“In a very simplistic sense, if you have ageing populations, older people don’t tend to riot. If you look around the world, you can almost predict where riots or civil disorder will be: places with much younger populations.”
For Mr Gartside, the ECB had succeeded where the US Federal Reserve had failed – it has provided a clear exit strategy for its quantitative easing strategy and clarity about its future interest rate policy. Days earlier, following the Fed’s announcement that it could taper off QE as early as this year, 10-year bond yields soared (gaining 100 basis points within two months). The markets had concluded – incorrectly – that QE tapering was a byword for interest rate rises, building on fears that rates would bite at the first signs of economic stabilisation.
“Markets overreacted,” Mr Gartside says. “They were too aggressive in pricing interest rate rises. Markets always overreact, because they can price the future either too soon or too late.”
He concludes that QE strategies have run out of steam – “QE’s impact has become questionable” – and that rather than lowering the cost of finance so that corporates can use leverage to stimulate economic activity, “QE has been very good at inflating financial asset prices”.
In a world that is, as Mr Gartside describes it, “awash with debt” and shocked into deleveraging by a global credit crunch, cheap money supply seems a bizarre panacea. The US, the world’s biggest bond market, did not need to calm financial markets following the QE tapering statement, he suggests, but to convince US consumers that interest rates would remain low, enticing them to continue spending.
But, Mr Gartside points out, there is a crucial missing ingredient: wage growth. This, he says, will be a key indicator and a measure of the success of QE strategies. He explains: “If the consumer gets a pay increase, they feel better about themselves, about their employer. They will spend the marginal pound, dollar or euro, and that is very good for the economy – you get a multiplier effect, which is also very good because that is how you build inflation expectations.”
The problem, he says, is wage growth has been lacklustre. Corporate health is strong, and many have paid down debts and recapitalised but are unwilling to invest in staff while the economic outlook is stable but stagnant: the age-old economic chicken-and-egg conundrum.
So, will history look kindly on the Fed’s decisions during this challenging period or on Ben Bernanke, its chairman, more specifically?
“You could make a case that the BoE has more credibility than the Fed. In the UK inflation is 50-60 per cent higher than in the US, yet you have bond deals that are lower than in the US. So just conceptually, there is something wrong there, and maybe one argument is that BoE policy is seen as more credible than Fed policy.”
