Preparing for the Post-QE World

Over the past eight years, the major central banks have increased their balance sheets to $18 trillion from $6 trillion, predominantly through the purchase of their own government’s bonds. While the Fed has ended its QE program, the European Central Bank and Bank of Japan continue theirs. But those too will eventually come to an end. What happens next will determine whether the world economy is set on a path to real growth or further stagnation.

"Unwinding" these positions -- even progressively as the acquired assets mature -- would almost certainly create deflation and a financial crash as it would lead to the withdrawal of massive amounts of liquidity from the financial system. Instead, we are likely to see what Adair Turner, the former chairman of the U.K.’s Financial Services Authority, recently called a state of “permanent monetization.”