Preparing for the post-QE world

By Jean-Michel Paul

Over the past eight years, the major central banks have increased their balance sheets to $18 trillion from $6 trillion, predominantly through the purchase of their own government's bonds. While the Fed has ended its QE programme, the European Central Bank and Bank of Japan continue theirs.

But those too will eventually come to an end. What happens next will determine whether the world economy is set on a path to real growth or further stagnation.

"Unwinding" these positions ­­ even progressively as the acquired assets mature ­­ would almost cer tainly create deflation and a financial crash as it would lead to the withdrawal of massive amounts of liquidity from the financial system. Instead, we are likely to see what Adair Turner, former chairman of UK's Financial Services Authority, recently called a state of "permanent monetisation".

Permanent monetisation may be inevitable, given the risks and difficulties entailed in undoing the asset accretion that happened under QE. It can prove beneficial, too.

Since central banks are ultimately owned by governments, absorbing the QE purchases would effectively mean that governments would own their own bonds, assets that comprise a significant share of national debt. Recognising this changes the national debt picture.

The newly consolidated national debt will be markedly lower once the assets acquired by the central banks through QE are subtracted.