This article first appeared in The Edge Malaysia Weekly on December 30, 2019 - January 5, 2020
IT is perhaps audacious to suggest that the ongoing unrest in Hong Kong can be blamed on the era of cheap money that began with the bailouts following the collapse of the US subprime mortgage market in 2007/2008. That’s no discredit to those seeking democratic reforms at the special administrative region where many residents not only disapprove of the withdrawn extradition bill but also could not get on the property ladder.
While inequality is not new, conditions have worsened with home prices up over 200% the past decade, driven higher by large capital inflows, including from mainland Chinese buyers being granted residential permits. The affluent buyers were already sought after by luxury brands, also beyond the reach of the average Hong Konger struggling to pay rent.
Nearly half of Hong Kong flats rent for HK$20,000 (US$2,550) a month — 70% of the city’s median household income of HK$28,100 and above the median of HK$16,400 for individuals, the South China Morning Post reported in August 2018.
Graffiti scrawled near a protest site reads, “7K for a house like a cell and you really think we out here scared of jail,” according to a Reuters report in August.
The number of Hong Kongers living in properties illegally divided up from larger ones rose 5% between 2015 and 2016 to reach 21,000 people, according to a 2018 report by aid agency Oxfam. It recommended the Hong Kong government set aside an extra HK$36.7 billion (US$4.7 billion) to address the city’s widening wealth gap and prevent more people falling into poverty. The government has reportedly come under fire for relatively measly spending on aid to over 1.3 million people estimated to be living in poverty despite its sizeable budget surplus.
And people are not just being priced out in Hong Kong, which is tied for first place with Singapore and Paris as the world’s most expensive city to live in on the Economist Intelligence Unit’s 2019 Worldwide Cost of Living Survey.
The number of rough sleepers has reportedly more than tripled since 2010 in London, where prices have risen significantly, although the property market had cooled since the Brexit vote.
Without quantitative easing (QE), house prices in the UK would have been 22% lower in 2014 while equity prices would have been 22% lower without policy loosening, according to a staff working paper by the Bank of England in March 2018 on the distributional impact of monetary policy easing in the UK between 2008 and 2014.
QE-pumped asset bubbles
Economists have long warned of asset bubbles forming — from real estate to commodities — as interest rates collapsed to zero and into negative territory.
The first round of quantitative easing (QE1) or the asset purchases that the US Federal Reserve started in November 2008 — about two months after Lehman Brothers filed for bankruptcy protection — was deemed a success as it revived the mortgage market, allowed many home mortgages to be refinanced and successfully restored stability in the crisis-stricken financial sector.
The verdict for the subsequent QE2, QE3 and “Operation Twist”, however, were not as unanimous. That’s because subsequent QEs — which took place between November 2010 and October 2014 — were no longer about restoring stability to the financial system.
To the uninitiated, QE essentially saw central banks printing money to buy debt securities, including debt paper issued by the government. Massive purchases of these government bonds and other debt securities are why central banks’ balance sheets have more than tripled during the so-called era of cheap money.
While the rates were kept low in the hope of shoring up growth at home, the money flow is global.
Investors, flush with trillions in cheap funding obtained at home, flowed the money abroad to emerging markets into equities, commodities and other asset classes, including real estate.
In a recent op-ed, Stephen Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, estimates US$4.7 trillion to be “the functional equivalent of a massive liquidity injection that has been propping up asset markets over most of the post-crisis era” from 2008 to 2018.
The figure is the difference between the US$5.3 trillion increase in combined nominal gross domestic product (GDP) of the US, the eurozone and Japan from 2008 to 2018 — about half the US$10 trillion collective expansion in their central banks’ balance sheets over the same period.
The combined assets of the US Federal Reserve, European Central Bank and Bank of Japan stood at US$14.5 trillion in November 2019, more than 3.6 times the pre-crisis level of US$4 trillion, though slightly below their peak of US$15 billion in early 2018.
