While Mervyn continues to inflate our universe via Quantitative Easing, another Mr King — Stephen, the chief economist of HSBC — has issued a report saying QE is a way for governments to ‘hijack the credit system’.
‘The financial system is being rigged via acts of financial repression as governments look for new ways of funding excessive debts,’ says King in his bluntly worded report. While he doesn’t cite the UK or Sir Merv by name, it’s clear that reference is being made to QEs I and II, the government’s preferred means of stimulating lending through lowering borrowing costs.
Financial repression — basically, when governments fund their borrowing through imposing costs on others — may have worked for the West in the 1950s and 1960s, when government debt levels fell rapidly, notes King. This, however, was more a happy coincidence: debt fell mainly because growth was then so strong, allowing economies to shrug off the effects of repression. With ‘neither decent economic growth nor coherent fiscal consolidation plans’, this is unlikely to happen now.
What QE enables governments to do is to jump to the front of the credit queue as funds are channelled from the private sector. It allows governments ‘to escape the disciplines associated with market forces by pushing bond yields down to low levels even when fiscal policy is out of control. When real interest rates end up too low, or even negative, savers are penalised.’
Governments are essentially arranging the financial system to suit themselves — at the expense of the economy as a whole, says King. And, as the government gets increasingly addicted to cheap funds, it’s unlikely to want to reverse policies such as Quantitave Easing. QE is not a way to lower debt, it’s a means to live with it, he adds.
It’s unlikely the other King will lose sleep over this HSBC report. But — with inflation set to bust the Bank of England’s target for a third year — perhaps we should.