The View | Trapped in a QE black hole

Lost in all the noise and chaos of the recent surprise devaluation of the yuan is an understanding of what might have been said behind the scenes between the US Treasury and the People's Bank of China. It would be surprising if the officials at the Federal Reserve or US Treasury had not been consulted by their counterparts at the PBOC before embarking on a significant devaluation.

Members of the Fed may not have liked what they heard, but they were probably informed about the PBOC's intended course. After the 2008 global financial crisis, central banks have coordinated policies, goals and actions closer than ever.

Ever since the Japanese emerged as big holders of US dollars in the 1980s, coordinating exchange rates and the purchase and sale of US treasuries became a necessity. Remember the Plaza Accord in 1985, an agreement that managed a 51 per cent depreciation of the exchange rate between the US dollar and the yen to 1987?

Today, different problems face central banks and their economies. But the same old tools aren't working in a globalised economy, especially with China's newfound influence. So the PBOC (and investors) need to confront the inescapable orbit of the quantitative easing black hole that the US has delivered us into.

There is one intriguing theory that has so far garnered little attention: that the yuan devaluation was only a reaction to front run the suspicion that the US was unlikely to raise interest rates as its promise of QE tapering. Or maybe the Fed never intended to raise rates at all.

It's not a conspiracy theory because the second-half recovery the Fed has hoped for doesn't look like it will occur. And that poses a dilemma for policymakers and investors.

QE has defied withdrawal for almost seven years. Yet every fund manager prepares for its eventual withdrawal and talks about it in their presentations as if is a temporary programme. They are not prepared for the reality that because of a stubborn US recession and an unsatisfactory economic recovery, we may be living in a permanent QE world. That means more financial and real asset distortions, heightened volatility and a risk of more market meltdowns.