Reading like his name-sake's horror novels, HSBC's Chief Economist Stephen King unleashes a torrent of truthiness about the Titanic-like economic ocean liner that is headed for an iceberg except this fragile ship doesn’t have lifeboats. As ValueWalk's Mark Melin notes, what is different with this economic recovery is that, unlike most, "the recovery phase has not marked a return to economic growth," nor has it ushered in a return to policy "normality." From King’s point of view, the normal recovery “typically allows policymakers to rebuild their stocks of ammunition, providing them with room to fight the next economic battle.” Problem is, under the regime of quantitative easing, the central bank central planners are now out of bullets as the economic recovery and the stock bull market is long in the tooth.
Stephen King: Economy is like Titanic except without lifeboats
In his research piece titled “The world economy’s titanic problem: Coping with the next recession without policy lifeboats,” King notes it has been six years since the last recession. Without specifically saying it, those who follow quantitative market probability note that bullish stock market environments last, on average, 67 months. The current bullish economic environment, depending on where you call the low point, is nearly 72 months old.
What is different with this economic recovery is that, unlike most, “the recovery phase has not been marked a return to economic growth,” nor has it ushered in a return to policy “normality.” In a normal environment interest rates have risen, tax revenues have rebounded, welfare payments shrunk, and government deficits have declined – “and, on some occasions, have even turned into surpluses.”
Stephen King: In QE-driven economic recovery, policymakers are out of ammunition
From King’s point of view, the normal recovery “typically allows policymakers to rebuild their stocks of ammunition, providing them with room to fight the next economic battle.” Problem is, under the regime of quantitative easing, the central bank central planners are now out of bullets as the economic recovery and the stock bull market is long in the tooth.
Quantitative easing has not built a a “real” economic foothold other that instilling a four letter word for investors: hope. “The higher value of financial assets have not translated into decent economic growth,” he said, and then documented what many hedge fund managers and economic analysis points out, that quantitative fairy dust isn’t driving sustainable economic growth:
It may be that QE has merely driven a wedge between financial hope and economic reality. Worse, if the next recession simply provokes more QE, are investors already beginning to believe that, once again, they are to be continuous beneficiaries of what was once affectionately known as the “Greenspan put”? This was the belief – held most strongly during the late-1990s tech bubble – that the Fed would stand ready to offer support in the event of economic weakness, inevitably encouraging even more in the way of risk-loving behavior.
Stephen King: We are closer to the next recession with few bullets remaining
King says that “if history is any guide, we are probably now closer to the next one (recession),” as he points out that the QE recovery has not accomplished what previous recoveries have: enabled monetary and fiscal policymakers to replenish their ammunition. In fact, the QE recovery has “been distinguished by a persistent munitions shortage.”
King goes on to outline solutions to a potential forthcoming recession, which is difficult to predict in an environment where debt is literally “out of control” and economic central planners have few bullets available to them.
These include 1) reducing the risk of recession; 2) reverting to quantitative easing; 3) moving away from inflation targeting; 4) using fiscal policy to replace monetary policy; (v) using fiscal and monetary policy together in a bid to introduce so-called “helicopter money”; and 5) pushing interest rates higher through structural reforms designed to lower excess savings, most obviously via increases in retirement age.
“We conclude that only the final option is likely to lead to economic success,” he said. “Politically, however, it seems implausible. As a result, we are faced with a serious shortage of effective policy lifeboats.”
Stephen King: The Second Great Depression Only Postponed, Not Avoided Altogether
Knowing that central banks are potentially hooked on QE for the long term is, at best, likely to lead to the mis-pricing of financial assets. That, in turn, might lead to a deterioration in the quality of investment and, hence, lower productivity growth over the medium term. At worst, it may lead to a repeat of the asset price bubbles that have proved to be so disruptive to economic activity.
In the absence of conventional policy ammunition, an addiction to QE could ultimately mean that the second great depression was only postponed, not avoided altogether.
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In his own words...
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