Quantitative easing (QE) arouses more passionate argument than the rather bland term for money printing should probably provoke. The use of bond buying to suppress long-term interest rates on bonds was supposed to underpin the value of other asset classes, with the resulting confidence boost a way of getting credit moving in the wider economy. This has taken on an aura of mantra, particularly at the Federal Reserve, which has committed itself to buying $85bn (£53bn) of securities a month for seemingly as long as it takes to get the US economy moving. The problem is that such an untried monetary device is clearly causing previously unforeseen distortions in other parts of the financial system as investors are forced to hunt for yield.
What seems to be happening is that QE has caused equities to be viewed as a source of income rather than growth, with profound implications for how companies are ultimately run. There is evidence, particularly in the US, that company managements are prioritising dividends and share buybacks over business investment. Figures compiled by Citigroup show that, in 2011, companies spent some $650bn on buybacks and dividends, compared with $580bn in business investment in a reversal of the usual proportion. The practical implications are that companies are cutting back on vital functions such as research and development to meet the needs of their income-conscious shareholders.
Executives are not slow to see the benefits of returning more cash to shareholders when it comes to supporting the equity value of their businesses by borrowing at record low interest rates in the bond market to get shares off the market. For example,
The long-term risks to such a change in investor behaviour could be profound. The most extreme analysis is that companies evolve into nothing more than cash shells living off the proceeds of their legacy products until the income dries up. The other more immediate problem is that gearing the balance sheet while interest rates are low risks the capital stability of a business if debt needs to be refinanced at a time of much higher rates. In addition, governments could start to muscle in on investor returns by increasing taxes on payouts, as threatened in the US should the fiscal cliff not be averted, forcing companies to artificially invest their surplus cash and inflate further credit bubbles.
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