HK Monetary Authority: QE is NOT a Panacea

Hong Kong’s Monetary Authority headed by Chief Executive Norman Chan appears to have come to grip with reality and indirectly censures the US Federal Reserve

From CRI English (hat tip Zero Hedge) [bold mine]

Hong Kong Monetary Authority Chief Executive Norman Chan said Monday that if the process of deleveraging is disrupted by quantitative easing, asset prices might drop sharply and remain volatile.

When delivering a speech entitled the Global Deleveraging: The Right Track at the Hong Kong Economic Summit 2013, Chan said that excessive leveraging, or over-borrowing, in major industrialized countries was the root cause of both the global financial crisis and the more recent sovereign debt crisis plaguing Europe.

Chan said quantitative easing is not a panacea, but it is the exact opposite of deleveraging. In the past three years, quantitative easing had limited stimulating effect on the real economy. "In order to solve the structural imbalances built up in the past two decades, we must get to the bottom of the problem."

There is a possibility that quantitative easing produces the desired results, which is a very desirable scenario as global economy will return to its normal growth path, he noted.

However, there is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices in the first place. Yet, since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient.

As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound, if inflationary pressure builds up alongside asset price increases, central banks may consider exiting the market and raise interest rates, the authority's head said.

When economic performance, inflation or monetary policy falls short of market expectation, asset prices might drop sharply and remain volatile, he added.

Translation to central bank vernacular: QE only buys time and further inflates current bubbles.

I may further add that by disallowing markets to clear to reflect on its real state or conditions “not supported by economic fundamentals”, imbalances will accrue “inflationary pressure builds up” to the point of greater volatility ahead. 

Euphemism aside, Mr. Chan means a bursting bubble (see last highlighted statement).