I am a fan of the TV show QI, originally hosted by that Stephen Fry and now by Sandi Toksvig. However, the QI I am exploring in this article has nothing to do with the TV program it's about what I described back in 2019 as Quantitative Infinity (QI).

I’ve been fortunate enough to have spent a large part of the past 30 years on and off, researching and writing the history of Australia’s business, banking and financial system. While this might be coma-inducing for some I found it fascinating.

 

QI is QE forever

Mario Draghi is most recognisable as the President of the ECB (2011-19) and for his statement that “we’ll do whatever it takes” in the now dim dark past of the GFC. Whatever it takes has come to mean Quantitative Infinity…which is actually the complete capitulation of European central bankersto the political expediency of focusing on the ‘now’ over 12 years post the GFC rather than facing up to the necessity of structural reform.

And, before you comment about the independence of central banks from the political sphere, just take a look at how the Bank of International Settlements is structured, who ‘sits’ on its board and who they are accountable to? A clue here in relation to the latter comment from Adam LeBor’s book The Tower of Basel: ‘Created by the governors of the Bank of England and the Reichsbank in 1930, and protected by an international treaty, the BIS and its assets are legally beyond the reach of any government or jurisdiction. The bank is untouchable. Swiss authorities have no jurisdiction over the bank or its premises.’[1]

 

QI won’t fix economies

Monetary policy in most advanced economies has failed to kick-start economies and support a return to growth. As Warren Hogan comments:

‘There’s been a loss of perspective over what monetary policy can and cannot achieve. It is a tool to influence demand in the economy in the short term. 

It cannot affect demand over the long run, nor can it influence the supply side – at least not in a positive manner.’

Easy monetary policy, QI, distorts private sector decision making and ultimately reduces the productivity and efficiency of the economy as it’s easier for companies to borrow cheap money that improve their businesses. For ‘people’ this means stagnant wage growth, low inflation, flat employment on the one had and speculation in shares, financial instruments and property for those with some money seeking higher returns.

By implementing QI central banks around the world have flooded their countries with easy money meaning governments haven’t had to make tougher decisions about fiscal and structural policies. In effect central banks and governments have been kicking the structural change in their specific economies down the road.

And, as Philip Lowe recently commented when asked about Modern Monetary Theory, ‘Some proponents of Modern Monetary Theory think it's a free lunch. The reality is … someone ultimately has to pay, and they have to pay through higher taxes.[2]

And then came COVID-19 pandemic that as resulted in QI on opioids. The US death rate from drug overdoses more than tripled between 1999 and 2017, and that from opioid overdoses increased almost sixfold during the same period. Tellingly, more people in the United States died from overdoses involving opioids in 2017 than from HIV- or AIDS-related illnesses at the peak of the AIDS epidemic.[3] 

 

Why QI Covid monetary policy is like the opioid crisis

Because QI has, and continues to be, well-intentioned (supporting nations’ economies to grow) but the world’s central bankers have inadvertently (or carelessly) created bigger problems for themselves and ‘we the people’.

And just what are these problems?

1. Financial instability

Easy money and low interest rates put upward pressure on asset prices and debt levels as we’re seeing only to clearly in Australia with house prices and the bounce bank in the stock market. Financial speculation ratchets up creating more volatility and vulnerabilities;

2. A flight to risker investments

People seeking yield ‘hunt’ around for higher returns which are higher risk and often outside the core, regulated financial system, some are even in it or at the margins. Just think of the efforts of the Buy Now Pay later companies successful attempts to NOT be defined as a financial services provider (requiring them to be licensed and hold way larger. It’s no coincidence that these company’s share prices have sky-rocketed in 2020. And then there’s companies like James Mawhinney’s Mayfair 101 (IPO Wealth Fund) https://www.afr.com/companies/financial-services/trustee-targeted-in-ipo-wealth-class-action-lawsuit-20201214-p56najand Stirling First in Perth https://thewest.com.au/news/wa/fallout-from-sterling-first-scandal-affecting-more-than-100-west-australians-ng-b881232158z

3. Declining economic efficiency/productivity

As harsh as this sounds low interest rates can allow financially weak firms to survive for longer than they would otherwise would – becoming Zombie companies. Such companies aren’t a productive use of capital or labour and can caused longer-term stress for the owners as they fight a potentially never-ending battle to generate enough profit to pay off debt (no matter how cheap it is). As someone who lost their business in the GFC I can attest to how hard this is, however, it forced me to create a new business model, one way more responsive to the industry and marketplace I operate in . . . and as a result I’ve been able to navigate through the COVID-19 pandemic.

