The Problem With QE: The Final Chapter

Yesterday, I clumsily tried to explain that QE II was not a win-win. Jeremy Grantham does so much more eloquently in his Q3 investment letter. Here are some gems from the letter:
Given the mysteries of momentum and professional investing, when coming down from a great height, markets are likely to develop such force that they overcorrect.Thus, all of the beneficial effects to the real economy caused by rising stock or house prices will be repaid with interest. And this will happen at a time of maximum vulnerability, like some version of Murphy’s Law. What a pact with the devil! (Or is it between devils?)
....Any plunder to be had from the booms and busts went, of course, to the more nimble members of the financial community!
...When rates are artificially low, income is moved away from savers, or holders of government and other debt, toward borrowers. Today, this means less income for retirees and near-retirees with conservative portfolios, and more profit opportunities for the financial industry; hedge funds can leverage cheaply and banks can borrow from the government and lend out at higher prices or even, perish the thought, pay out higher bonuses. This is the problem: there are more retirees and near-retirees now than ever before, and they tend to consume all of their investment income.With artificially low rates, their consumption really drops. The offsetting benefits, mainly shown in dramatically recovered financial profits despite low levels of economic activity, flow to a considerable degree to rich individuals with much lower propensities to consume.

No comments: