Economist Dr Peter Warburton speaks to Glint Perspectives about how the money printing agenda has kept wealth with the rich and fundamentally undermined our economic and political systems
“We have undermined the basis of competitive capitalism.” Polite and softly spoken, Dr Peter Warburton isn’t pulling his punches when it comes to his indictment of money printing by the world’s central banks. The significance of quantitative easing and the other policies that have accompanied it, is that we have eroded the very foundations of our market economies he says, “and we are still at an early stage of understanding how significant that might be”.
The founder of consultancy Economic Perspectives received his doctorate from London’s City University before stints at Lehman Brothers and Robert Fleming in the late 1980s and early 1990s. In 1999 he published Debt & Delusion in which his afterword in the second edition (2000) stated: “When lenders, whether banks or non-banks, are overcome with fear of mass delinquency on their loans or investments, then credit access will seize up. September 1998 was merely a dress rehearsal for the real credit quality crisis that threatens to bring down the curtain on this deluded generation of investors.” Words poignantly proved true seven years later as toxic debt brought the global financial system crashing down.
While the advent of cheap money as a solution to the panic of that financial crash was timely in providing needed liquidity, its persistence, almost ten years on, is having serious systemic consequences says Warburton. Not only has it made markets fundamentally less competitive, it has allowed wealth and the means of investment to stay pooled in the very institutions that were the cause of so much financial instability.
The concentration of money in the hands of fewer financial establishments and individuals, “has all kinds of connotations: unfairness, injustice and misallocation”. That has led to malcontent well beyond the financial sector as the economic circumstance underpins political viewpoints. Has the furthering of imbalance and the denial of prosperity fed populism’s straw men? “It isn’t the only driver of populism but it certainly plays into this scenario. I think if we look across the age cohorts, we find the under 30s, under 35s, are the biggest losers from the financial crisis and they are politically the most dissatisfied and most desirous of radical change.”
So what’s to be done? The initial challenge is to identify what and how quantitative easing went wrong says Warburton. Brought in as a safety measure it went too far: “If you have the misfortune to be in an accident your airbag will kick in extremely quickly and powerfully but you certainly don’t want your airbag to keep inflating after the accident is over.” It’s not a perfect analogy he admits but it shows the reluctance to withdraw from emergency measures and “worse than that”, the idea it all was all free. “That orthodoxy that [QE and low interest rates] were a low cost, or no cost, option, still persists. I disagree profoundly.”
Although the negative side effects are sorely felt, the phenomenon of QE is still relatively poorly understood says Warburton. He uses the concept of “red money” and “blue money”. Red money circulates within elite organisations, it doesn’t circulate in the general economy, while blue money is that which sits in the wider, popular economy. “Essentially, QE is a closed system. It’s not inflationary per se.” However, once banks have become better capitalised, have started lending again and are expanding their balance sheets, as they have been for most of the last decade, then inflation returns. “Arguably we’ve reached that. The point is that the banks’ balance sheets have healed and clearly a lot of wealth has been accumulated in various quarters as well.”
Warburton sits on the Institute for Economic Affairs’ Shadow Monetary Policy Committee – a think tank shadowing the Bank of England’s own policy discussions and decisions on interest rates and QE. He started to vote for interest rate rises in 2013, while Threadneedle Street only saw fit to raise them last year, and then by just 0.25%. “That inordinate delay is to our detriment but it will probably take some more difficult times to make that obvious.”
The current medical guidance when it comes to the health of the economy consists of a dichotomy of interest rates and QE. We should look beyond that to cure the system and not just the symptoms, believes Warburton. Debt has been cast as an enemy, and while it undoubtedly represents risk, it is a key vehicle for the improvement of people’s lives. To say ‘there’s too much debt’ and that a rising generation is misconceived about their debt not being a risk, is wrong he believes. there should be constructive, multi-faceted approaches to debt and lending and that goes right back to the CEOs: “What the banks should have done and should still do is have written down a lot of unsecure debt.”
Further he says, the ‘bad bank’ concept, such as that enforced on RBS (whose toxic assets were stored in siloed ‘bad’ bank separate from the main organisation), should have been used more widely to clean up balance sheets even if it meant a capital hit. By storing the bad assets there would still be the chance they could improve in time and reduce what needed to be paid out, allowing banks to bring assets back to trade. On the flip side though, banking culture typically does not like to talk about its carbuncles: “The weakness of the system is there is nothing that compels banks to recognise the extent to which assets are impaired.”
