.

Conventional monetary policy assumes, he says, that low interest rates (which make borrowing cheaper) will make people want to borrow more. But beyond a certain point that isn't true. Very low rates kill the profitability of loans (by crunching the spread between the rate at which a bank can borrow and that at which it can lend). This makes it hard to think that the lower they go the more banks will lend. If, for example, the pushing down of rates via quantitative easing (QE) really worked, loan growth and inflation would have risen during periods of QE. They did not.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Also, moving from low rates to super-low rates doesn't make much difference to businesses, given their margins of forecasting error: "businesses won't launch more projects because of quarter-point or even full-point rate cuts. If a project isn't profitable at current rates, it isn't worth doing at fractionally lower ones even 0%". The answer to our current woes then is not to keep cutting rates and introducing new rounds of QE (as the European Central Bank has and the Federal Reserve is about to), but to reverse the whole thing. The result of this return to monetary sanity would be "near magic". Loans would flow as banks could make money on them again. Business investment would accelerate everywhere and in the UK the stage would be set for a "post-Brexit pop", with banks clamouring to lend just as firms "get the clarity needed to deploy pent-up plans".

We are not convinced we would do this at the speed Fisher suggests (crashing bond prices would have nasty consequences). But on QE not working as advertised? We are convinced. Bill Bonner agrees pretty wholeheartedly. Matthew Lynn agrees too. And even the International Monetary Fund, under its new leadership, is getting agitated about monetary policy. Its new head, Kristalina Georgieva, said in her first speech this week that her team is looking closely at the impact negative interest rates are having. We suspect that the closer she looks, the more unintended consequences she will find.

Advertisement - Article continues below

For something more positive, John Stepek explains in our cover story how the (slightly over-egged) misery over Brexit has produced some fantastic investment opportunities in the UK. We hear constantly from global investors about how hard it is to find yield. They clearly aren't looking very hard: the FTSE 100 yields 4% and some of our biggest stocks pay over 5%. Next, we have an update on Vietnam, one of the few emerging markets we like. Finally, for those of you who have had enough of your jobs, we look at how to use Airbnb to make money and at how, if you are very frugal (and negative rates and stockmarket crashes don't destroy your finances), you can retire by 40. Perhaps not in such a way as to be able to afford a new Land Rover Defender, but definitely in such a way as to have time to do a little protesting.




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019