To put that into perspective, China’s nominal GDP was US$13.5 trillion in 2018, more than double Japan’s US$5.1 trillion, but behind the US’ US$20.5 trillion. The eurozone’s was US$18.8 trillion while Malaysia’s was about US$347 billion.
The global stock market was worth about US$85 trillion at the time of writing. Apple Inc and Microsoft are each worth about US$1 trillion currently, easily quadruple their value in 2008, while Malaysia’s total stock market capitalisation stood at RM1.71 trillion (US$415 billion) as at Dec 26, 2019.
Markets, high on liquidity rush, naturally baulked in May 2013 when the then US Fed chief Ben Bernanke hinted at scaling back its US$85 billion monthly bond purchases as early as September 2013 and end it by mid-2014 — thus the “taper tantrum” that caused stock markets to fall. The Fed only began tapering in December 2013 and QE3 was halted in October 2014. At its peak, the Fed’s balance sheet swelled to US$4.5 trillion, more than five times the US$870 billion it stood pre-crisis, and is currently about US$4 trillion.
Government, corporate and household debt rose to US$255 trillion globally in 2019, three times the global economic output, up from US$186 trillion in 2009, Bloomberg says.
We know that macroeconomics is not an exact science and it is during times of crisis that practitioners get to really employ their policy tool kit, conventional or otherwise.
To their credit, central bankers around the world — including the governor and monetary policy committee in Malaysia are constantly assessing the global situation for potential vulnerabilities stemming from this unprecedented era of unconventional monetary policy.
While the Bank for International Settlements (BIS) concluded in a recent report that the benefits of the unconventional monetary policy the past decade outweigh the adverse side effects, the jury is still out. The verdict likely depends on how well the potential vulnerabilities are contained before they become problematic.
What’s certain “from a lower for longer” stance is that growing retirement savings with and outside pension funds will be challenging and could well return to roost for governments expected to cast wide-enough social safety nets for a growing portion of the electorate.
Normalising interest rates to pre-crisis levels would also prove a lot tougher than ending and unwinding QE. Richard Koo, chief economist at the Nomura Research Institute, had perhaps summed the scenario at hand in the title of his 2015 book: The Escape from the Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy.
Whether or not the Fed indeed raised rates too fast too soon in 2017 and 2018, normalisation after a decade of ultra-loose monetary policy was already hard enough without the high-profile Twitter updates undermining Fed chief Jay Powell.
The Trump factor
To be sure, QE was not a product of Donald Trump, who won the US presidential election in November 2016 and is up for re-election next year.
The global factors that Powell attributes to the Fed’s dovish turn, however, has much to do with the protracted US-China trade war that began within months after Trump occupied the White House.
In August 2017, Trump ordered a probe into alleged Chinese intellectual property theft and in January 2018, threatened a “big fine” on China over IP theft, subsequently kicking off a tit-for-tat US-China tariff war and retaliatory exchanges that lasted most of the year.
On Aug 1, Trump announced 10% tariffs on US$300 billion Chinese imports in addition to the 25% already levied on US$250 billion worth of products. The same day, the Fed cut key rates by 25 basis points to 2% to 2.25% to provide insurance against the ongoing risks and said it will stop shrinking its balance sheet.
In October, the Fed indicated another round of Treasury purchases at an initial pace of about US$60 billion a month at least through January 2020, but says it is not QE4 — calling the purchases “purely technical operations” to ensure reserves remain ample even during periods of sharp increases in non-reserve liability and to mitigate risk of money market pressures that could adversely affect monetary policy implementation. The bond-buying operations between 2008 and 2014 were aimed at lowering long-term rates and support economic recovery, the Fed statement read.
While the Phase One US-China trade deal, announced on Christmas Eve, could well be sealed as planned next month, the world will likely need more convincing that the two superpowers can make nice for the long-haul to support global growth amid downbeat forecasts. The US stance on Huawei Technologies will be a key barometer. Whether Trump wins a second term next year is another.
