Free money is an ancient practice that has never ended well, according to MFS global investment strategist, Robert Almeida.
In a recent investment note, Almeida debunks claims “about the uniqueness of Modern Monetary Theory and quantitative easing” that have circulated post the GFC.
“The reality is that they are neither unique nor modern. They are centuries old,” he says, citing the Roman banking crisis of AD33.
“Julius Caesar lent out the government’s treasure without interest, creating liquidity which pushed interest rates lower,” Almeida says. (The emperor in question was actually, Tiberius.)
“… And history points to each episode of their use ending with unintended and unwelcome consequences.”
He says the decade-long monetary experiment of QE and suppressed interest rates encouraged poor investments that are only now starting to unravel – as seen in the recent US regional bank collapses.
But the bank wobbles signal a deeper rot in the economy with many corporate profits pushed artificially high and “not reflective of long-term or enterprise health”.
False profits will likely be exposed as monetary authorities reverse tack in a bid to squash inflation, Almeida says, suggesting the US bank woes are just the beginning.
“While the normalization of interest rates has exposed small pockets of stress, in our view there are more unintended and unwelcome consequences to come,” he says. “We think this new environment should set the stage for a multi-year transition in leadership from non-discretionary portfolios to fundamentally oriented active strategies and create significant opportunities for alpha generation.”
Finding alpha at the end of free money times might be somewhat chaotic, however, if history rhymes.
Almeida says while the build-up of “distorted, malinvestments” due to over-easy monetary policies may take years to unwind “the consequences of those decisions usually result in financial or economic turmoil”.
The AD33 Roman version of QE did help resolve the immediate crisis but the empire was never quite the same afterwards. And Tiberius died four years later “smothered with his own bedclothes”, according to the internet, in an unrelated incident.