As QEs can reduce the short term pain and pressure brought by adjustments, there is a real risk the implementation of the much needed reforms in the private sector and the fiscal reform in the public sector could be delayed, or dropped altogether. This means the fundamental cause of the imbalances in the global financial system is not being addressed at all. The problem is particularly acute in the fiscal positions of many advanced economies that have built up high levels of public debt. According to the “Ricardian Equivalence” theory, when people believe the fiscal positions of their governments are unsustainable and that at some future stage the governments have no choice but to raise taxes to pay back the debt, this will materially curtail the citizens’ desire to spend and invest now because they need to save more to prepare for the “rainy” days ahead. (c) Finally, the third important cost or risk factor is the misallocation of resources and investments: Given the near zero interest rates and abundant liquidity in the financial system, it is to be expected that the asset markets, especially the stock and housing markets, will benefit. With US stock markets continually reaching historical highs and with a strong rebound in the housing market, the positive wealth effects should help boost consumption and investment.
As we don’t have a crystal ball, we can only wait and see what will happen in the re-pricing of assets across the globe as and when interest rates begin to normalise. In the meantime, it is crucial we are well-prepared for possible turbulence and shockwaves. BIS central bankers’ speeches  5  17. But, I believe Hong Kong is on the right track. While we have been at the receiving end of massive international capital flows for several years, prompting a rise in inflationary pressure and overheating in the property market, we have acted swiftly to contain the adverse impact of such unprecedented monetary easing policies. Since 2009, the HKMA has undertaken six rounds of countercyclical prudential measures on mortgage lending, coupled with other supervisory action on bank capital and liquidity, to enhance the resilience of the banking system so it is better equipped to cope with future shocks. We have also launched a series of measures to contain credit growth, and recently we have further required banks with relatively fast credit growth to ensure they have stable funding sources to support that growth. 18. The prospect of a tapering in quantitative easing in the US has already caused jitters on global financial markets, including fund flows and exchange rates in some regional economies. Such volatility may continue, if not magnify, in the next couple of years. Therefore, we must remain vigilant against the possible spillover effects from other economies, as well as any other emerging risks.