4. Inter-generational inequality (STD on a grand scale)

There’s a saying that being married is a potentially harmful. In this care STD stands for Sexual Transmitted Debt.

What QI on opioids has done is load up the next 2-3 generations with stratospheric levels of debt, both public and in many cases, private. With QI funds hoovered up in the vortex of the stock market and property market sweet little is going to productivity-enhancing investments in infrastructure, R&D and advanced manufacturing.

The next 2-3 generations are being saddled with more debt. Global debt rose at an unprecedented pace in the first nine months of 2020 as governments and companies paddled out to catch a debt tsunami wave. The total level of global indebtedness has increased by $US 15 trillion leaving it on track to exceed $US277 trillion by the end of 2020.[4]

The Institute of International Finance expects total debt to exceed 365 per cent of global gross domestic product by the end of 2020 up from 320 per cent in 2019.[5]

Naturally, emerging economies are in a much more precarious position that countries in the developed world. That said, debts in advanced economies rose by more than 50 percentage points in 2020 to hit 432 per cent of GDP. Of this the US accounted for nearly half.[6]

Let’s have a bit of a look at some countries and their central bank balance sheets from February 2020 to November 2020.

USA Fed Reserve: $US3 trillion to $7 trillion. 34% of GDP

ECB: €4.8 trillion to €7 trillion. 60% of GDP

Bank of Japan: ¥580 trillion to ¥760 trillion. 130% of GDP[7]

Australia: $180 billon to $300 billion in November. 15% of GDP

5. Increasing inequality

Interestingly, compared to the rest of the world, income inequality is not particularly high in Australia, nor is it getting much worse.

The real problem is housing inequality. Rising housing costs have dramatically widened the gap between high and low disposable incomes. Home ownership is increasingly benefiting the already well-off. Since 2003-04, increasing property values have contributed to the wealth of high-income households increasing by more than 50%. Wealth for low-income households has grown by less than 10%.[8]

This said, the increasing casualisation of the workforce, move towards gig work and part-time work has put even more pressure on younger workers and less-skilled workers of all ages.

And, we have to find a much better, workable outcome for our First Nations communities. Support an engagement as usual is what has resulted in their marginalisation, widespread incarceration and institutionalisation.

And for those in our community are in our aged care system (the numbers of which are about to explode) we need to craft way better solutions that provide, care, dignity and engagement. 

 

Australia and QI

With it’s world breaking record of 29 years without a recession it seems Australia would not have to follow other nations engagement of QE let along QI. COVID-19 busted both the recession record and, by November our central banks embrace of QE.

In a way it was inevitable given all our major trading partners and the world’s largest economies have been operating with QI for years…and there was a desire to keep the Aussie dollar lower to push unemployment down and limit long-term joblessness. However, savers will suffer through lower interest rates while the stock market and house prices keep powering past pandemic levels as the wealthy take more risks (to find higher yields). Forever low interest rates are NOT powering productive investment, they’re powering speculation. They won’t convince small business owners to borrow/borrow more as we’re all in cash preservation mode as COVID uncertainty continues into 2021 and we wait to see what happens with the JobKeeper and JobSeeker programs in March, our new fiscal cliff.

When the Australian Reserve Bank embraced QE was in part an attempt to keep the Australian dollar in the low 70 cent range to the US $. Well, that hasn’t worked. But then it's understandable when the US Federal Reserve’s balance sheet at $7.17 trillion towers of the Australian Reserve Bank’s of $300 billion + as does the Fed Reserves $US 120 billion a month QI compared to our $100 billion over six months. As Robert Guy commented the RBA is ‘bringing a peashooter to a bazooka fight’.’[9]

Joe Biden is about to drop another $2.1 tirllion in the first stage of support for the US economy, and there'll be more to come.

It's important to understand these numbers as there’s really very little the Australian Reserve Bank and the federal (and state) governments can do from a monetary perspective. What Australian governments CAN do is direct investment to areas that can underpin future productivity, ensure regulation and oversight of banking and finance companies, investment products and ASX-listed neo banks and fintechs is up to speed not trailing along behind OR being unwound. Having lived through the 1987 crash, 1992 recession we had to have, 2000 dot com crash, 2008-9 global financial crisis and now COVID-19 and covered business and finance across this 30+ year period I know, first hand the financial chicanery that abounds in times of extremes.

