I am so at home in Dublin, more than any other city, that I feel it has always been familiar to me. It took me years to see through its soft charm to its bitter prickly kernel - which I quite like too.

Home Uncategorized Hair of the Dog?

Hair of the Dog?

Michael O’Sullivan
There is a well-known scene in Charles Dickens’s Oliver Twist where Oliver asks Mr Bumble, the poorhouse master, for more gruel (“Please, sir, I want some more.”). Bumble’s response is violent. This scene is increasingly being played out in financial markets, with a twist. Investors are like Oliver Twist, thirsty for more liquidity, though in the old days, central bankers like Arthur Burns, who coined the term “take the punch bowl away”, and Paul Volker were the monetary incarnation of Bumble. In the aftermath of the global financial crisis, however, central bankers have changed their tune and it is not too unkind to characterise their response to demands for liquidity as “How much would you like?” rather than “More?” This change in reaction function, to put it awkwardly, underlines the fact that the global economic and investment climate are now marked by the emergence of trends, policies and behaviours that would have been seen as radical before the financial crisis but which are now accepted as normal. In particular the presence of central bank liquidity (formally known as quantitative easing or “QE”) is dominant and has the eerie effect of dampening market volatility to record low levels, levelling bond yields and elevating the price of risky assets like high-yield bonds. Europe has recently succumbed to the mania for central bank liquidity. Following the recent ECB meeting where the central bank announced that it would purchase asset-backed securities, expectations are high that the ECB will embark upon a policy of quantitative easing (buying government bonds) towards the end of this year. Against this backdrop, the Irish economy is beginning to recover, but there is also a sense that like the early 2000s it is the crucible for the spillovers of many of the forces acting on the world economy. It is unique it in that it has probably benefited from QE in the US, the priming of the UK economy by the Bank of England and now stimulus from the ECB. The risk is that it is now over-drugged, with little will or means to control the side-effects of what the large central banks are doing. In this context we have to question whether QE works at all from an economic point of view, whether it can cure the euro zone and what path will Ireland’s economy take in the next five years? While if often seems that QE as an economic remedy…

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