It has now been a year since the introduction of radical reforms to pensions which have provided savers with much greater freedom and flexibility over how they can access their pension pots.
A year is a long time in the markets, and how things have changed. It is worth reflecting that there has been a quite remarkable shift in sentiment in little more than a year, from one where there was arguably far too much complacency about risk as investors assumed Central banks would always be ready to step in and prop up asset prices, to one where there are growing doubts about the credibility of Central banks. Danger and uncertainty rather than opportunities are seen everywhere: a potential Chinese devaluation, unstable oil prices, and Brexit, to name three.
After years of ultra-low interest rates and relentless liquidity provided through so-called quantitative easing (QE) asset-purchase programmes, investors are growing concerned that Central banks are losing control of the situation. You can see this being played out through the rebound in gold prices this year, with gold being a physical asset that investors have historically bought when they perceive the financial system to be in a fragile state.
While QE has clearly provided a boost to stock markets and other risk assets, we have long argued that the benefits these programmes have delivered for real economies is highly tenuous to say the least, and arguably they have been out right damaging as well as fuelling wealth inequality. Such policies have led to the gross misallocation of capital into financial markets while capital expenditure by businesses has remained weak. Furthermore, the provision of cheap credit has propped up failing businesses, preventing the normal and necessary creative destruction of a default/bankruptcy cycle that cleanses an economy of past excesses. Of particular relevance is that years of expansionary monetary policy have simply failed to push inflation anywhere near the levels targeted by Central banks wherever you look.
The move to negative interest rates by some Central banks, including the European Central Bank and Bank of Japan, has spooked rather than reassured investors as it smacks of desperation. It shows they are running out of tools to respond to the weaker outlook for global growth. And now increasingly you will hear talk of 'helicopter money' as the next potential foray into unconventional monetary policy.
'Helicopter money' is an expression coined by the late Nobel Prize winner Milton Friedman, the architect of monetarism. It is a concept where Central banks directly inject money into the real economy by literally giving money away, rather than through the mechanism of the financial markets. Ironically, in some ways, Jeremy Corbyn’s proposed 'People's QE' programme, that was treated with howls of derision, is a variant of helicopter money.
In mid-April the European Central Bank President Mario Draghi denied that the bank had considered nor discussed such an approach, after speculation in some quarters over what further moves the ECB could take after the extension of QE and move to negative interest rates, but this may yet prove to be a concept that we hear more of as QE becomes consigned to the dustbin of history.
Such an experimental policy is unlikely to be adopted in the UK, where orthodoxy prevails. But it might yet prove a tempting experiment for a country like Japan where ‘Abenomics’ is looking like a busted flush, and where massive balance sheet expansion by the Bank of Japan has failed to kick-start growth and reintroduce inflation in the face of headwinds from its significant trade exposure to China and the recent strengthening of the yen. So keep your ears to the East and listen for the sound of whirring rotors.