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Central Bank 'Crackpot Ideas' Are Splitting Society: Dylan Grice

Tuesday, 12 Mar 2013 | 4:54 AM ET

Loose monetary policy by central banks around the world has made us sick, according to Societe Generale's former strategist Dylan Grice, who says that cheap money has caused divisions in society and in some cases could even add to the risk of war.

Federal Reserve Building, Washington, D.C.
Mark Chivers | Getty Images
Federal Reserve Building, Washington, D.C.

"When central banks play the games with money of which they are so fond, we wonder if they realize that they are also playing games with social bonding. Do they realize that by devaluing money they are devaluing society?," Grice, now a research director at investment firm Edelweiss Holdings, said in a research note.

Quantitative easing had increased revenue for these governments, Grice added, but inflation and a lack of spending power will mean the people furthest away from this new money are the ones that will end up losing out.

"Deliberately impoverishing one group in society is a bad thing to do. But impoverishing a group in such an opaque, clandestine and underhanded way is worse. It is not only unjust but dangerous and potentially destructive," he said.

"With their crackpot monetary ideas, central banks have been robbing Peter to pay Paul without knowing which one was which."

The Federal Reserve announced in December that it would buy $45 billion in additional Treasurys every month, on top of the $40 billion a month in mortgage-backed securities it has already committed to, taking the total size of its QE (quantitative easing) program to $85 billion a month.

(Read More: Fed Officials Divided on Future of QE)

The Bank of Japan has also made an open-ended commitment to continue buying assets and the Bank of England has embarked on a series of asset purchases that have so far totaled 375 billion pounds ($600 billion).

But it not just during the current squeeze where this unfair distribution is at work, according to Grice. The cheap credit and high interest rates during the boom years also meant those closest to it (financial institutions and anyone working in the finance industry) were the prime beneficiaries, he said.

"In 2012 the top 50 names on the Forbes list of richest Americans included the fortunes of eleven investors, financiers or hedge fund managers. In 1982 the list had none," he said.

Despite fears that QE would lead to inflation, and while there is some evidence of price increases, official statistics show the effect is limited. Federal Reserve Chairman Ben Bernanke said in February that inflation remains projected at or below the the 2 percent target for the foreseeable future.

(Read More: QE Program a 'Disaster,' Say UK Saving and Pension Groups)

In the U.K., inflation has remained stubbornly above the 2 percent target but the central bank has said it is likely to rise further and could remain above the 2 percent target for the next two years. Meanwhile Japan is still struggling to battle deflation with its 2 percent target looking some way off.

Recent low interest rates and central bank bond-buying has also created other unintended consequences, according to Grice. Unaware victims of the redistribution don't know who the enemy is, so they create an enemy, he said.

"The 99 percent blame the 1 percent; the 1 percent blame the 47 percent," he said.

"In the aftermath of the euro zone's own credit bubbles, the Germans blame the Greeks. The Greeks round on the foreigners. The Catalans blame the Castilians," he said, adding that 25 percent of the Italian electorate voted for a professional comedian whose party slogan "vaffa" translates to words that can't be printed, but which essentially mean "get lost".

(Read More: Japan Central Bank Eyes QE-Style Balance Sheet Expansion)

A long-simmering row over uninhabited Islands in the East China Sea also threatens to boil over, he said. The islands, known as the Senkaku in Japan and the Diaoyu in China, have seen an escalation in firepower in recent months with the presence of fighter jets and patrol ships from both sides.

"[In] China, that centrally planned mother of all credit inflations, popular anger is being directed at Japan, and this is before its own credit bubble chapter has fully played out," he said.

"The rising risk of war is something we are increasingly worried about."

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