Why QE May Have Done Net Damage

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Quantitative easing has been a controversial policy even among the financiers who benefitted from it. The Fed has brushed those critics off, its confidence based on the fact that the economy didn’t go into a Great Depression-style black hole, which Fed officials believe was the result of its ministrations. One suspects the central bank regards its critics as an uninformed lot: goldbugs and hyperinflationists, right-wingers who don’t like government intervention in markets, pinkos who don’t like banks.

But there’s a world of difference between saying that the alphabet soup of special programs, which did shore up all sorts of players who didn’t have direct access to the Fed’s coffers, benefitted, and to say that QE, which didn’t begin until March 2009, was a plus to the economy. (And the cheery view of the Fed’s “success” during the crisis brushes by the fact that the Fed was fixated on rescuing only the financial system, and never even considered ways to do that, like restructuring debts, that would also have helped households and real economy businesses).

In addition, QE and its fellow traveller, ZIRP, has imposed a huge tax on retirees and savers, who can’t find high yielding, safe assets. The central bank believe they’d of course do the rational thing of either spending more of their principal or going into riskier assets (Gazprom, anyone? It has a nice 5.3% yield, although you would have done even better buying it six weeks ago). Instead, most are hunkering down and trying to make do on lower income.

In in a CNBC opinion piecePaul Gambles, the managing partner of MBMG Group, provided an elegant kneecapping of QE based on central bank research. Many of the arguments will be familiar to NC readers.

Gambles starts out by stressing that central banks are working from the wrong model of how lending works and the role it plays in economic expansion. He doesn’t use the term “loanable fund model” but he points out that banks don’t lend out of savings, that banks create credit based on demand for loans. The shorthand is “loans create deposits”. And what is devastating is that the Bank of England has gone on record calling out the “earth is flat” orthodoxy. Here’s Gambles’ layperson-friendly summary:

The findings in question are contained in the BoE’s Quarterly Bulletin. The paper’s introduction states that a “common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach.”

This “misconception” is obviously shared by the world’s policymakers, including the U.S. Federal Reserve, the Bank of Japan and the People’s Bank of China, not to mention the Bank of England itself, who have persisted with a policy of quantitative easing (QE).

QE is seen by its adherents, such as former U.S. Federal Reserve Chairman Ben Bernanke, as both the panacea to heal the post-global financial crisis world and also the factor whose absence was the main cause of the Great Depression. This is in line with their view that central banks create currency for commercial banks to then lend on to borrowers and that this stimulates both asset values and also consumption, which then underpin and fuel the various stages of the expected recovery, encouraging banks to create even more money by lending to both businesses and individuals as a virtuous cycle of expansion unfolds.

The theory sounds great.

However it has one tiny flaw. It’s nonsense….

The credit which underpins economic activity isn’t created by a supply of large deposits which then enables banks to lend; instead it is the demand for credit by borrowers that creates loans from banks which are then paid to recipients who then deposit them into banks. Loans create deposits, not the other way round.

Gambles points out that the Bank of England tries to salvage its reputation by claiming that QE nevertheless did some good by lowering interest rates which might have generated some additional (stimulative) borrowing. Gambles will have none of that:

…. the elasticity or price sensitivity of demand for credit has long been understood to vary at different points in the economic cycle or, as Minsky recognized, people and businesses are not inclined to borrow money during a downturn purely because it is made cheaper to do so. Consumers also need a feeling of job security and confidence in the economy before taking on additional borrowing commitments…

Ben Bernanke positioned himself as a student of history who had learned from the mistakes of the past. Dr. [Andrea] Terzi [Professor of Economics at Franklin University Switzerland] questions this, “This view that interest rates trigger an effective ‘transmission mechanism’ is one of the Great Faults in monetary management committed during the Great Recession.”

“The reality is that the level of interest rates affects the economy mildly and in an ambiguous way. To state that monetary policy is powerful is an unsubstantiated claim.”

This echoes a echoes a longstanding NC theme, that putting money on sale won’t induce businesses to borrow…unless the cost of money is a major factor in the cost of goods or services. What might those businesses be? Financial services companies, natch.

But here’s the part that is the real killer:

It may even be that QE has actually had a negative effect on employment, recovery and economic activity.

This is because the only notable effect QE is having is to raise asset prices. If the so-called wealth effect — of higher stock indices and property markets combined with lower interest rates — has failed to generate a sustained rebound in demand for private borrowing, then the higher asset values can start to depress economic activity. Just think of a property market where unclear job or income prospects make consumers nervous about borrowing but house prices keep going up. The higher prices may act as either a deterrent or a bar to market entry, such as when first time buyers are unable to afford to step onto the property ladder.

This is the exact opposite of the Fed’s beliefs, that the wealth effect encourages people to spend more. But what we saw in the cycle just past was that the spending consisted to a significant degree of tapping into accumulated paper wealth through borrowing. This wasn’t spending more out of discretionary income out of confidence; this was to a significant degree monetizing housing assets. And the value of those assets proved to be a hell of a lot more volatile than the Fed dreamed.

In the post-crisis era, with wealth even more concentrated, we’ve seen bifurcation: the wealthy indeed are spending again, as to some degree are upper income households. But they don’t have as high a propensity to spend as lower income earners. So an asset-price-driven recovery is almost bound to be flaccid. And that’s before you get to the huge negative that Gambles flags, that the Fed’s success in goosing asset prices, particularly housing, is actually undermining housing serving as a driver for a broader recovery (as it has in every past post World War II recovery).

