Money printing (quantitative easing, or QE) in the US has released “the shackles on global macro performance”, says Hugh Hendry of Eclectica Asset Management. QE has forced creditors “to transfer their wealth to the economy’s entrepreneurial and household sectors”, staving off “the very real prospect that the US economy would endure the hardship and misery of an economic depression comparable to that of the 1930s”.
While this asset price inflation has mainly benefited the wealthy, and generated a political backlash in the process, President-elect Donald Trump’s plans to spend huge sums on infrastructure and tax cuts should heal “the political fissures brought on by QE”, says the hedge-fund manager.
But Europe’s decision to delay QE until the last minute has left it struggling with “low growth and high government debt”. What’s more, “the German dogma of ‘good deflation’ seems as entrenched as ever” – the European Central Bank has just taken its first steps towards an exit from QE, even though there is “no political resolve at the core of Europe to embrace a fiscal expansion to offset the dangers of this tightening”. As a result, “Europe looks to set to flounder once more”.
By contrast, Japan has taken bold steps to boost demand. Politicians “have removed hawkish Bank of Japan governors, wound back fiscally regressive tax hikes and now have ‘sacked’ the bond market”. This means “their inflationary intent is now almost unencumbered” – which means that we could finally see inflation take off in Japan. And with nominal ten-year bond yields held at 0%, “the outlet valve would be a sharply weaker yen”.