Quantitative easing (QE) implemented by global central banks in the decade since the financial crisis has not helped economic growth and is responsible for the social unrest seen in many parts of the world, according to a fund manager at BNY Mellon.
Populist right-wing politics and protectionist policies have gained a foothold across many countries in Europe in the years since the 2008 financial crisis not witnessed to the same extent for decades. The United States has also seen a political lurch to the right.
Paul Flood, who runs multi-asset funds at the global investment firm, said QE had failed to ease the sovereign debt burden on populations, as had been intended, and has instead put more pressure on people's incomes.
“I think the point of quantitative easing was to cause inflation, inflation that would help economic growth and help to inflate away all of the debt, but all that has been inflated is asset prices," he said.
"That makes it more difficult for investors to get the income they want, and impacts on society - a lot of the social problems we have seen in recent years are the result of quantitative easing.”
Quantitative easing is when a central bank creates new money electronically to make large purchases of assets, usually government bonds, from pension funds, high-street banks and non-financial firms.
The aim is higher prices, lower borrowing costs, more corporate investment, greater consumer spending, and with it all, higher inflation.
The Bank of England's QE programme has put around £500bn of new money into the UK's financial system.
But both the Bank and and the "bank for central banks" the Bank of International Settlements, have said quantitative easing increases inequality.
Mr Flood said he thinks bond markets will suffer in the long term as a result of QE.
His Multi Asset Income fund has around 15 per cent invested in bonds. The sector to which his fund belongs allows him to have up to 35 per cent in bonds, but he has decided to refrain from increasing his allocation.
Looking at the United States, which has also had an extensive policy of QE, Mr Flood said debt levels have not come down, while the recent tax cut announced by Donald Trump is “unfunded” and will mean a need for more borrowing by the US government to pay for it.
He said the extra government borrowing will mean an increase of supply of bonds onto the market, as the Federal Reserve issues Treasury bonds to pay for the tax cuts.
At the same time the regulatory issues that have forced many banks and pension funds to buy bonds will recede, meaning far fewer buyers for an increasing supply of bonds, and that means, according to Mr Flood, that the price of bonds will fall in future, making them a bad investment right now.
He has been buying alternative assets instead, such as Greencoat Wind, a fund that invests in renewable energy products and gets 60 per cent of its revenue from the government.
Bruce Stout, who runs the £1.75bn Murray International investment trust, has long been scathing about the effect of monetary policy on the economy.
In his latest update to investors in the trust he said: “Despite positive financial market performance suggesting otherwise, the economic backdrop prevailing in the debt-laden developed world at year end 2017 can only be described as insipid and uninspiring.
"Fragile growth solely dependent on ever-expanding consumer credit combined with stagnant wages and inept economic policy leadership does nothing to install belief nor inspire confidence of sustainable progress ahead.
"Needless to say, such realities remained of no concern to relentlessly rising stock prices.”
David Scott, an adviser at Andrews Gwynne in Leeds echoed the doom-laden sentiment:
“The policies we see today, are not so much a monetary experiment but social engineering.
"The price of money is a very important social and economic signal. When money has a negative price you have to pay to lend your money and this has an unknowable impact on decision-making by businesses, banks and individuals.
"To the close observer the first results of this experiment are in and have been for years. Rather than spurring spending as the Bank of Japan said, negative interest rates spurred saving.
"Rather than driving corporate investment as the European Central Bank said, negative rates instead drove corporate borrowing which was then spent on stock buy-backs and other financial manipulation.”
With regard to the impact on the bond market, Mr Scott said 2018 will be the year when the “party stops” for bond investors as central banks buy fewer of the bonds in issue and the prices fall.
David.Thorpe@ft.com
