Panel
Central Banks: Is Quantitative Easing Becoming Quantitative Exhaustion?
Milken InstituteJames McCaughan, Cliff Noreen, Tad Rivelle, Aram Shishmanian, Kevin Warsh, David Zervos, Jim McLaughlin
- Consensus on Historical Necessity: Panelists agree that aggressive Quantitative Easing (QE) and liquidity injection were necessary emergency measures in 2008–2009 to prevent a financial system collapse and 1930s-style depression.
- Shift to Diminishing Returns: A consensus emerged that QE likely reached a turning point in late 2010 or 2011, transitioning from a successful crisis intervention to a policy with diminishing marginal returns and increasing negative side effects.
- Negative Distributional Impacts:
- Retirees: Low interest rates have decimated income for retirees relying on fixed-income instruments like CDs, reducing aggregate purchasing power.
- Commodities: QE was criticized for artificially inflating commodity prices (e.g., gasoline) despite excess supply, effectively acting as a tax on the broader economy.
- Wealth Inequality: Profits have surged while wages as a percentage of GDP have fallen, benefiting corporate balance sheets and the federal government more than the median worker.
- Corporate vs. Economic Divergence:
- Corporate profits rebounded to exceed 2007 peaks ($1.6 trillion to ~$2.35 trillion) despite the economy growing at only half its post-WWII rate (1.6% vs. 3.2%).
- Federal debt nearly doubled from $10 trillion to $17 trillion, yet interest expenses were halved as borrowing costs dropped from 5% to 2.5%.
- Labor Market Skepticism:
- Critics argue the "jobless recovery" persists when adjusting for declining labor force participation; the number of actual jobs working remains stagnant despite falling unemployment rates.
- Kevin Warsh noted that the Federal Reserve has "over-promised and under-delivered" by attempting to solve structural economic weaknesses solely through monetary policy.
- Structural vs. Cyclical Diagnosis:
- Cliff Noreen & Aram Shishmanian: Suggest the U.S. suffers from structural issues (competitiveness, capital/labor mix) similar to Europe's, which monetary stimulus cannot resolve.
- Kevin Warsh: Argues the Fed is "buying time" rather than "selling time," crowding out fiscal and structural reforms needed for sustainable growth.
- Tad Revelle: Warns that relying on the "portfolio balance channel" risks asset price bubbles (e.g., housing in Phoenix, SF, LA) decoupling from fundamental wage growth.
- Global Monetary Competition:
- Global central bank balance sheets expanded from $3 trillion to nearly $16 trillion between 2008 and the present, absorbing $10 trillion in securities.
- Switzerland: The Swiss National Bank faced the most aggressive pressure to join the "QE party," with corporations threatening to relocate if currency appreciation was not curbed.
- Deglobalization Risk: Warsh warns that persistent currency wars and competitive devaluations are fueling a "degloblization wave," causing financial markets to become increasingly segmented and home-country biased.
- Fiscal- Monetary Convergence:
- Warsh criticized the Fed for acting as a lender of last resort while fiscal policy remains gridlocked, noting that central banks are now effectively "crowding in" or subsidizing government deficits.
- The panel noted that Washington focuses on quarterly GDP and election cycles, neglecting three-to-five-year structural productivity and potential growth.
- Investment Strategy Adjustments:
- Fixed Income: Managers warn of significant risks for long-duration bond funds as the Fed eventually exits; credit spreads and structured products are preferred over Treasuries.
- Alternatives: Advisors suggest moving into non-traditional fixed income (private placements, commercial mortgages, CLOs) to compensate for negative real rates.
- Hedging: Investors must hedge against the inevitability of rising rates and widening spreads if QE ends poorly.
- Forward-Looking Statements:
- Exit Strategy: The Fed's "Evans Rule" (QE continues until unemployment drops below 6.5%) is viewed by some as a potential "victory" declaration, though others see it as risky if asset prices have already become unstable.
- Reflationary World: Fed Chair Bernanke's view suggests central banks believe larger balance sheets will drive real growth, implying a future with fewer QSIPs available for private purchase.
- Historical Parallel: A chart cited by the moderator suggests countries that abandoned the gold standard (expanding balance sheets quickly, like Japan) saw the fastest industrial rebounds, influencing current Fed strategy.
- Future Outlook:
- Jim McLaughlin: Predicts continued QE for 9–12 months, followed by an eventual exit, but warns that many bond managers are currently "vulnerable" to this shift.
- Kevin Warsh: Warns that without policy correction, the U.S. economy may become accustomed to 2% growth and chronic unemployment, becoming "far less promising" than the inherited baseline.
- Aram Shishmanian: Urges a new global monetary architecture to manage the transition away from dollar-centric reserve systems as emerging markets diversify.