Hong Kong Monetary Authority boss Norman Chan is a worried man. On Friday he warned that Hong Kong's financial markets will suffer heightened volatility when the US Federal Reserve begins to scale back, or taper, its current programme of quantitative monetary easing.
Monitor, Tom Holland,
SCMP, September 9
My colleague Tom Holland and I agree on so much that we tweak each other occasionally when we view things differently. I think perhaps he overstates the worry case about the arrival of this thing called "taper", which, anyway, yet shows little sign of arriving.
Miltonfriedmanism, a branch heresy of the Keynesian school of economic thinking in that it favours artificial stimulus through monetary rather than through classic Keynesian fiscal measures, is in the process of being proved another quack theory in the United States.
Milton's devoted disciple, Ben Bernanke, chairman of the US Federal Reserve, has for five years put into effect the monetarist swindle of showering money from helicopters to keep the US economy out of recession, only to find that the intended recipients of his largesse have left the money on the ground rather than pick it up.
The banks that were meant to pump-prime or reignite (choose your own false metaphor) the economy have simply parked US$2.2 trillion of the money back with the Fed. Their customers don't want to borrow money just yet. They would rather take the time to rebuild the health of their balance sheets. You can lead a horse to water, etc. etc.
The only effect of Conjuror Ben's measures has been to shift the focus of inflation from consumer goods and services to financial assets, never more so than in economies that have linked themselves to US monetary (non-)discipline. It is what Hong Kong has done with the peg, and the effect is greatest on those sectors most sensitive to interest rates, including our property market.
But what the would-be magician at the Fed calls "quantitative easing" cannot last forever. Sooner or later, the work of balance sheet rebuilding will be done, and then borrowing demand in the US will rise again.
At that time, according to the theory, the money-showering helicopter will go back to its heliport, and interest rates can start to rise without stalling an economic recovery. That time, says current conventional thinking, is now just around the corner.
The timing may be wrong, of course. Japan, which has tried its own variant of quantitative easing, still awaits the promised turnaround more than 20 years later. Stagnation is as likely a result as recovery of Miltonfriedmanism put into practice.
But eventually recovery will come, and patterns of international money flows will then change. Some people have long feared this prospect, Norman Chan at the HKMA among them.
I recommend to them the thinking of the man who had long fretted that the local town bucks would get his daughter with child. She came to him one day and said: "Daddy, I got news for you. I'm pregnant."
"Thank heavens!" he said. "What a relief. I was worried so long it would happen."
Let's welcome the news for itself. Most notably, higher interest rates will bring the property market back down to earth in Hong Kong. We will not need a futile overbuilding programme of 470,000 units to do the job. The rising cost of money will do it.
As a homeowner, I shouldn't welcome this prospect, and yet I do. It has to happen anyway. We may as well get it over with sooner than later. The longer we wait, the more painful the adjustment will be.
Even the HKMA may find something welcome here. It currently has HK$750 billion of bills and notes outstanding, all of it issued to mop out incoming hot money flows. Yet the Hong Kong dollar continues to trade nearer its HK$7.75 intervention level against the US dollar than it does at the official HK$7.80 rate. Norman will get some relief, too.
But by far the biggest beneficiaries will be depositors whose prudence in saving money is scorned when central banks inundate debtors with money. Deposits may eventually come to pay interest at more than the rate of inflation again.
Now isn't that a welcome prospect for an economy to be pregnant with.