In past couple of weeks, the financial and commodities markets
world over have been spooked by mere hint of tapering of US$85bn/month bond
purchase program of US Federal Reserve (Fed). The popular media debate these
days is completely engrossed in highlighting the ‘disastrous impact’ it might
have on global asset prices should Fed reduce the bond buying by let’s say
US$10bn/month.
In our view, the debate is little premature and somewhat
misdirected. We could not find data about how much bond buying Fed has actually
done in past three months, but there is enough evidence to suggest that since
beginning of Operation twist in US (September 2011), OMT in EU (August 2012)
and Abenomics in Japan (4Q2012) – developed market equities have given positive
return while much larger markets, viz., commodities, bonds and currencies have
lost ground. US economy has shown some random signs of recovery, while growth
has definitely decelerated in Europe, Japan, BRICS, Australia, etc.
In that sense, the two fold objectives of QE – stability in
financial markets and faster, sustainable economic growth have been met only in
small proportion. The debate over withdrawal or reducing it and fears emanating
out of such debate therefore are premature.
To put it most simple terms consider the following:
A person was critically
ill, suffering from multiple organ malfunctioning. A team of expert doctors
started the treatment. They operated on him multiple times and put him on high
dosages of life saving steroids. After tremendous effort they could stabilize
his vital functions and put him on life support system. The patient is now
stable but has not completely recovered. The team of doctors treating him now
proposes that they should calibrate the steroid dosages, as prolonged use could
have long term negative implications for his health. They explained the
proposal to relatives of the patient suggesting that they want to reduce the
dosage gradually. However, they would watch the condition very closely. Should
there be any deterioration, they would immediately restore (or increase if need
be) the dosage. There was no suggestion whatsoever that the doctors are less
confident of their line of treatment or they want the patient to die. The
relatives however got panicked and started debating how long the patient will
survive and started preparing for the funeral!
The current popular debate over QE tapering is sound something
similar.
We had suggested in one of our earlier posts that QE
is a matter of fact, not going anywhere. It will remain here till it
completely outlives its utility – not likely in next 3yrs at the least, most
likely till the time EU economy shows definite signs of revival, Japan achieves
its objective of creating nominal inflation in the economy and gets out of
decades of stagnation, and global trade rebalancing especially in relation to
China makes steady progress.
For records, TARP – the US government US$750bn response to
Lehman collapse, has more or less been withdrawn. No one talks about it. No one
sulks over its withdrawal.
Also read:
Thought for the day
“If you procrastinate when faced with a big difficult problem... break the problem into parts, and handle one part at a time.”
- Robert Collier
Word of the day
Codger (n):
An eccentric man, especially one who is old
(Source: Dictionary.com)
Shri Nārada Uvāca
Ashwini Kumar, Pawan Bansal, Navin Jindal…at the end of the day, Congress Party will seriously regret messing with the caged parrot.
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