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

Is the world's safest currency actually the riskiest?

No one holds the government to account on spending

The fetish for lower taxes has gone too far

banner

Most viewed in recent weeks

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

The missing 30%: how LIC returns are understated, and why it matters

The perceived underperformance of LICs compared to ETFs is due to existing comparison data excluding crucial information, highlighting the need for proper assessment and transparent reporting.

Little‑known government scheme can help retirees tap into $3 trillion of housing wealth

The Home Equity Access Scheme in Australia allows older homeowners to tap into their home equity for retirement income, yet remains underused due to lack of awareness and its perceived complexity.

Origins of the mislabeled capital gains tax ‘discount’

Debate over the CGT discount is intensifying amid concerns about intergenerational equity and housing affordability. This analysis shows that the 'discount' does not necessarily favor property investors.

Div 296 may mean your estate pays tax on assets your beneficiaries never receive

The new super tax, applying from 1 July, introduces more than just a higher rate on large balances. It brings into focus a misalignment between where wealth sits and where the tax on that wealth ultimately falls.

Latest Updates

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Retirement

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Superannuation

Markets have always delivered for super fund members. What if they don’t?

What happens if market resilience in the face of ongoing geopolitical tensions ends? Potential decade-long market weakness shows the need for contingency planning.

Retirement

We tend to spend less in retirement …

Studies show that a drop in expenditure during retirement leads to a happier retirement. But when costs ramp up again later in life, it's a guaranteed income that makes spending more hurt less.

Shares

Can you value a share just using dividends?

A cow for her milk, a stock for her dividends. Investors are too quick to dismiss this valuation technique. 

Property

The 25-year property trust default is being questioned

The 33% CGT discount rate being floated isn’t random. It sits at the structural break-even between trust and company for the multi-property cohort. That’s driving the conversation we’re hearing now.

Investment strategies

Are active managers bringing a knife to a gunfight?

How passive investing has permanently changed market structure — and why sophisticated tools are now the price of survival.

Sponsors

Alliances

© 2026 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.