".cityam.com/article/fears-over-future-qe-spook-global-investors" target="_blank">MARKET TURMOIL" screams the typically restrained headline in the City of London's in-house daily, City AM. It seems that FDR was wrong when he said 'the only thing we have to fear is fear itself' - we must also fear the withdrawal of Quantitative Easing (QE), the steroid on which markets the world over have grown to depend. Whether QE is inflationary or deflationary, stimulative or depressive, is not for me to judge - not least as we are in uncharted water and there are nearly as many differing opinions on the matter as there are virtual dollar bills being printed (yes, I know no-body actually prints money...). What is clear, however, is that traders in government bonds, equities and commodities appear addicted to the cheap legal high that is QE - addicted to the extent that any whisper of the US Fed taking its foot off the gas pedal sends markets into a mild panic, with stock exchanges and bond yields reacting sharply to rumours that this time next year there might - might - be less liquidity being pumped in by central banks. The panic is as yet mild - despite City AM's best attempts at hyperbole, it doesn't yet resemble turmoil - not least in the context of the recent surge in share prices. But as Keynes' animal spirits take over, there's little to prevent a full-scale slide as and when central banks finally decide to print less money for whatever reason that might be. So much so, that many analysts predict further QE, simply to stave off the panic that would ensue in its absence. Further proof, if any were needed, that dysfunctional financial markets remain intoxicated by QE and other schemes, detached from the economic fundamentals many mere mortals relate to. Meanwhile, the IFS says that "since the start of the recession real wages have fallen by more than in any comparable five-year period. It also highlights an "unprecedented" drop in productivity as output has tumbled faster than employment." This income squeeze is becoming the defining story of this economic crisis - or at least, it ought to be, were it not for the financial press focussing on volatile markets. The drop in pay is even more salient when we look at how that pay squeeze is distributed. LSE's John van Reenen claims that 'the “decoupling” between average compensation and productivity has been exaggerated.' This is because van Reenen plots productivity against average pay, which is heavily influenced by a long tail of very high pay given over to a select few, as John acknowledges in a footnote. When we look at median pay, as James Plunkett does in an OECD paper, we can see that the middle-earning worker can expect to take home is falling, and is detached from rises in productivity. Indeed, productivity and median pay has been detached since way before the current crisis. I won't drive the point home here too much - I have written elsewhere that the failure of employees to secure adequate compensation for their work underpins much of the economic crisis we face. What we can say here is that whilst global markets wallow in preemptive withdrawal symptoms in anticipation of being weaned off QE, most workers face the bleak prospect of being in work, yet unable to afford the basics. We live in strange times.
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