 

Is the QI approach the best pathway for Australia?

Well, it’s more case of ‘if you can’t beat them join them’ in terms of Australian entering the global currency wars. As Lowe state before the Reserve Bank’s QE announcement: ‘Australia us a mid-sized, open economy in an interconnected world, so what happens abroad has a major impact here on both our exchange rate and our yield curve’…once the majority go for record low rates ‘you really have no choice’.

What we did have a choice about what how we responded to COVID and there were two clear strategies: suppression or trading off deaths against the economy. While the degree to which Australian states have implemented the suppression option has varied somewhat, Australia did adopt the suppression model whereas countries that have sacrificed lives have tended to end up with both high, and increasing mortality AND high economic costs.

Here in Australia COVID-19 has been a devastating economic shock but the damage was done largely because we chose to elevate people’s safety, forego a large portion of our normal daily expenditure (toilet paper aside and, I have to admit that I still have half of the 5kg bag of rice I bought in March in my cupboard) while our government was able to and did (and still is) supporting affected people and businesses on a large (albeit decreasing) scale.

 

The challenge of creating and walking across the bridge out of COVID-19 and QI rehab

As we start 2021 Australia and a few other countries might be ‘doing well’ in terms of their response to and management of COVID-19, but this is not case for most nations, particularly some of the world’s largest economies. Overlay the major trade war with China now being waged and it’s simply not realistic to think local is going to get Australia over the COVID-19 hump any time soon. The Depression of the 1930s imprinted a generation with a tendency towards thriftiness and an aversion to risk. Now we’ll have a generation or perhaps two who are struggling to find or keep full or part-time employment/permanent gig workers, loaded with high levels of debt if they could get it, struggling to secure it if they want to enter the property market even if they could afford it.

In addition, generational inequality is compounded by increasing and embedded job insecurity for millions, while income inequality continues to grow. In other countries this combination has already led to social dislocation and civil unrest. While I see this as unlikely in Australia we should not be so smug as to think we’re impervious to these outcomes.

As the Federal Government’s support measures taper off (are decreased and/or removed) the March ‘fiscal cliff’ if renovated will only defer the inevitable for some businesses (insolvency provision changes notwithstanding). Elevated joblessness, disrupted education, low productivity, flat-lining or negative wages growth appear likely to endure for years, perhaps a generation.

Ian Goldin, Oxford University Professor of Globalisation and Development, made and interesting comment at the end of 2020.

'What I am allergic to is the notion of going back, bouncing back. It’s business as usual that got us to where we are.’

I’ve shared with many friend and colleagues my thoughts about the Trump phenomenon and have almost finished a terrific book by Nick Bryant on it, When America Stopped being great.

You under-educate your population at your peril, and this is particularly true for Australia, that has always been a capital poor country. Our energy, vitality, educated population, openness and willingness to work hard and give something ago has dissipated over the 30+ years I’ve chosen to make Australia my home, replaced with entitlement, complacency and increasing selfishness. COVID-19 might just be a circuit breaker we needed.

We have, potentially, the opportunity to reset as there’s no going back to business as usual/normal. There’s no ‘new normal’, there’s a possibility of a new vision for Australia, one in which continual education and learning is embedded into everyone’s working life, where thinking about what’s good for our wider community not simply our tax effectiveness at the extreme, where we all invest in our local capacity to manufacture, produce, invent, scale and grow.

Where we really can be ‘one and free’, if we chose to, and if we choose leaders who believe and articulate in this vision.

 

 

[1] https://www.amazon.com/Tower-Basel-Shadowy-History-Secret/dp/1610393813

[2] Someone always has to pay: Lowe, Peter Quattrocelli, AFR

[3] https://www.nature.com/articles/d41586-019-02686-2

[4] Pandemic fuels global debt tsunami, Jonathan Wheatly, FT 20 November 2020

[5] Ibid

[6] Ibid

[7] https://www.yardeni.com/pub/balsheetwk.pdf

[8] https://theconversation.com/rising-inequality-in-australia-isnt-about-incomes-its-almost-all-about-housing-119872

[9] RBA brings peashooter to bazooka fight, Robert Guy, AFR 4 November 2020