Usually economic jargon does not stimulate opinionated and passionate discussion, but ‘quantitative easing’ forms an exception to the rule.
In an effort to explain how China thinks about the American approach to kick-start the domestic economy, finance historian Niall Ferguson wrote that the mandarin translation for quantitative easing is ‘printing money’ and since then it has been adopted by many to make a point.
It is an appealing anecdote, but the reality is unfortunately more boring.
The mandarin term for quantitative easing is lianghua kuansong, which means exactly that: quantitative easing.
The mandarin term for printing money, yin chao, is used, but it is used in the same way as selective western media, analysts and even central bankers use the term: to express their disagreement with the measure.
Nevertheless, Ferguson is right about the dominant opinion in China on QE, as it has been commonly abbreviated.
Investec Asset Management global strategist Michael Power is more straightforward in his description.
“QE stands for quack economics,” Power said during a recent visit to Australia.
Power argues the western world is labouring under the weight of oversupply induced by lax credit and quantitative easing only perpetuates this.
The excess liquidity is having a negative impact on emerging markets, thereby undermining the global economy.
“Flooded by the liquidity of QE, [emerging markets] are now expected to pay the heavy price of unwanted currency appreciation in the wake of the desperate efforts of the US to inflate its way out of its problems at almost any cost,” Power says.
QE is quite simply a form of currency intervention, he says.
Another reason why quantitative easing sparks so much debate is because it goes to the heart of governmental economic thinking.
Kick-starting an economy through a stimulus program finds its origins in the Keynesian model of measured government intervention.
Power does not go as far as to say John Maynard Keynes was wrong. He says the circumstances have changed.
“I think Keynes might have been right in the narrow context of the 1930s, where most societies in the West did not have high levels of government debt accumulated at that time, they had the demographics still in their favour and, if you want to use the phrase, to jump-start the engine of growth was probably a good idea. But the situation is vastly different today,” he says.
An ageing population means there are fewer people to take on the burden of debt, while the composition of the market sectors have changed as well, he says.
“The percentage of gross domestic product dominated by the government in the 1930s was somewhere around 20 per cent. Today, it is up to the mid-40s and possibly 50 per cent,” he says.
“The actual structure of the economy is that far more money goes through government than did back then.
“That makes the whole process of the government borrowing to jump-start things and then somehow relying on the private sector to pick up the initiative and carry it forward [difficult].”
The ‘new normalites’ at PIMCO largely agree with this picture.
Nations had reached a “Keynesian endpoint” as exhausted balance sheets left policy makers with few options to bolster economic growth, PIMCO investor Anthony Crescenzi wrote to clients last year.
So what is the solution then?
According to PIMCO head of global portfolio management Scott Mather, who visited Sydney earlier this week, developed economies need to find a new growth model altogether.
“Growth is even weaker than we thought it would be for the last couple of years and we moved into this space where we really anticipate for most of the developed world growth is going to be teetering around zero,” Mather says.
“We basically progressed through the crisis to a point where countries need to find a new growth model.
“That is really what is called for because in the last several decades growth has always been accompanied with a lot of debt building in one or another. It was either the private sector accumulating a lot and the private sector wasn’t or the government doing it when the private sector was not.
“We reached the end of the useful life of that model and what we are grappling with now is the developed world trying to find a way to grow without accumulating debt.”
It seems the only way we can get out of this environment of stalling growth rates in the western world is to find the economic equivalent of the perpetuum mobile.
