The head of the UK’s largest insurance company has warned incoming Bank of England Governor, Mark Carney, that Britain is at risk of fresh financial turmoil unless Mr Carney halts quantitative easing.
“QE was a good short-term fix,” Mr Thiam said at a private breakfast last week. “In 2008, 2009 and 2010 it was the right answer. But now, it is different.
“We are just storing long term trouble by minimising short term pain.”
The Prudential CEO, who met Mr Carney at the World Economic Forum in Davos last month, said that the deepening market distortions created by quantitative easing had a negative effect on growth and damaged savers.
Mr Thiam said that there was now a reliance on cheap money without a sensible exit plan. This, he warned, left the door open for inflation shocks that could throw the economic recovery off course.
“In the macro economy: savings equal investments. But QE is depressing savings and therefore depressing investment. This means, QE is depressing growth,” he said.
“It is a really strange economic strategy because everyone is looking for growth but the monetary policy is completely anti-growth. There is no other exit to indebtedness than growth,” he said, referring to the UK’s £120bn or so deficit.
The policy of “printing money” allows central bankers to buy up government bonds from institutions, which frees up capital in the market and allows institutions to invest. This means money circulates through the economy, theoretically giving it a boost.
In the UK, the Bank of England has already pumped £375bn into the economy via this route.
But Mr Thiam says that the consequences of government policy creates too much focus on short-term gains.
“I am very worried we are creating bubbles, everywhere. Interest rates will have to normalise. And it is not clear to me what the exit strategy is. I ask central bankers this all the time and I still have not heard a single sensible answer,” he said.
The debate about monetary policy has become more polarised recently, with some members of the Monetary Policy Committee conceding that the effectiveness of QE might have run its course.
Pension-fund campaigners have also been increasingly vocal about the damage to valuations because of the distorting effects of QE, which have resulted in falling gilt yields.
“QE creates a total distortion in the economy,” said Mr Thiam. “The risk free rate is possibly the single most important piece of economic information we have and we shouldn’t mess with it. That is a dangerous game, because, to manipulate the risk free rate is to introduce huge distortions.”
Analysts say that the flight to equities and share price inflation is, to a large part, driven by QE.
“What we are seeing in the equities market is the translation of the QE distortion because the money [created] has nowhere to go,” Mr Thiam said.