As policy fizzles, watch out for currency wars

With the euro near a six-year high, European Central Bank board member Klaas Knot last week said the ECB would consider further interest rate cuts to prevent further euro appreciation from affecting inflation in the euro zone.

Knot's comments represent how central banks all over the world are thinking. It looks like economic factors are not the only things that need to be taken into account, and more thought is being put into whether currency movements can affect inflation and export performance.

This does not seem to be wrong, and reflects that the incentives rolled out by central banks across the world to boost their economies may coming to an end, because even if monetary policy is further loosened, it won't have much of a stimulating effect since the world is still beset by the coronavirus pandemic.

If the pandemic refuses to die, it's going to be very difficult for the global economy to rebound significantly and at the very least, it's going to continue to be very fragile in terms of relations between nations, and troubling for their economic growth.

However, what needs more attention is that even without the pandemic factor, monetary policy does not seem to be an effective way of fostering a recovery because in the end it drives asset prices higher, helping stock markets reverse their slump and continue to rise, and making major shareholders richer and richer while widening the gap between the rich and poor.

In the long term, this will only negatively impact the economy because the number of middle class will dwindle while the number of people who can truly promote the economy will also decline.

Thus, monetary policy alone is not enough to support the economy in the long run.

So, why is monetary policy failing to generate momentum for the economy even though it's driving stocks higher?

This is because the increasing-of-wealth effect brought by the stock market boom keeps declining. Since the outbreak of the pandemic, stock markets have risen on the back of share buybacks with major shareholders increasing their stakes. This has led to a lot of stock being concentrated in hands of major shareholders, institutional investors and professional investors, rather than the man on the street.

This means that not many retail investors have benefited by the boom in stocks.

In the past, when listed companies sought money from the markets, they would increase their investments, but in recent years, many would rather use the funds for dividends or to pay off a debt, which means there will be less of a positive effect on the economy.

At the same time, large shareholders who benefit hugely from rising stocks will not boost their consumption, or their spending won't exactly match the pace at which they accumulate wealth.

For instance, when Elon Musk found out he had become world's richest person last week, his only reaction was: "Well, back to work."

Thus, monetary policy to promote the stock market ends up making some people better off, but it doesn't do much to stimulate the economy.

Are central bankers aware of these problems? They certainly are, but there is nothing they can do about it because if they abandon ultra-quantitative easing now, there will be a significant decline in stock markets, which will only make the global economy worse.

Therefore, central banks may now have to focus on devaluing their currencies to boost exports and trade, since that may be the only way they can revive their economies. But it also means that there is a real possibility that a currency war is coming, which could actually do more harm to the global economy in the long run.

Andrew Wong is chairman and CEO of Anli Securities