There are other weaknesses too. The criticism of the banking sector by society has, for many, broadened into total a re-evaluation of market systems – Warburton points to the Occupy Wall Street movement and the rise of divisive socialist and protectionist policies. It all has identifiable roots, he says, that go back to his original accusation of QE undermining competitive capitalism. “When you dig into what people’s criticisms are, what they are describing is crony-capitalism, or klepto-capitalism, or basically monopolistic-capitalism. Most people would agree these are undesirable forms of industrial organisation. What we’re seeing today is governments being too afraid to confront pseudo-monopolies; in some cases preferring to have national champions, feeling that that’s good as a kind of strategic security.”
Clearly a principled capitalist himself, it follows that Warburton believes the current trade war posturing is as erroneous as the one-dimensional reading of a trade-deficit statistic. The benefits of capitalism come through the efficiencies of companies in keen competition with each other he says. Currently the larger, often nationally sanctioned, operations are able to simply buy or crush potential competitors – “unfortunately in our world that’s the kind of capitalism we have”.
By example he mentions to the double-edged sword of regulation which often rests in the hands of governments and other interested parties and how the ‘challenger banks’ have not had the impact it was hoped they would, pointing to Virgin Money’s merger with Clydesdale Bank & Yorkshire Bank. “We’re all the losers of a system where you have to be big to survive.”
So, as interest rates creep up and the value of money creeps down, all with little prospect for a meaningful rebalancing of who holds, and benefits from, cheap money, are we due another financial crisis, this time prompted by inflation? Warburton refers to the Small Inflation we currently have versus the Big Inflation that really will wipe out wealth: if the former triggers the latter we may be in big trouble. There are already some worrying symptoms as bulwarks to rising inflation are eroded by excessive indebtedness, seismic realignments of the international trade order and the overtly inflationary policies of the US, China, India and Japan.
“What crisis does to governments is make them fearful,” warns Warburton, explaining that a point of stress, be it a political event or an economic black swan, could open the door to high inflation as governments panic and pursue inflationary policies such as devaluation, monetised deficits and the creation of a false demand which will drive up the costs of goods and services.
If this is on the cards, if not on the horizon, then one thing that holds up is gold but Warburton doesn’t believe there is a strong case for gold gaining incrementally as paper money drops due to inflation. “The more compelling argument for gold is really that if systemic failure results in inflation or collapsing asset prices, then gold stands in a very small group of investments that will remain as a store of value. Gold is the anti-central bank asset – if they lose control, gold very quickly supersedes.”
The VIX index, a bet on the low-volatility of the market, lost over 80% of its value earlier this year because volatility shot up. Spooked investors might now be running to gold he says, describing VIX as “not fit for purpose”, and restating his fascination for how underowned and undervalued gold is in the face of QE’s inflation. “We’re setting ourselves up for another fall. Gold is one of the options that would pay out in times of systemic crisis.”
Calling out the bankers
More recently the European Central Bank has sought to defend its own quantitative easing program. Its own research claimed: “On the whole, we find that monetary policy in recent years benefitted most households and did not contribute to an increase in wealth, income or consumption inequality.” During this defence the ECB president, Mario Draghi, was handed a solar-powered tulip by Dutch policymakers as a poignant reminder of the Tulip Bubble ‘mania’ of the 17th century.
Warburton echoes that critique, questioning the ECB’s data as well as their logic. “I am not convinced by this explanation. The ECB is incorrectly attributing real income gains of Eurozone households in 2015-17 to its own QE program, when, in reality, it was the Chinese-led credit expansion (from 2015 Q2) that boosted world trade growth and Eurozone exports. The failure of the ECB program to regenerate Eurozone bank lending growth reinforces the conclusion that its impact on household real incomes has been small.”
The red money has remained behind finance’s glass walls it seems and competitive capitalism’s cutting tools remain blunted: “The balance of evidence upholds the charge that central bank QE has benefited the rich more than the poor.”
Dr Peter Warburton is the chief economist of Economic Perspectives, he is also an investor in Glint