Friday, August 12, 2016

It's Quantitative Easing To Infinity!?!
"They won’t ever say they’re out of ammunition, but central bankers are starting to look like naked emperors  .. Using monetary anaesthesia for a long time can eventually cause the patient to develop side effects. Among these are distortions in asset markets, rising wealth inequality and a misallocation of resources. Distortions in asset prices and potential asset bubbles are a direct consequence of asset purchases. Bond investors, for example, are left with little risk premium to compensate for credit and liquidity risk – while more investors are herding towards the same trades, as pointed out by the IMF’s herding indicator in a recent Global Financial Stability Report .. The mechanical effect of QE on asset prices has arguably exacerbated disparity in wealth across social classes and across generations .. Persistently low interest rates can lead to misallocation of resources towards debt-dependent industries, as pointed out in several papers by Claudio Borio of the Bank of International Settlements. Cheap funding has fuelled a build-up of industrial over-capacity in energy, mining, shipping, banking and a range of other sectors. Keeping interest rates low slows a reduction in capacity – delaying the pain but also keeping zombie firms alive. In turn, this makes economies more sensitive to increases in interest rates and reduces central banks’ degrees of freedom. In other words, too low for too long interest rates can become self-validating, bringing low interest rates tomorrow, and reducing productivity as resources remain allocated to the wrong sectors."
- Alberto Gallo, Fund Manager at Algebris Investments
link here to the essay

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