“Keynes is the only answer now central bankers have run out of bullets”

15th February 2016


A fund manager is urging central governments to remember John Maynard Keynes and invest in the real economy rather than pushing banks to lend even more to debt fuelled consumers and corporations.

Peter Toogood, investment director, City Financial, said the current negative interest rate fad has precious little to do with economic orthodoxy and more to do with desperation. He argued that the authorities must turn their attention to the real economy

In a note issued today, he said: “With due deference to Bill Clinton’s election campaign in 1992, one wonders when our elected and unelected officials are going to face up to the stark reality that quantitative easing (QE), at least in its current form, is deeply flawed and to recognise that “it’s the real economy, stupid!”.

“When it was first enacted, QE was a very convenient way to allow the banks to make a decent margin from borrowing at next-to-nothing from the Federal Reserve, while also providing liquidity to unwind their absurd levels of leverage.

“The extra margin allowed banks to write down huge, non-performing loans from sub-prime mortgages. This exercise was eminently doable with a positive yield curve.  Try that trick now, with yield curves around the globe as flat as pancakes! With net interest margins representing a large proportion of most banks’ profitability, it is no wonder that investors are unnerved.”

Toogood added that there is no tangible multiplier effect from QE in its current form and putting banks in a better position to lend to already debt-laden consumers, not to mention corporations, is like “handing an arsonist an open invitation to a warehouse full of fireworks”.

He believes corporations face huge competitive pressures from the digital consumer and are burning cash to compete and every country is desperate to devalue to attract that cost-conscious consumer.

In addition, Toogood argues that neither more QE nor negative interest rate policies are going to solve the situation.

“The answer is for the authorities to turn their attentions to the real economy. Keynes may be derided by the “austerity” school, but, in reality, it is the only answer when central bankers are out of bullets,” he added.

“Some options include directing QE bond buying to quasi government agencies, like the European Investment Bank, which could then spend liberally on infrastructure projects.”

Toogood argued that offering tax breaks to pension schemes to invest in infrastructure would achieve a similar objective. A mass affordable house-building programme wouldn’t go amiss in the UK either.

He said: “There are many potential spending options, so, uncomfortable as it seems to some, the “people’s QE” is likely to be a reality very soon. It is a delicious irony that if any of these things come to pass, the very economically-sensitive stocks that everyone loves to hate will run like crazy!”

“The stockmarket is currently deeply oversold and due a good bounce, but we remain wary until a proper panic sets in. A bear market is defined by rapid declines and oversold bounces, with investors looking to sell the bounces, even if it means taking losses.  Caution is still warranted.”

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