QUANTITATIVE easing (QE) is coming to an end, at least it was until last Tuesday, when equity markets showed us all just how far they can fall without a spoonful of sugar. Okay, so they bounced back — maybe there have been some promises.

It has been a long day. There is a risk that my brain may go into recession. Before I sat down to start writing this I thought I’d just have one row of the mint crisp chocolate slab I’d bought on the way home. One row, three blocks, that’s it. I was sure that just one sugar burst was all I would need to fire up those neurons and synapses with writeable energy.

I finished the whole slab. I’m border-line sugar high, but at least there’s no more temptation and I can start focusing.

Just after the financial crisis in 2008-09, the US Federal Reserve thought it would be a good idea to give the economy a quick energy burst of money — just to get the population over the impending recession and back to work, filled as they would be with the hope and enthusiasm that only cheap money can bring.

Well, that chocolate bar is all but eaten up now as tapering begins, QE ends and the prospect of rising interest rates is upon us. Was the one bite that turned into sustained overindulgence worth it? I don’t think so. I never have. Detractors of the policy of QE have been nigh impossible to find over the past five years, but now doubters are beginning to raise their heads above the parapets — previously considered most unfashionable, if not downright unpatriotic.

QE was a flawed strategy. The hangover hasn’t yet manifested, but we know it is deserved and surely it will come. The primary fault of QE was its circularity. The money went around in a very tight circle, never breaking out into the real economy where it was needed most.

It was essentially a term structure game where long-term money (bonds) were being bought for short-term money (cash) as banks swapped more risky, sometimes toxic assets for cash with zero credit risk.

As this disingenuous circle continued, the Fed’s balance sheet continued to swell (as did those of its international counterparts, the European Central Bank and the Bank of Japan in particular). A bit like a hospital storing a cure for a pandemic rather than dispensing it to the infected patients out there. Silly persons.

As at the end of June this year, General Electric was sitting on $87-billion of cash, Microsoft on $86-billion, Google on $61-billion … the list goes on. This is a harvest and store economy, not the growth economy that had been hoped for. Altogether, $2-trillion has been spent on share buy-backs in the US alone, over the past five years.

As the Fed balance sheet assets went up, from $1-trillion in 2008-09 to $5-trillion as tapering came into focus, so too, in an almost perfect one-to-one correlation, did the S&P 500 share index — going from 800 to 2 000 in the same period. The market waited with bated breath on every Bernanke or Yellen speech. When the sugar dose was confirmed, the momentum algorithms were switched back on.

The secondary round of circularity will be found out to be most shortsighted. Corporations now awash with this free cash didn’t spend it, can you believe? Instead, they either hoarded it or gave it back to their shareholders.

As at the end of June this year, General Electric was sitting on $87-billion of cash, Microsoft on $86-billion, Google on $61-billion … the list goes on. This is a harvest and store economy, not the growth economy that had been hoped for. Altogether, $2-trillion has been spent on share buy-backs in the US alone, over the past five years.

As much as share buy-backs might fall into the category of distributions, they aren’t really. The money doesn’t go any further than the asset managers and pension funds that together make up the bulk of investors in the stock markets. Institutional investor mandates require them to buy shares, particularly in rising markets. Direct retail investors are few, and the richest 5% of households in America own 80% of the shares anyway. So, distribute all you like, buddy, you’re just churning your price per share.

The (perhaps unintended) consequence of all of this is that less money was spent on capital projects or new business development or new product research or anything else that would have formed the foundation for sustainable growth, which creates employment, which gives real people money to buy goods and services, which gets the economy back on its feet — the economic circle of life. That virtuous circle was given a bypass.

This asset bubble circularity wasn’t limited to the stock markets. All asset classes were affected as the supply of money kept increasing and real goods and services didn’t (because nobody was investing in them, duh). Everything went up, from properties to paintings, from sports cars to yachts. It will all come tumbling down as easing changes to tapering, wait and see. Stand close to the door.

Back in people’s homes, old-age homes in particular, the purchasing power in the ordinary people’s economy decreased as interest rates went negative in real terms. No point in saving in this environment. That’ll be the next problem: for the state to fund old people who could not live off the interest on their savings and started consuming capital. Then the money will have to go to the people?

Outside the US, those that could join in, did. You had to, to keep the exchange rates competitive — the European Central Bank and Bank of Japan et al also started printing money, negating the primary intention of the US’s QE programme — to weaken its currency, to lower the value of its massive debt burden. Never mind the other stated objectives, that was the reason this all started.

Realising that near-zero interest rates weren’t much fun and companies weren’t investing in the future, some of the money left home and set off in search of yield.

Where did it go? Among other places, it came here — a first world financial system paying third world yields, it doesn’t get better than that. We didn’t even require them to invest. What a perfect opportunity to issue some juicy South African infrastructure bonds to fund the repair of our decaying infrastructure or build production capacity. No. We let them trade in and out of our deeply liquid capital market, extracting the yield from day to day and taking the capital back straight after the coupon had been paid.

When tapering comes, and the visiting yield seekers go home, as they surely will (when their interest rates start going up), what will we have to show for it? Nothing — we’ve been a cheap date.

As the mist of plentiful money clears, we will find that nothing new (or precious little) is left in its wake on which to build the future. Not enough new factories, not enough new medicines, not enough employment, not enough growth — and a society more divided than it ever was before the financial crisis.

We fixed the financial crisis overnight, but so what? Who needs a financial industry if there isn’t a real economy?

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