Analysis: Surfing central banks in a benign 'QE trap'

Wed Nov 27, 2013 1:55am EST
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By Mike Dolan

LONDON (Reuters) - The message is sinking in - economies of the rich world face super-easy money far into the future and central banks are now convinced it's the least of all policy evils.

Despite rumblings of dissent about the financial bubbles and iniquities associated with zero interest rates and money printing, 2013 is ending with a remarkable certainty among global investors that cheap money is around for the long haul.

And the outsize financial market reaction this year to even a suggestion the U.S. Federal Reserve would dial back money printing crystallizes the point for many. And even if the Fed does taper asset buying in 2014, liquidity from the Bank of Japan or European Central Bank could be boosted to offset it.

That's not to say money managers are all cheer leading this. Many who spoke at Reuters Investment Outlook summit last week doubted its long-term efficacy and feared its social and political fallout even as waves of cheap cash continue to push stock markets to new records.

If financial asset owners benefit more from 'quantitative easing' than the jobless or low wage earners, they insist, then monetary pumping merely exaggerates already disturbing wealth and earnings inequality in the United States, Britain and beyond - injects unforseen and incalculable political tension.

Yet despite these misgivings, most assume zero interest rates, QE and extraordinary credit easing are the only likely horizon if soundings from the halls of monetary power in Washington, Tokyo, Frankfurt were taken seriously.

"We are all long on central banks as an industry," said Pascal Blanque, chief investment officer at Amundi, which has more than $1 trillion in assets under management. "Fears about the normalization by central banks are way overdone."

"We are seeing a change of DNA of central banks. What we think non-conventional will become part of theory. And, as often in economic matters, theory comes after practice."   Continued...

U.S. Federal Reserve Vice Chair Janet Yellen testifies during a Senate Banking Committee confirmation hearing on her nomination to be the next chairman of the U.S. Federal Reserve, on Capitol Hill in Washington November 14, 2013. REUTERS/Joshua Roberts