“As a practitioner of markets, I love this stuff,” said Stanley Druckenmiller. “This stuff is fantastic for every rich person. It’s the biggest distribution of wealth from the poor and the middle classes to the rich ever.”
Druckenmiller is among Wall Street’s most fabled investors. He started Duquesne Capital in the early 1980s then teamed up with George Soros, running the legendary Quantum Fund. Together they made billions by “breaking the Bank of England”, shorting the pound in massive volumes and forcing sterling out of the Exchange Rate Mechanism. That was in 1992.
The quotation above is more recent. Druckenmiller said these words on CNBC television last Thursday and the “stuff” was quantitative easing. While extremely critical of America’s $85bn-a-month money-printing habit, Druckenmiller is at least decent enough to acknowledge that, as a wealthy chap with a bucket-load of equities, the Federal Reserve’s asset-buying programme has made him even richer.
Yet, still, Druckenmiller refers to QE as “dope”. He pans the Fed’s prolonged use of “extraordinary measures” and the impact on ordinary savers. He also describes the recent efforts of Fed Chairman Ben Bernanke to engineer a smooth QE exit as nothing short of “a fiasco”. As a retired plutocrat, rich enough to be almost untouchable, Druckenmiller’s language may be more colourful than most. But his criticisms are increasingly widely-held.
Last Thursday, contrary to nearly all expectations, Bernanke announced that now was not the time to start reducing, or “tapering”, that rate at which the US central bank buys bonds under QE. Financial markets were dumb-founded. Since May, Bernanke has been heavily hinting that QE could soon end, or at least begin to end. Investors have taken him and his tapering overtures seriously. As a result, the US Treasury yield has risen sharply over the last few months, doubling to almost 3pc.
So, the fact that tapering would soon begin, with the Fed slowing down its rate of funny-money expansion, was already baked into the market. That’s hardly surprising, given the constant parade of policy-makers and former policy-makers who’ve lately been saying that now is the time to act. Yet, when it came to it, Bernanke confounded the very expectations that he himself did more than anyone to create.
On this news, of course, global equities rallied. The pound and the euro also benefitted as the dollar fell on the expectation that US money-printing would now continue at its current rate for longer than expected. Pretty soon, though, the head-scratching began. Why did the Fed create expectations only to deny them, investors wondered aloud. Does the central bank know bad things about the US economy that aren’t yet public? Is it really wise to keep printing money willy-nilly and can this rally go on forever? Is the Fed now panicking – and should we be panicking too?
In trying to explain this “no tapering” decision, Bernanke ended-up sowing further seeds of confusion. It’s true that the US recovery remains sluggish. Employment is rising slower than expected as the economy struggles to gain momentum. Having said that, America’s main stock index, up some 120pc since QE began in early 2009, is close to an all-time high. Is there really a need to pump up the markets even more?
Also, given that growth remains pretty anemic after almost 5 years of QE, even the most craven bank-financed analysts are now asking whether the policy is doing any good, beyond the short-term interests of the equity market. Economic Agenda has argued, since the earliest days of QE, that the benefits in terms of jobs and growth would be minimal. I wasn’t the first – far from it. After all, Keynes remarked in a letter to President Roosevelt in 1933: “To think output and income can be raised by increasing the quantity of money is rather like trying to get fat by buying a larger belt.”
Yet this is a truth that even the most consensual of economic thinkers are now starting to acknowledge – despite the powerful nexus of myopic financial and government interests that want QE to go on forever, just as long as this incredibly risky policy doesn’t backfire before they’ve sold or on their political watch.
Perhaps the strangest part of Bernanke’s remarks last week was that tapering didn’t happen due to the “rapid tightening” of financial conditions caused by the Fed’s attempts “to provide more guidance on how the pace of purchases might be adjusted over time”. In other words, the Fed didn’t move on tapering because Treasury yields have recently risen as a direct result of the Fed deliberately indicating that it would soon be moving on tapering.
Confused? I don’t blame you. It wasn’t long ago, after all, that Bernanke said rising yields were helping to take some “speculative excess” out of the US economy. Now the fall in government debt prices is being used as a justification to carry on ballooning the Fed’s balance sheet in order to prop them up – and Treasury prices certainly spiked, with yields plunging, on the “no taper” news.
At the very least, Bernanke looks as if he “bottled it” – and/or was sat on by his political masters. Perhaps the loss of nerve went all the way up to the White House? After all, we’re in “debt ceiling” season, with Democrats and Republicans now once again indulging in their annual game of buck-passing and posturing. Are we in for yet another round of political gridlock, as Washington plays chicken over the prospect of a US default? Maybe Obama sees that happening – so took a tapering “rain-check”.
Many investors are tiring of these political games. “Stop the talking and just get on with it,” is a refrain I’m increasingly starting to hear. Some experienced hands are now openly calling for a modern-day Paul Volcker, the no-nonsense Fed Chairman who squeezed inflation out of the US economy during the 1980s. Instead, while it’s good news that Larry Summers bowed-out of the race to replace Bernanke last week, we’re now left with the default option of Fed Deputy Janet Yellen – who makes uber-dovish Bernanke look like a hawk. Hardly inspiring.
While there was some justification for a rapid liquidity expansion in the immediate aftermath of the sub-prime collapse, both here in the UK and the US, this policy long ago turned from crash mat into comfort blanket. QE pumps up oil prices, hiking our fuel costs. It punished savers, robbing them of returns. It’s causing trade disputes, as we debase our currencies and the debts we owe the emerging giants of the East. Yet, the West is addicted to QE – and nothing illustrates that better than the Fed’s failure last week, despite months of preparation, to take the first steps on the road to normality.
Interest rates on both sides of the Atlantic will now stay lower, for longer, we’re told. Maybe that’s true. Or maybe, when QE does end, and the party is over, the hangover will be even worse. “This is a tragedy,” said Druckenmiller, of the Fed’s refusal to light the tapering touch-paper. “They blew it, and this will make life so much harder when we do actually start this process”.
The word “taper” can also be used to describe the wick on a candle or the fuse of a bomb. Will the Fed’s communication tactics be a source of guidance or set-off a financial explosion? That crucial question, once the preserve of alarmists and cranks, has now moved centre-stage.