Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 42

QE causes currency and fiscal impotence

The world has never worked through a period where Quantitative Easing (QE) has been undertaken by most of the major global economies, including for the first time the United States.

A goal of QE is to increase liquidity through the central bank by buying illiquid bank assets, freeing up funds which the banks should in turn lend to consumers and businesses. This has not occurred in the US. Instead banks have tightened their credit criteria and are using QE as an opportunity to re-capitalise their balance sheets. QE is a godsend to US banks as it is simpler and substantially cheaper than raising equity capital. It has helped to address a bank solvency issue but has not increased money supply.

Having a strategy to deal with it is critical, yet neither the Reserve Bank of Australia (RBA), nor past or present governments have articulated one. QE is the foremost issue impacting on our economic future.

Put simply, QE is an admission of failure to properly manage an economy in prior years that results in a central bank having to print money to stimulate economic growth. On a global scale, countries that have made a mess of their economy and are engaging in QE generate flow on problems to the rest of the world.

Exchange rates no longer reflect fundamentals

The first casualty of QE is exchange rates. Rather than a rate reflecting underlining economic fundamentals, there is a distortion of both spot and forward markets as those countries engaging in QE attempt to devalue their currency, to improve their competitiveness and increase exports.

For Australia, these so-called currency wars are a major factor causing the strength of the Australian dollar, as global investors seek out safe haven currencies. This combined with continuing strong commodity prices and Asian investors looking to protect their wealth through Australian property investment are maintaining the upward pressure on the Australian dollar.

Another impact that needs to be considered is whether the nexus between the Australian dollar and commodity prices has been broken in the long term. Only time will tell, however if it has not and the Australian dollar’s correlation with commodity prices returns, then Australia will once again be relegated to being a price taker, not maker. For the nexus to remain permanently removed we must continue transforming the Australian economy through significant productivity improvements to reduce unit costs of production. We must also commercialise our innovations and embrace the structural changes to our economy that the internet and offshoring are driving. These major challenges can bring huge rewards.

Rates rise and equities fall on hint of tapering

Low interest rates associated with QE encourage investors to switch from cash to higher risk assets. On this score QE has been successful as investors have returned to equity and property markets. However, it only takes a slight hint of tapering to cause equity markets to fall.

Interest rates around the world will increase when tapering commences as competition between governments for budget deficit funding intensifies. For Australia, the Federal budget deficit will blow out further as interest costs on current borrowings jump before including the funding costs for the proposed infrastructure projects. Based on recent company earnings forecasts, tax receipts will remain stagnant, so the pressure is on the Federal Government to make necessary structural changes to the budget if it wants to return to surplus over the forward estimates.

The RBA has acknowledged that its response to global QE through lower interest rates has proven impotent. The Australian dollar will continue to ride high regardless of RBA policy settings as the QE programs of major economies wreak havoc on economies that have been managed well. Australia must fight back with well thought-out strategies. In addition to addressing structural problems within the budget, tax and industrial relations reform, we should be looking at re-negotiating free trade agreements with QE protagonists while avoiding protectionism. We need to broaden our intellectual property laws and advocate solutions that place less reliance on the world’s reserve currency.

 

Michael McAlary is Founder and Managing Director of WealthMaker Financial Services.

 


 

Leave a Comment:

RELATED ARTICLES

The fetish for lower taxes has gone too far

Brace, brace, brace: The real issue behind the banking turmoil

RBA justifies its QE to QT, but did it drive inflation?

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.