Excerpted from Paul Singer's letter to investors,
Policymakers in the developed world do not seem to believe (as we do) that their complete reliance on zero-percent interest rate policy (ZIRP) and quantitative easing (QE) for propping up the global economy may be the unintended but proximate cause of the poor performance of the developed economies over the last six years, rather than the cure-all nostrum that they think it is. Indeed, Europe is in the process of actually doubling down on QE, with large asset purchases by the European Central Bank expected in the near future. ZIRP and QE were concocted as emergency strategies, but their persistence post-crisis has caused distortions that have seriously interfered with the proper functioning of the developed economies. Ironically, these policies also exacerbate the income and wealth inequality that has become a source of some resentment among the public at large, as well as considerable attraction as talking points for politicians.
Policymakers do not seem willing to believe that they need to unlock and promote economic expansion through pro-growth policies, the particulars of which we have described often in the last few years. Politicians are more than willing to delegate to central bankers the entire job of generating growth, so that they themselves do not have to take political risks. For their part, central bankers keep referencing inflation targets as if inflation is a proxy for growth. It is not. The reality is that inflation only has an indirect impact on growth, so the effectiveness of inflation as an expansionary tool is extremely limited, as evidenced by the economic malaise we have witnessed in the six years since the financial crisis.
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Perhaps the recent October apprehension in the financial markets is only a “trailer” for the next period of real market turmoil. When the next such period arrives, it could resemble a “panic” or “crash” for a short period of time, before the inevitable “cavalry” (central banks and major governments) try to calm scared investors and encourage them to stop their selling and start their buying. On the other hand, there is a very real possibility that the cavalry’s thundering hooves will cause investors to get even more frightened and run away, perhaps having lost confidence in the effectiveness of the central bankers’ toolkit (essentially permanent policies of ZIRP, unlimited asset purchasing and market manipulation, and other – yet untried – policies supporting trillions of dollars of money creation).
The next period of real market turmoil may then turn into a severe financial crisis, the exact shape of which cannot be determined in advance. It is hard to imagine what the governments can do when the signaling effect of central bank activist intervention is no longer effective to stop the crisis from spreading – unless the politicians of the world are finally goaded into taking the serious and appropriate fundamental actions necessary to ameliorate the crisis.
Don’t hold your breath.
