Veritas' Meg Woods: identifying the 2020 winners

Western governments’ penchant for spending more than their revenues is being indulged by their central bankers, who persist with accommodative monetary policies and repressing interest rates.

They turn a blind eye to the long-term fallout of their policies. For example, low interest rates produce a misallocation of capital: one in 10 British businesses is only being kept alive by low rates.

Repressed interest rates also cause pension liabilities to balloon. In the UK, they are estimated to have risen by an astonishing 40%-50% since 2009 by Hymans Robertson.

Thus, the politicisation of the major central banks continues, step by step.

Ben Bernanke at the US Federal Reserve now promises to continue quantitative easing until the unemployment rate falls to 6.5%. Those who worry about the inflationary fallout from all this printing of money should reflect on the chairman’s in-built stabiliser: as soon as growth starts heating up (measured by the fall in unemployment to 6.5%), the punch bowl will be eased off the table.

Indeed, it is interesting to note in the minutes of the December 2012 Federal Open Market Committee meeting that some members mooted slowing or even stopping bond purchases by the end of 2013.

This would clearly be prudent, given the huge inventory of bonds now on the Fed’s balance sheet – but might it also reflect a quiet confidence in the US recovery?

The seeming inability of Congress to tackle the deficit in any meaningful way, forcing the Fed’s hand, casts a spotlight on the Achilles’ heel of democracy.

As Gillian Tett observed in the Financial Times: ‘Modern American political rhetoric is peculiarly addicted to the presumption of permanent growth.’ She quotes Peter Thiel, founder of the company PayPal: ‘Democracy works where voters think that things are getting better.’ It presumes that the economic pie can be made to expand.

Contrasting economies

In Japan, a country that has effectively been ex-growth for over two decades, they have just elected their seventh prime minister in six years. The economy is moribund, with total debt at 235% of GDP.