Global liq­uid­ity stalls as Fed puts QE into full-throt­tle re­verse

The Daily Telegraph - Business - - Front Page - By Am­brose Evans-Pritchard

GLOBAL liq­uid­ity is van­ish­ing faster than wa­ter on the beaches of Mont-St-Michel as the tide goes out.

The two great cen­tral banks of the Western world – the US Fed­eral Re­serve and the Euro­pean Cen­tral Bank – are both di­alling down stim­u­lus rapidly even though the world econ­omy is slow­ing.

The $2 tril­lion (£1.5 tril­lion) flow of stim­u­lus each year from “peak QE” has plum­meted to zero. By early next year the net ef­fect will be neg­a­tive. “We are mov­ing into an en­tirely dif­fer­ent world,” said Brian Coul­ton, chief econ­o­mist at Fitch.

Quan­ti­ta­tive eas­ing by the Fed is now in full-throt­tle re­verse. The pace of bond sales rises to $50bn a month this quar­ter. Since the Fed has al­ways ar­gued that QE “works” by driv­ing up eq­uity prices and hold­ing down credit spreads, one might in­fer that the op­po­site also holds: that fall­ing as­set prices use­fully helps the Fed do its dirty work.

In­vestors have been com­pla­cent about this ac­cu­mu­lat­ing shock, al­though the credit crunch is al­ready plain to be­hold in emerg­ing mar­kets. Bor­row­ers in Asia, Latin Amer­ica, the Mid­dle East and Africa have to­gether wracked up $7.2 tril­lion of dol­lar loans and equiv­a­lent de­riv­a­tives – dou­ble the pre-Lehman lev­els – and are hav­ing to roll over debt in an ever less friendly cli­mate.

Mar­kets have also been com­pla­cent about the fu­ture path of US rate rises, bet­ting Con­tin­ued on Page 8

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