Hong Kong Monetary Authority Chief Executive Norman Chan nailed down the root cause of our economic problems in a recent speech. It wasn’t too little taxes, too little regulation, not enough demand (as Keynesians would believe), it’s too much debt.
The following is from English CRI:
Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that if the process of deleveraging is disrupted by quantitative easing, asset prices might drop sharply and remain volatile.
When delivering a speech entitled the Global Deleveraging: The Right Track at the Hong Kong Economic Summit 2013, Chan said that excessive leveraging, or over-borrowing, in major industrialized countries was the root cause of both the global financial crisis and the more recent sovereign debt crisis plaguing Europe.
Chan also says that quantitative easing, which is essentially money printing by central banks, is not necessarily the answer and brings with it other risks. Instead of allowing the badly needed liquidation of bad debts and malinvestments, quantitative easing attempts to maintain the status quo:
Chan said quantitative easing is not a panacea, but it is the exact opposite of deleveraging. In the past three years, quantitative easing had limited stimulating effect on the real economy. “In order to solve the structural imbalances built up in the past two decades, we must get to the bottom of the problem.”
There is a possibility that quantitative easing produces the desired results, which is a very desirable scenario as global economy will return to its normal growth path, he noted.
However, there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient.
The Federal Reserve’s quantitative easing program (we might be seeing round 4 of this soon) has not only prevented the liquidation of bad debts and investments, it’s also heightened the risk of high price inflation in the future. Once the economy starts to stabilize a bit more and all that new money enters the economy, it could cause prices to spike rapidly if the Federal Reserve fails to remove if fast enough – which could be tough considering how much money the Fed has created.