Quantitative easing (QE) is like trying to put the kettle on by placing a high pressure firehouse through the front door letterbox and hoping some of it ends up in the kettle, says a professor of political economy.
As there isn’t going to be a mean reversion, investors need to adapt their expectations, particularly as pressure on politicians and central banks will continue to lead to policies that depart from what has been the norm for the past 30 years, Mark Blyth, Eastman professor of political economy – The Watson Institute for International Affairs, Brown University said in an energetic address to AIST’s Superannuation Investment conference.
“We [should be doing] a ‘helicopter drop’ on the bottom 80 per cent of the income distribution. Now, that’s going to upset a lot of people, but it is a hell of a lot more efficient than what we have done pissing through the firehose, trying to fill up the kettle,” Blyth said.
He added this will be very popular with debtors because they are going to be able to clean up the balance sheets and get out of paying the lenders.
“For any politician that does this they are going to win big time, so it is just a question of time before they do it.”
Good news – it’s not all bad news
For all of the challenges facing investors, Blyth does not believe there will be another financial crisis, as compliance has greatly increased.
“The entire structure of the industry is being beaten down – this is policy folks, this is not an accident,” Blyth said.
He added what you end up with is long and low positive growth, “a bit like the 50s rebased”.
“Imagine a world in which inflation is basically zero and interest rates are 0 to negative and real growth is only 2 per cent. That Is going to kill the banks, but as I said, that’s part of the idea – that policy – they just don’t admit it.
“Demographics is a big problem for you guys, as well as slow growth, but if real growth is still high enough to do some things, you can still survive.”
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