The Verdict on QE and Zero Interest Rates

3d blue stock chart

Not much action on markets overnight.

US markets were relatively flat. Gold has lost a little lustre in recent days. But in a world of negative interest rates, gold — a zero interest paying asset — could start to look very attractive.

The Aussie dollar lost some of its recent strength too. Any move to the downside for our dollar will take the short term pressure off the RBA to reduce interest rates.

However, my longer term bet is on our cash rates eventually inching closer to those in the Northern Hemisphere.

Did you know there is US$7 trillion of sovereign debt paying negative interest rates?

Five countries have ventured into minus interest rate territory — Denmark, Japan, Sweden, Switzerland and the European Central Bank (ECB).

Last week the ECB — led by ‘whatever it takes’ Draghi — announced a three-pronged assault on deflation. The ECB has gone a little further into negative territory, broadening and deepening its bond buying activity. And it’s offered European banks (of all sizes) a bonus if they increase lending activity.

According to Ambrose Evans-Pritchard’s column in the UK Telegraph on 10 March 2016:

The European Central Bank has pulled out all the stops to avert a dangerous deflation-trap, launching a blast of triple stimulus despite angry criticism from Germany that it is entirely unnecessary and will do more harm than good.

Why did Draghi launch a blast of triple stimulus? As the Guardian reports:

The ECB itself is now predicting inflation in the Eurozone will be just 0.1% this year, 1.3% in 2017 and 1.6% in 2018 — all under its target for inflation close to but below 2%.

Not many people saw it. Hardly anyone reported on it. It pretty much went under the radar.

The ‘it’ I’m referring to is the ECB’s downward revision of European inflation in 2016. A couple of months ago, the ECB target was set at 1.0%. Quietly, and without much attention, the expected inflation rate has been revised down to 0.1%.

For psychological reasons it cannot be zero or below (unlike what they’ve done with interest rates). The wafer-thin positive inflation number avoids a headline of ‘Deflation Predicted’.

The ECB are paraphrasing Basil Fawlty, ‘don’t mention deflation’.

Europe, like Japan, China, and the US, are all caught in the same bind. The dual strategy of Quantitative Easing (QE) and punishing savers has been an abject failure.

Both strategies have sown the seeds of demise in the global economy. Which is why Germany has warned that the continued use of this toxic strategy will do more harm than good.

QE was a nice little arrangement between central banks and investment bankers. The latter have pushed asset prices to a level where future returns are expected to hit new lows. Which explains why the US market has been struggling to gain traction of late. With earnings — from the real economy — contracting, even a new burst of QE would struggle to move the indices much higher.

Where do overvalued assets go to? Do they get over-overvalued? Even I don’t think the Fed is stupid enough to do this…then again I live to be surprised.

QE was a boon to financial markets, but did precious little for the economy…as witnessed by the central bankers’ and IMF’s continual downward growth revisions.

Japan, Europe and China are adopting various forms of QE to keep their markets afloat. They too have reached a point where QE is just not as effective anymore.

Yes, there are short term jumps as the smart money figures out how to milk this largesse for all its worth, but then it falls flat. Why? Because the whole thing is a sham. It’s artificial. None of this is real economic activity. Central bankers are simply giving traders a free kick to keep goosing up markets.

Zero interest rates have been brutal to savers. Those who have managed to accrue a few dollars either accept the sweet nothing on offer from the banks, or they go in search of yield. That higher yield is being offered by companies looking for cash to finance their grand plans of expansion, share buybacks, or to refinance more expensive debt. Not many of the companies put the debt to use in making their operations more productive.

Low interest rates, one way or the other, have screwed savers good and proper. Fewer dollars to spend, and/or a massive loss of capital from credit defaults, is not going to spark a genuine economic recovery anytime soon.

The only reason there’s any GDP growth at all is because nations (public and private sectors) are prepared to go deeper into debt to keep money circulating in the system. The need for more and more government debt to keep the system ‘functioning’ is why interest rates are going into negative territory in the first place.

However, central banks don’t operate in a vacuum. For every action there is a reaction.

On 22 February 2016, the Wall Street Journal ran this headline: Japanese Seeking a Place to Stash Cash Start Snapping Up Safes. With a sub-heading reading: ‘Negative interest rates spur sales of safes—a place where the interest rate on cash is always zero’.

Negative interest rates are counterproductive. People start holding onto cash. This only hastens the deflationary spiral officials are so desperate to avoid.

After 7 years, the verdict is in on QE and zero interest rates — guilty of economic fraud.

The fraudsters are not going to accept the verdict and, quite frankly, why would they? They’re above the law. Untouchable. They are the PhDs appointed by governments to give an air of authority to the greatest con in history.

While the law of the land gives them unfettered freedom to wreak havoc with their crackpot strategies, they are not immune to all laws. The universal law of ‘if something cannot continue then it won’t’ will eventually come into play.

However, before the curtain comes down on this period of monetary madness, there’s a least one more act (of desperation) to come.

If it is widely accepted QE and interest rates are close to reaching their use-by dates, then what’s left?

‘Helicopter money’…putting money directly into the hands of spenders. The investment bankers have had their fun, now it is time to send out cheques (or the electronic version) to all and sundry to embark on a spend-a-thon.

In 2009, Kevin Rudd and Wayne Swan went down this path with $900 cheques being sent to persons both living…and dead.

Malcom Turnbull, Leader of the Opposition at the time, had this to say about Swannie’s cash splash: ‘like Paris Hilton on a shopping spree sending out $900 cheques to just about everybody’.

I wonder what Turnbull, now Prime Minister, would say if and when the ECB, Fed, BoJ or RBA decide things have become so desperate that it’s time to take a page out of Swannie’s playbook?

The long term debt cycle is at the stage where households have just about all the debt their income can handle. Repaying debt is taking spending money out of the economy; and retirees are not generating sufficient income (thanks to low interest rates) to warrant any spending splurge.

If your PhD in economics indoctrinated you with a total belief in the debt-funded growth model, your only option is to give these cash poor people money to spend. Where would the money come from for this ‘helicopter drop’? Simple. Government can issue negative yielding bonds and print money to buy them.

Personally, I’d have thought you’d look at the model and question its central role in not only creating this mess, but in gauging where this madness is taking us. But, then again, I don’t have a PhD in economics.

Central banks are pushing on a string…albeit a very long one.

Yes, they drop the money and there’s a flurry of spending…I see more tattoos and big TVs in our future. Retailers are delighted. Headlines pronounce a lift in GDP. Everyone is happy.

After that? Those with debts go back to paying them off, and retirees try to make enough to pay the bills. Retailers complain about poor trading conditions.

Then we go again. The helicopters take to the skies and rain money down on the masses. More mindless spending…or perhaps some people might start saving said money…to the great disappointment of policymakers.

If you stand back and look at this with a degree of common sense you have to shake your head at the madness of it all.

Sadly, pushing on a string is what passes as prudent economic management these days.

Vern Gowdie,

Editor, The Daily Reckoning

Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.

Leave a Reply

Be the First to Comment!

Notify of

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to