Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 42

QE causes currency and fiscal impotence

The world has never worked through a period where Quantitative Easing (QE) has been undertaken by most of the major global economies, including for the first time the United States.

A goal of QE is to increase liquidity through the central bank by buying illiquid bank assets, freeing up funds which the banks should in turn lend to consumers and businesses. This has not occurred in the US. Instead banks have tightened their credit criteria and are using QE as an opportunity to re-capitalise their balance sheets. QE is a godsend to US banks as it is simpler and substantially cheaper than raising equity capital. It has helped to address a bank solvency issue but has not increased money supply.

Having a strategy to deal with it is critical, yet neither the Reserve Bank of Australia (RBA), nor past or present governments have articulated one. QE is the foremost issue impacting on our economic future.

Put simply, QE is an admission of failure to properly manage an economy in prior years that results in a central bank having to print money to stimulate economic growth. On a global scale, countries that have made a mess of their economy and are engaging in QE generate flow on problems to the rest of the world.

Exchange rates no longer reflect fundamentals

The first casualty of QE is exchange rates. Rather than a rate reflecting underlining economic fundamentals, there is a distortion of both spot and forward markets as those countries engaging in QE attempt to devalue their currency, to improve their competitiveness and increase exports.

For Australia, these so-called currency wars are a major factor causing the strength of the Australian dollar, as global investors seek out safe haven currencies. This combined with continuing strong commodity prices and Asian investors looking to protect their wealth through Australian property investment are maintaining the upward pressure on the Australian dollar.

Another impact that needs to be considered is whether the nexus between the Australian dollar and commodity prices has been broken in the long term. Only time will tell, however if it has not and the Australian dollar’s correlation with commodity prices returns, then Australia will once again be relegated to being a price taker, not maker. For the nexus to remain permanently removed we must continue transforming the Australian economy through significant productivity improvements to reduce unit costs of production. We must also commercialise our innovations and embrace the structural changes to our economy that the internet and offshoring are driving. These major challenges can bring huge rewards.

Rates rise and equities fall on hint of tapering

Low interest rates associated with QE encourage investors to switch from cash to higher risk assets. On this score QE has been successful as investors have returned to equity and property markets. However, it only takes a slight hint of tapering to cause equity markets to fall.

Interest rates around the world will increase when tapering commences as competition between governments for budget deficit funding intensifies. For Australia, the Federal budget deficit will blow out further as interest costs on current borrowings jump before including the funding costs for the proposed infrastructure projects. Based on recent company earnings forecasts, tax receipts will remain stagnant, so the pressure is on the Federal Government to make necessary structural changes to the budget if it wants to return to surplus over the forward estimates.

The RBA has acknowledged that its response to global QE through lower interest rates has proven impotent. The Australian dollar will continue to ride high regardless of RBA policy settings as the QE programs of major economies wreak havoc on economies that have been managed well. Australia must fight back with well thought-out strategies. In addition to addressing structural problems within the budget, tax and industrial relations reform, we should be looking at re-negotiating free trade agreements with QE protagonists while avoiding protectionism. We need to broaden our intellectual property laws and advocate solutions that place less reliance on the world’s reserve currency.

 

Michael McAlary is Founder and Managing Director of WealthMaker Financial Services.

 

  •   29 November 2013
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

No one holds the government to account on spending

The fetish for lower taxes has gone too far

Brace, brace, brace: The real issue behind the banking turmoil

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 639 with weekend update

Thank you for the hundreds of responses to our Reader Survey and to maximise the sample size, we’re leaving it open until this Sunday. Here is an overview of the results so far.

  • 27 November 2025
  • 2
Investment strategies

Where to hide in the ‘everything bubble’

It might not be quite an ‘everything bubble’ but there’s froth in many assets, not just US stocks, right now. It might be time to stress test your portfolio and consider assets that could offer you shelter if trouble is coming.

Investment strategies

The ultimate investing hack: dividend growth stocks

Investors often fall prey to ‘amygdala hijacks,’ letting emotion trump reason. By focusing on dividend-growth with stocks instead of volatile prices, you can steady your mindset and let compounding do the work. 

Investment strategies

CBA or global banks?

CBA’s recent pullback highlights single-stock risk. Global banks trade at lower P/Es with rising earnings and dividends, offering investors both income potential and long-term value beyond the local market.

Investment strategies

Global dividends rising, but Australia lags

Global dividend growth surged in the third quarter, with median growth of almost 6%. Australia was a notable exception as dividends fell, thanks to flagging mining company payouts.

Economy

I called inflation's rise and fall and here's what's next

In 2020, I warned that surging US money supply growth would spark inflation. By early 2023, I said US money supply was dropping dramatically and that meant inflation would decline. Here's what happens next.

Superannuation

Are excessive super funds giving Australia “Dutch Disease”?

The irony is profound: a system designed to secure Australians’ futures may be systematically dismantling the economic diversity necessary for long-term prosperity.

Investment strategies

Could your children pass the inheritance ‘stress test’?

You devote years of your life working, saving and investing, striving to build a legacy that will outlive you. Before any wealth moves to the next generation, here are six questions every parent should ask themselves.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.