by Michael Arbow, MBA
Partner, RSD Solutions Inc.
The Bank of England decided today that because of the Euro-crisis and a sluggish home economy the financial system in the UK needed more quantitative easing: a flood of cash to build some forward economic momentum. Over the near future the Bank will purchase £75 billion (about 115 billion USD) of bonds with freshly printed money in the hope (?) that the financial crisis hitting Europe will, at worse, only have a minor impact on the UK economy. Will this new flood of cash help the UK avoid the effects of the contagion now pulsing through Europe? That is the question that has economist offering as many answers as there are economist plus one. Regardless of the effect on the UK, there is a more generally accepted feeling that the more powerful benefits will be to the emerging markets. To quote Sir Terry Leahy (ex boss of Tesco): “QE created an awful lot of liquidity intended for the real economy but found a home in markets and speculators looking for quick returns."
We witnessed from the Great Recession the power of quantitative easing’s effects on the economies of the emerging markets. The positive effects included creating new wealth and a near unprecedented increase in their middle classes. This benefit came back to haunt the easing nations in the form of a high commodity prices which have arguably contributed to a sluggish economic recovery and increased talks of a second dip recession.
What does this mean for risk departments? Keep an eye on the horizon and watch for signs of other countries joining the QE parade. It may be time to revisit those hedging strategies you put off due to the current pullback in commodity prices – it’s days may be short lived.
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