Push, pull, or just pretend?

Quantitative easing doesn’t look like the right mechanism to get the global economic engines turning over

s capitalism broken, dead, or dying? This is something that has been bothering me, given developments in recent weeks. Just recently the European Central Bank (ECB) has had to basically use a hand crank to ignite its economy, some seven years since all its troubles started. During that time we’ve witnessed many false dawns.

All through last year, leading economists sold the idea of an imminent recovery in mainland Europe and asserted that deflation fears were unfounded. But as we now know, their calculations were based on hope above anything else.

The central bank’s push to boost liquidity, weaken the euro and trigger some much-needed inflation is the last monetary trick it can play. A last throw.

I am going to be as brave as some of our rather more esteemed economists and make the suggestion that this last trick won’t work. But what it may do, if anything, is buy some time from asset markets — addicts not quite ready to face their addiction to stimulus.

As for the real economy, it’s a long way down before those extra bank notes actually make their way into its nuts and bolts. As in the US experiment, we’ll soon discover that there are a lot more pockets for that money to go into before it reaches a bank manager in Mallorca.

And in any case, European banks are not healthy. The ECB wants banks to be the agents of change, restoring confidence in the system, but they aren’t in a position to do so. (Perhaps in deciding on quantitative easing, the ECB should have taken a closer look at its banks, and at least asked US courts to ease up on the fines they have been imposing on these banks for misconduct.)

So I am clearly in the camp that believes it just won’t work. Demand, the one thing that has been missing from the global economy, will remain elusive.

I guess you may ask: why the lack of faith in capitalism? Especially as the US is buzzing again, with unemployment under control and a bounce returning to Barack Obama’s step.

The dollar is strong and opinion polls are favourable. And in US politics, a strong dollar is a feather in any president’s cap.

But it was actually a weak dollar — during the three rounds of QE that began in November 2008 — that supported the recovery of the US economy.

While exports aren’t as important to the US economy (13% of its GDP) as, say, to our economy or Germany’s, it is the world’s third-biggest exporter and they’ve been a key component of its overall recovery.

Last August, a couple of months before the Federal Reserve embarked upon its last round of monthly bond purchases, exports reached their highest over a 64-year period.

Politically a strong dollar is good for Washington, but for Wall Street it isn’t. Microsoft, which reported earlier this week, has already been burnt by the greenback’s performance.

Expect more of the same from other blue chips, which, in an age of quarterly targets, means a quick return to focusing on costs and jobs.

There’s no way the Federal Reserve can tighten policy if it means an even stronger dollar. If the Bank of England raises rates, it will be a very, very brave move, especially as fourth-quarter growth numbers disappointed earlier this week.

My faith in the system can be restored only when central banks — especially the big three — are allowed to normalise monetary policy. My admittedly limited understanding of things that occur in their meeting rooms tells me we are still far away from such a world.

How does a central bank governor in little old SA get closer to normality?

Last year, the story was set in stone. We would see rates go higher. But oil’s collapse has (for now at least) put paid to this.

Whether it occurs later in the year depends on what that dollar does, and what the ECB’s bond purchases do to asset markets. As clear as mud. Derby is the deputy editor of the

Financial Mail derbyr@fm.co.za