Earlier today, we laid out [9] all of the myriad reasons why Draghi-style QE won’t (indeed can’t) work. Some of these reasons are logistical (euro fixed income supply/demand imbalance) and some are structural (former easing efforts impeding current accommodation). We’ve also taken a hard look at the deleterious effects [10] CB asset purchases have had on market liquidity and, by extension, price discovery, and volatility. Here, we present yet another unintended (we hope) consequence of monetization gone wild: underfunded pension plans.
Of course anyone with a basic understanding of the time value of money could have predicted this, so we’re sure it was in the back of more than a few peoples’ minds, but apparently the situation worsened materially over the past 12 months or so as the market began to try and front run the ECB.
Via FT:
[S&P] blames the sharp fall in long-term bond yields ahead of the imminent start of the European Central Bank’s €60bn-per-month asset-buying programme.
Such yields determine the “discount rate” that pension funds must use to calculate the present value of their liabilities: the lower the rate, the higher the liabilities.
S&P estimates that defined-benefit scheme liabilities will have increased 11-18 per cent, equivalent to €58bn- €92bn, in 2014, driven by the sharp fall in long-term corporate bond yields and only partly offset by the fall in long-term inflation expectations.
… and more from Bloomberg:
Among the measures S&P says companies may have to take to adjust to this new low-yield world are freezes on pensionable salaries, raising the retirement age, and closing plans to new or even to existing members.
[11]
So accommodative monetary policy, which is ostensibly supposed to stimulate aggregate demand thereby encouraging businesses to spend and hire, is now perversely causing people to work longer and preventing new employees from having access to a secure retirement. About the only thing worse (and more sadly ironic) than this would be if international loans designed to prevent insolvent eurozone countries from descending into Third World status were being repaid out of pensioners’ pockets — oh wait, that’s happening too [12].
Meanwhile, commentators seem to be gradually catching up to what we’ve been saying for years. Namely, that this isn’t working.
From BlackRock’s Peter Fisher, via Bloomberg:
“Quantitative easing, which is supposed to push investors into riskier assets, instead is driving up prices of low-risk assets “as we’ve seen in Europe today,”
“The Fed’s bond-buying program wasn’t much more successful.”
“It didn’t really work here, it worked at the margin as a little chase for yield. People want to hoard the best assets”
