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QE is driving up stock markets because the money has nowhere else to go says Prudential boss

Posted on 03 February 2013 with 4 comments from readers

Quantitative Easing has come under strong attack from the head of one of the UK’s largest investors, Tidjane Thiam of the Prudential insurance company in an interview in The Daily Telegraph this weekend. He said this monetary policy causes ‘amazing distortion’ and is now ‘just storing up trouble by minimising short term pain.’

‘What we are seeing in the equities market is the trans­lation of the QE distortion ­because the money [created] has nowhere to go,’ he added. ‘I am very worried we are creating bubbles, everywhere. Interest rates will have to normalise. And it is not clear to me what the exit strategy is. I ask central bankers this all the time and I still have not heard a single sensible answer.’

$600bn QE program

The Bank of England has become the largest supplier of QE in the world on a per capita basis with almost $600 billion pumped into the economy.

Mr. Thiam added: ‘In the macro economy: savings equal investments. But QE is depressing savings and therefore depressing investment. This means, QE is depressing growth. It is a really strange economic strategy because everyone is looking for growth – but the monetary policy is completely anti-growth. There is no other exit to indebtedness than growth.’

That leaves economies like the US, UK and soon Japan locked in negative feedback loops. ‘QE creates a total distortion in the economy,’ concludes Mr. Thiam. ‘The risk free rate is possibly the single most important piece of economic information we have and we shouldn’t mess with it. That is a dangerous game, because, to manipulate the risk free rate is to introduce huge distortions.’

Next move?

ArabianMoney readers will know where we think this will end up: with high inflation, a bond and equity crash, higher interest rates and a shift into precious metals as the currency of last resort. It is curious to read how really serious investors like the Prudential are coming around to what was previously regarded as lunatic fringe thinking.

Still it is impossible to know how long this madness will go on. We remember getting the Nasdaq bubble nonsense right six months early and waiting painfully for the crash (actually this writer decided to go off around the world for three months and came back with a business plan to make a dot-com fortune in the Middle East).

Nothing goes up forever as Emaar Properties’ investors learnt today when their shares crashed 3.7 per cent, that said after a 37 per cent run up in price in January this is hardly a shock. There will be a day of reckoning for many bubbles but when?

Posted on 03 February 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Gold & Silver, Hedge Funds, Investment Gurus, US Dollar

4 Comments posted by readers:

Comment by John Mark - 03 February 2013

It is a relief to read how “really serious professonal investors are coming around to what was previously lunatic fringe thinking”.

Yet, in his criticism of QE, he fails to mention hyperinflation.

So, does he really understand? Is he, in fact, way behind the curve which is now being led by the previously “lunatic fringe”.

I ask if he really understands the link between QE and hyperinflation because James Turk has immediately picked up the link between, on the one hand, Congress’ recent decision to “suspend the debt ceiling until May” and, on the other hand, hyperinflation, because it goes through QE.

He says: “Now the debt ceiling, which is the last check to prevent unbridled QE, is to be eliminated.

“When the bill receives the approval of the Senate and President, there will be no doubt that the dollar is heading for a hyperinflationary outcome, because federal government spending will spiral out of control.

“So, hyperinflation here we come!”

If the CEO of the Prudential sees the same mechanism happening with sterling QE, why doesn’t he say so, instead of wittering on about the risk free rate and not being clear what the exit strategy is.

He is crassly wrong to say that “there is no other exit to indebtedness than growth”. Yes, there is! It is debt monetization by which debt is hyperinflated away by huge amounts of QE.

When the new sterling is released after the old sterling has reached a ratio of, say, £1,000,000 to the pre-hyperinflation £1, then debt will be largely removed because there will have been so many poiunds floating around to pay off all debts that ever existed.

If I have a debt of £1,000,000, then just £1 of pre-hyperinflation currency will pay it all off.

But the introduction of the new £1 valued at £1,000,000 of hyperinflated currency will bankrupt everyone who has kept their wealth in sterling or other hyperinflated currency.

So, no debt! And no currency to buy food with either! Debt will have been eliiminated by hyperinflation caused by QE.

Growth is not required to eliminate debt; just QE to infinity.

Maybe Mr Thiam doesn’t understand and, perhaps, that’s because he’s a professional investor.

Comment by Andy - 04 February 2013

The fact is there really isn’t any where else to put money these days. Business is slow and returns are not so great these days in business so why not pump them stocks till they pop.

Comment by John Mark - 04 February 2013

But you run the risk of not pumping them out before the pop. You might have pumped them stocks but lose everything because of the pop.

I suppose investment managers can do this because they are not accountable to their investors. Who’s going to take them to law if all the investment managers got it wrong, I mean, got the pop wrong.

It’s so risky out there! You win on stocks now, only to lose all you’ve gained and more a little while after.

And to say that “there really isn’t anywhere else to put money these days”, when the Ed. has been pumping up silver and gold here, is, well, it’s crazy, don’t you think?
Put the money in bullion! That’s where to put it!

Comment by a9358411 - 13 February 2013

I’ve said that least 9358411 times. SKC was here…

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