Unintended Consequences of QE

A monetarist economists’ mantra is: “Too much money chasing too few goods causes inflation”.

Why then, when central banks have “printed money” by exercising “extraordinary monetary measures” or “quantitative easing (QE)” have prices not soared away?

The hope behind QE was that “loads of money” created by central banks buying bonds would push down interest rates. That in turn was supposed to spur borrowing by businesses; creating a virtuous trajectory of investment, higher employment and higher incomes.

Following the global financial crisis (GFC) economies rapidly retreated from working at capacity. So inflation would only become a risk once this output gap closed and full employment was achieved.

However since QE, instead of inflation, we have been tottering on the cusp of deflation. Or to reverse the monetarist mantra, “There has been too little money chasing too few goods”.

QE Hangover?

Is this a hangover from the GFC with economies not recovering from that debt-fuelled shock or has QE failed to promote “real investment” and create “real jobs”?

But hang on: while consumer prices bumped along the bottom asset prices - the prices of commodities, shares and property - leapt as money unleashed by central banks flowed into banking systems.

Central banks don’t measure asset price inflation. Changes in the prices of Vodafone, Apple and GlaxoSmithKline aren’t included in consumer price Indices, nor are changes in property or commodity prices, so rising asset prices are not seen as inflationary.

Yet, since oil started its decline in mid-2014, followed by other commodities, it is falling commodity prices that have added to the deflationary momentum as their prices feed through to the consumer.

Tiger, Tiger Burning Bright

QE is officially the exercise of “extraordinary monetary measures” so it unsurprising that these should they have unintended consequences.

As the financial world waits with bated breath for the US Federal Reserve and the Bank of England to raise interest rates, questions have to be asked as to whether, with QE, central banks have mounted a tiger they dare not dismount.

Talking It Through

FinanceWriter has coined its own mantra to reduce the risk of unintended consequences: “No time is lost in planning”. Clients commissioning financial writing of thought leadership papers, preparing speeches for senior executives to deliver at major events or committing a company to a strategy statement in an annual report may know their subject inside out. Yet they may be too close to it – not able to see the wood for the trees!

Unintended consequences can be malign or benign. Gerald Ratner clearly didn’t think through has famous comparison of his firm’s jewellery with an “M&S prawn sandwich”!

On the other hand, talking and thinking things through with an experienced, intelligent and independent financial writer not only avoids pitfalls, but also create exciting opportunities.

Using FinanceWriter as a resource when commissioning important financial writing broadens and deepens the impact: improving the clarity, reach and language.

By establishing the correct tone of voice and embracing a clients’ brand (particularly their rules on verbal branding) it is possible not only to convey a firm’s messaging effectively and support its reputation, but also to protect it from those, sometimes dire, unintended consequences.


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