MC Feature: The QE theory of everything
How a $30 trillion experiment made our world.
Good afternoon. Today we are sending you, in full, this week’s 4,800-word cover story by Will Dunn, an eye-opening feature on how quantitative easing explains so much of the past 15 years. The first 800 words run below. The next 4,000 can be unlocked in-email by becoming a Morning Call subscriber. This is the kind of piece that stays with you.
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On 2 September 1995 the world’s biggest financial newspaper, the Nihon Keizai Shimbun of Japan, led its Saturday edition with a piece by Richard Werner, a young German economist working at an investment bank in Hong Kong. The article addressed what everyone was talking about: the recession. Japan had risen from the devastation of the Second World War at great speed, becoming the second-largest economy in the world, but during the 1980s a huge asset bubble had developed. When it popped, Japan’s economy fell into a severe, protracted slump. In his article, Werner suggested a cure: a new kind of credit creation by the central bank. He called it ryōteki kinyū kanwa, or “quantitative monetary easing”.
In the decades that followed, Werner has watched as different versions of his idea have been applied around the world: in Japan in 2001, then in the US and Europe in 2008, and at a still greater scale in 2020. The total credit created by central banks through quantitative easing, or QE, is now more than $30trn.
In the process, QE has quietly become the defining idea of our time. For the past 15 years, every major development in our economy and the cultural superstructure that rests upon it – the explosive growth of social media and Big Tech, the property boom, the gig economy, Elon Musk, cryptocurrencies, fake news, overpriced coffee, Brexit, woke capitalism, Donald Trump and yes, perhaps even Prince Harry and Meghan Markle – can be related to the huge sums of new money that have disrupted every major economy.
In recent years the idea of the “widening gyre” – the loss of consensus, polarisation, the culture wars – has been part of the political conversation. QE is not just part of this situation: it is the gyre. It is the invisible gas that raises the temperature.
We have been living through a two-decade experiment enacted by largely unknown people whose power we underestimated. But attempts to end the experiment have been volatile; our politics is now, more than ever, dictated by fluctuations in the markets QE was supposed to control. We are about to find out if this great engine of inequality and stagnation can ever be wound down.
Richard Werner arrived in Tokyo at the peak of the Japanese economic bubble, in the summer of 1989, to start a postgraduate fellowship at the Development Bank of Japan. Looking back on that time from his office, a handsome red-brick building overlooking the cathedral green in Winchester, he told me about his frustration with the mathematical models and “theoretical games” of equilibrium economics, in which demand and supply balance each other out, and markets are rational and perfectly informed. This approach, which persists today, seemed to him to bear little resemblance to the real world. Werner preferred economic history. Theory tended to suggest the price of money shaped an economy, but in practice, Werner thought, what mattered was how much of it there was to go around.
By the end of the 1980s, Japan’s money was everywhere. Between 1970 and 1991, Japanese foreign investment had grown by 100 times. As the largest net investor in the global economy, Japan bought US computer companies and movie studios, Van Gogh’s Sunflowers, and the skyscrapers of New York City and Los Angeles. Pervasive in the culture of the time – in Blade Runner, Michael Crichton’s Rising Sun and even John McTiernan’s Die Hard – was the idea that the future belonged to Japan. Werner’s research focused on a simple question: where was all that money coming from?
It was a puzzle that couldn’t be answered by interest rates, which were higher in Japan than the US – meaning money should have been heading into Japan, not leaving it. “None of the theories worked,” Werner told me. But he was sure that Japan’s vast capital outflows were connected to the other great mystery of its economy: “I thought, it’s connected to the bubble.”
The bubble touched everything. When a young couple applied for a mortgage to buy their first home in Japan in the late 1980s, they were typically offered twice the value of the property. A golf-club membership could cost $3m. An airport-sized piece of central Tokyo had a greater land value than the whole of Canada. It was common for people to talk about the country’s “excess money” over dinner; in one Osaka restaurant the market predictions of the owner, a former nun called Nui Onoue, made her for a time a celebrated stock-picker, so much so that financiers loaned her hundreds of billions of yen to invest.
Werner spent months interviewing people in the Japanese financial sector, and what he heard shocked him. In bank branches, loan officers told him “wild stories” about “chasing customers, begging them to borrow money”. They acknowledged what they were doing was “crazy”, but said: “We were ordered to do it.”
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