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Business: Analysis: Business leader: QE bonanza may be diverting, but it won't do any long-term good
GuardianThe stock market knew how to react to Ben Bernanke's "QE3" money-drop: buy mining stocks, which filled the top 10 riser slots in the FTSE 100 index on Friday, and sell dull dividend machines like BT, GlaxoSmithKline and Vodafone.
The reaction was entirely logical. If we've learned anything about how quantitative easing works, it's that commodity prices go up when a wave of new dollars seeks a home. And this time it is an unlimited series of $40bn waves, since the chairman of the Federal Reserve has pledged to spend that sum every month until the US economy creates lots of jobs.
This policy response will probably be enough to divert investors' attention from the eurozone crisis and the Chinese slowdown for a few weeks at least. But will it do any lasting good? There's every reason to think not.
The flip side of higher commodity prices is higher prices for goods on supermarket shelves. That eats into consumers' incomes unless wages are rising at a meaningful rate, which they are not. Consumers' firepower could, of course, be boosted if the cost of their mortgages fell, which is another ambition of QE. But in the UK interest rates are already on the floor, yet Abbey National, for example, raised its standard variable rate last week.
Whatever Bernanke does, the climate seems highly unlikely to encourage non-financial companies to invest. In the average boardroom, they will worry about the hit to costs from higher commodity prices; and they will fret that demand from debt-laden consumers will fall. Directors are likely to conclude that the best way to keep the shareholders happy is to buy back more shares. Few jobs are created that way.
The first bout of QE, launched after the Lehman collapse, succeeded in restoring confidence for a while. Successive doses seem to have had the reverse effect, since the one certainty is that central banks can't keep it up forever. In the meantime, we live in terror of the shock to the financial system when the QE drug is withdrawn.
