Quantitative easing will push investors into riskier assets and will not solve Britain’s economic problems, says Newton’s head of European equities, Raj Shant.
The manager of the European Higher Income fund claims the government’s monetary policy is reckless and worsening the scenario that brought on the downturn.
At a Cofunds press conference this morning, he said: “When we reach a point of zero interest rates and have exhausted monetary policy there is nothing else to do but print money to buy gilts and inject capital into the financial system.
“The government does not want people to hoard cash because if we were all saving, the economy would grind to a halt.”
He argued that by making interest rates on cash so low, the government is driving people to buy riskier products that they may not understand for the sake of higher yields.
“The Bank of England is printing money to drive these [gilts] prices down further and is deliberately driving people into riskier assets. The government thinks this is the only way we can return to the party. The reality is we are not going to return to the party. We need to return to a world of less borrowing and more saving so we enter a new equilibrium.”
Shant adds that the government should concentrate on spending money on infrastructure projects “in a more focused way” and cutting taxes as an alternative to quantitative easing. It should also be encouraging a new level of spending and saving.
However, he says, politicians are not keen to cut taxes as they know the money will be saved and not spent until consumer debt comes down. He also notes tax cuts may not fit into short-term electoral cycles.
In continental Europe, Shant says, government policy will not result in quantitative easing, because although there are similarities, the economic problems are different.
“In the UK, the premise is that the problems have been caused by a surge in leverage and credit and a property boom. Germany has not had a property boom and consumers are still saving 10% of their income. They have not indulged in credit cards. Italians do not have big personal borrowings and the French, yes, it has had a bit of a property boom but they do not have highly leveraged households. Europe does not have the fundamental problems that the US and UK do.”
However, he adds, the European economy has tended to rely on exports and is suffering as a result, but domestic demand is not low, so the European Central Bank does not need to resort to zero interest rates or quantitative easing.