Role of state
Whatever one’s thoughts on Hong Kong, there are clearly lessons to be learnt from how the misreading of a situation could see peaceful protests degenerate so quickly into chaos and anarchy.
Economic and social inequality was the bone of the Occupy movement, not just in Wall Street, but the Occupy Central movement in Hong Kong in 2011. Demands for electoral reform was only central in the 2014 Umbrella Movement, which preceded the on-going unrest triggered by the now-abandoned extradition bill that saw more than half a million Hong Kongers take to the street since June 2019.
Though nowhere as acute as the situation in Hong Kong, housing affordability had also fallen drastically in Malaysia during the era of easy money. The median house price grew at a 23.5% compound annual growth rate (CAGR) between 2012 and 2014, more than double the 11.7% CAGR of median household income, according to data from Khazanah Research Institute. That income growth isn’t catching up with the rise in house prices was also the conclusion of a 2017 study by Bank Negara Malaysia.
Here, policymakers should heed Nobel laureate Joseph Stiglitz’s call for the strengthening of the state in tackling the socioeconomic and political challenges in a world left too much to market forces for too long. In his book People, Power and Profits: Progressive Capitalism for an Age of Discontent, Stiglitz proposes several reforms, including upping public investment in research to understand how best to tackle economic inequality.
“The reality is that markets have to be structured, and over the last four decades, we’ve restructured them in ways that have led to slower growth and more inequality. There are many forms of market economies, but we have chosen one that ill-serves large portions of our population. We now have to once again rewrite the rules so that our economy serves our society better,” Stiglitz wrote.
The QE recap
Sept 15, 2008 — Lehman Brothers files for Chapter 11 bankruptcy protection with US$639 billion in assets and US$619 billion in debt (solvency of banks).
Sept 18, 2008 — US bailout bill passed. Hank Paulson, Secretary of the Treasury, and Ben Bernanke, chairman of the US Federal Reserve, went to Capitol Hill and told congressional leaders that if they did not authorise a US$700 billion bank bailout the financial system would implode.
November 2008 — The first round of quantitative easing (QE1) announced. The Fed buys US$100 billion of agency debt and US$500 billion of mortgage-backed securities (MBS).
March 2009 — QE1 extended with the Fed buying another US$850 billion of MBS and debt. The Fed also channelled US$300 billion into longer-dated Treasuries.
May 9, 2010 — The International Monetary Fund and European Union agree to lend Greece €110 billion (solvency of governments).
November 2010 — QE2 announced with the Fed buying US$600 billion longer-dated Treasuries by mid-2011.
Aug 5, 2011 — Standard & Poor’s cuts US’ AAA sovereign rating.
Sept 17, 2011 — Occupy Wall Street protest movement against economic inequality.
Sept 21, 2011 — Operation Twist kicks off to increase average maturity of the Fed’s Treasury portfolio by buying US$400 billion worth of Treasuries with 72 to 360 months maturities and selling off an equal amount of treasuries with 3 to 36 month maturities.
Oct 15, 2011-Sept 11, 2012 — Occupy Central in Hong Kong against economic and social inequality.
September 2012 — QE3 announced with the Fed buying US$40 billion of MBS per month. This coupled with Operation Twist accounted for US$85 billion worth of monthly long-term bond purchases. In Europe, European Central Bank chief Mario Draghi also announces the purchase of bonds issued by eurozone countries.
May 22, 2013 — “Taper Tantrum”. Emerging markets fall as Bernanke hints at scaling back bond purchases from US$85 billion to US$65 billion as early as September 2013 and end it by mid-2014.
December 2013 — The Fed begins tapering, reducing the US$85 billion monthly purchases by US$10 billion.
Sept 26-Dec 15, 2014 — Umbrella Movement in Hong Kong for electoral reform.
Oct 29, 2014 — The Fed halts QE3 after accumulating US$4.5 trillion in assets.
Dec 17, 2015 — FOMC raises rates 25bps to 0.25% to 0.5%.
Nov 9, 2016 – Donald Trump wins the US presidential election.
