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Citi: This Is One Reason Why More Quantitative Easing Probably Won't Work 

September 6, 2016

Sid Verma, Bloomberg

As central banks in Europe and Japan gear up to further expand quantitative-easing policies, market participants have issued a flurry of stark warnings about the potentially-negative unintended consequences, from the hit to pension funds to the risk of fueling market bubbles.

But the more-prosaic prognostication — that further easing simply won't stimulate slowing economies by reviving enfeebled corporate investment — may be the hardest-hitting retort from the perspective of central banks in the U.K., euro-area and Japan.

While a clutch of reasons for moribund business investment in advanced economies have been advanced, central banks would do well to wake up to another typically over-looked cause, according to a new report from Citigroup Inc.

Corporate investment faces a financing hurdle as the weighted-average cost of capital for companies (known as WACC) remains elevated thanks to the stubbornly high cost of equity, Hans Lorenzen, Citi credit analyst, said in a report published this week. The report pleads with central banks to forgo further asset purchases, citing diminishing returns from such stimulus programs and their questionable efficacy more generally. Read more

 
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