For several centuries, sailors in the Royal Navy enjoyed a daily ration of rum, designed to fortify sailors to do what sailors had to do under what were often horrendous circumstances. And we are not talking a nip here, at least not to begin with. Originally, before common sense began to prevail, the daily ration was a pint. The allowance was first reduced to half a pint, and eventually reduced to 70 millilitres.
Over the years, debate raged over the ration: did it genuinely fortify the sailors and give them the courage they needed when it counted? Or did the ration simply leave them, at best, with a false sense of security or invincibility, and at worst, make them a danger to themselves and others?
Other navies also adopted the practice, but one by one began to abolish the ration, beginning with the Americans in 1862. The Royal Navy gave it away in 1970. Perhaps surprisingly, the Royal Australian Navy never had a rum ration, which perhaps tells you that Queenslanders never got a vote. It became increasingly clear to all concerned that the rum ration was not conducive to the mental concentration needed to wage modern warfare. The operation of sophisticated electronic equipment and the piloting of jet aircraft clearly required sailors to at least be able to pass a breathalyser test, and it was feared that on any given day, many would not.
So what on earth does this have to do with investing? In the last five years, world share markets have benefited from the financial equivalent of the rum ration, otherwise known as ‘quantitative easing’ or ‘QE’. Like the rum ration of old, it was designed to fortify: both financial markets and the economy, at a time of great peril. Make no mistake, in 2008 and early 2009, the world economy stood on the edge of an economic abyss not seen since the 1930s.
As with the rum ration of old, debate rages about whether quantitative easing has really fortified both the financial markets and the economy, or whether it has lulled investors into a false sense of security without producing lasting economic benefits.
Resolving the issue is extremely difficult: we can never really know what would have happened in the absence of QE. Growth in key QE countries such as the US and UK has been solid, but unspectacular– but could things have been worse if the central banks had not acted? On balance, I’d argue that QE has delivered. Boosting share prices and keeping borrowing costs extraordinarily low has supported private spending, particularly in the face of public sector austerity.
Just as the US Navy was the first to abolish the rum ration of old, the US Federal Reserve has just become the first to end the financial rum ration. How the world copes with the end of QE in the US is likely to remain a source of uncertainty for financial markets for some time yet, even though the British and the Japanese are still at it and the Europeans are about to start. The worry of it all is enough to drive investors to drink!