Dec 15, 2016 — FOMC raises rates 25bps to 0.5% to 0.75%.
March 16, 2017-Dec 20, 2018 — FOMC raises rates three times in 2017 and four times in 2018, to reach 2.25% to 2.5%.
March 31, 2017 — Trump orders review of US trade deficits and their causes.
April 7, 2017 — Trump-Chinese President Xi Jinping summit at Trump’s Mar-a-Lago estate agrees to 100-day plan for trade talks.
July 19, 2017 — US-China talks fall through.
Aug 14, 2017 — Trump orders probe into alleged Chinese intellectual property theft.
Jan 17, 2018 — Trump threatens big fine on China over alleged intellectual property theft.
Jan 22, 2018 — Trump imposes tariffs on all imported washing machines and solar panels.
March 8, 2018 — Trump slaps 25% tariff on steel imports and 10% on aluminium.
April 2, 2018 — China imposes tariff of up to 25% on 128 US products.
April 3, 2018 — Trump plans 25% tariff on US$50 billion worth of Chinese imports.
April 4, 2018 — China responds with plans for retaliatory tariffs on US$50 billion in US imports.
June 15, 2018 — US says it will levy 25% duties beginning July 6 on US$34 billion in Chinese imports, rising by another US$16 billion after a public comment period. China responds with US$34 billion tariffs on US goods.
July 10, 2018 — US unveils plans for 10% tariffs on US$200 billion in Chinese imports.
Aug 1, 2018 — Trump hikes tariffs from 10% to 25% on US$200 billion in Chinese imports.
Aug 7, 2018 — US releases list of US$16 billion worth of Chinese goods subject to 25% tariff. China retaliates with 25% duties on US$16 billion worth of US imports (both effective Aug 23).
Sept 24, 2018 — US slaps 10% tariff on US$200 billion worth of Chinese imports, says rates will rise to 25% on Jan 1, 2019. China retaliates with US$60billion in duties on US goods.
Dec 1, 2018 — US-China agree to 90-day halt of new tariffs.
June 29, 2019 — US-China agree to restart trade talks after concessions from both sides. Trump meets with Xi and agrees to no new tariffs and an easing of restrictions on Chinese telecom powerhouse Huawei Technologies Co Ltd. China agrees to unspecified new purchases of US farm products.
Aug 1, 2019 — Trump announces 10% tariff on US$300 billion worth of Chinese imports, in addition to the 25% already levied on US$250 billion worth.
Aug 1, 2019 — The Fed cuts key rate 25bps (2% to 2.25%) to provide insurance against ongoing risks and says it will stop shrinking its balance sheet. The move puts an end to the era of quantitative tightening by major central banks (Fed, Bank of Japan, ECB) less than one year after stockpiles of bonds and other assets began contracting after a decade of stimulus, according to Bloomberg data.
Aug 5, 2019 — China halts purchase of US agriculture products, and renminbi weakens past the seven per dollar level, sending equity markets sharply lower. US Treasury says China manipulating currency, sending gold to six-year high.
Aug 13, 2019 – Trump delays tariffs on about half of Chinese products on
US$300 billion list announced Aug 1, including laptops and cellphones from Sept 1 to Dec 15.
Aug 23, 2019 — China announce 10% extra retaliatory tariffs on US$75billion of US goods. Trump says tariffs on China will go to 30% instead of 25% on Dec 15.
Sept 1, 2019 — China begins imposing a 5% duty on US crude oil for the first time since the two countries began their trade war over a year ago. US soybeans, already subject to a 25% Chinese tariff, are subjected to an extra 5% tariff, while US beef and pork get an extra 10%.
The US begins imposing 15% tariffs on a US$125 billion list of Chinese goods, including footwear, Bluetooth headphones, smart watches and flat-panel televisions.
Sept 4, 2019 — China and the US agree to hold high-level talks in early October in Washington.
Oct 11, 2019 — “Not QE4” initiated.
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