So QE skeptics, I encourage you to circulate Gambles’ piece widely. It’s a refreshingly straightforward and compact treatment of why QE was never a good idea but why monetary economists like Bernanke couldn’t get past their dogma.

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  1. John

    Yellin has drunk the QE kool-aid. Congress, on c-span the other day, was wanting a firm date on when the Fed free money to the banks was going to stop. Her answer: it is tapering but the Fed needed to see improvements in the unemployment numbers before the program was to be eliminated.

    She needs to start taxing overnight bank deposits. Watch the banks scramble then.

  2. David Lentini

    WIll Milton Drysdale Please Pick Up the White Courtesy Phone? Reality is Calling

    “Gambles starts out by stressing that central banks are working from the wrong model of how lending works and the role it plays in economic expansion. ”

    Can bankers as a group really be this stupid or delustional? In any other profession the members may be incompetent practitioners, but at least they understand the intellectual basis of their work. How can we have so many economics departments and business schools that miss something so obvious and straightforward? It’s time to cast out the whole lot, and turn the whole lot of buildings into low-cost housing.

    Of course, one answer is that adhering to the fantasy gives our élites a lot of power while the curtain remains closed. The nonsense view carries the strong moral message of thrift (for the masses), and the need for those severe, sober bankers, like those in Mary Poppins, to manage our affairs for our own good. They are the adults in a world of children, who must act outside of eyesight and earshot to avoid unnecessary confusion among those who “just wouldn’t understand”.

    1. allcoppedout

      We’re 100 years beyond that point David and still can’t see it. There is something we don’t understand about self-interest and education involved in this. What we haven’t done with our economics and finance is to twig it is at stupid as Sino-Soviet nonsense.

      1. David Lentini

        D’oh! Thanks, Jim. Better brush up on by Beverly Hillbillies.before I post again! :-)

          1. craazyman

            You guys better not try to hit on any hot women under 50 with these lines.

            But don’t worry, that still leaves a lot of hot women! hahahaha

    2. Lord Koos

      “It is difficult to make a man understand something when his salary depends on his not understanding it” – Upton Sinclair

      1. backwardsevolution

        Lord Koos – you hit the nail on the head. Of course they understand; they just pretend they don’t. I’m so tired of hearing that “the Fed appears to be oblivious”. They’re not! They fully understand what they’re doing. This has never been about helping the general economy, even though they pretend it is. It has always been about helping the bankers, the financial elite.

  3. allcoppedout

    QE is essentially Ponzi money. I’d guess bankers and various in the class hierarchy know about the Ponzi. The feeling is that once collapsed the sky would fall on us all 1930s-style. So upper-classers are doing us a favour keeping it going and leeching more and more themselves. They problem here is doing economics and finance at all.

    What should be done is a cross USUKEU and BRICKS scheme to keep the sky off everyone while we dismantle the Ponzi and move to sustainable green. Economics and finance as we have them have no answers on this, and is very appealing to the war lords and bandits running everything. Water, food, shelter, clothing and policing we control is all we need to keep the sky up there, while we do some radical doubting and evaluation and build a new core.

    Stuck deep in the mind-propaganda is that we need the sort of stuff Max Weber and Schumpeter talked about as essential to capitalism.
    Though, if you read even this paper, you will find only the slogans survive in the propaganda we get. Schumpeter thought socialism inevitable and it didn’t matter whether the means of production was privately or government held. Both men felt the entrepreneur would be gentrified to bureaucracy

    The banksters and political stooges knew QE would not achieve productive investment. It’s all about not collapsing the Ponzi and “earning” comfortable livings and having cash after the collapse to them. We keep giving them credit as decent people even though we know what decent people do in the wrong culture. They go with the flow and we see the banality of evil – though remember we don’t see the hideous in the banal. It gets hidden. QE was just more looting before the fall, and they knew. To “spot” this 5 years on is dire.

    Where were the tenders for good, innovative green engineering and social projects coupled to idle labour? Where was the holding plan to prevent dire suffering of the poor? Where was the levelling plan for stock and property prices? Where was the feasibility study on realistic needs, providing for pensioners based not on inheritance and prior looting but on a new kind of working society not weighed by by us old farts? There is a QE multiplier and they knew what it was. They just lied about that crap of it getting through to productive investment. There was no ‘write up your productive investment plans across society’ and we’ll have an open process on creating money to fund them – itself surely a crass failure of the banks and the political class, none of whom have ever wielded a spanner.

    Schumpeter and Weber were talking about what is happening now in 1910 – 20. The prissyfication of innovation through graduate schools and MBAs (gentrification). Read the paper linked and weep on what we knew 100 years ago and think how still have vile prissies in charge, like the officer class were bought into their positions. I’ve worked with people who work hard and it ain’t any of these prissies. None of my mates would have worked without incentive (often one of not letting the rest of us down by slacking). The prissies don’t work hard, but convince themselves they do via endless neurotic activity. Their meetings are no better than a bunch of thieves sitting about playing cards. QE came out of such a meeting.

    Never mind QE – where is plan B?

    1. RUKidding

      If really asked, I think more citizens are aware, at least on some level, that QE is Ponzi scheme than one may realize. That said, most citizens prefer to ignore it, which is easy to do, and bury their heads in the sand. Who can blame them? I, myself, would prefer to bury my head bc what the eff can I do?

      QE is a Ponzi scheme that has enabled the “market” to remain pumped up on some level, but what does it really signify? I look at my investments (I’m lucky to have those… well, kinda/sorta lucky) and think: and so? what is all of this truly worth? and for how much longer will this *piece of paper* look so nice? and then what?

      Those friends of mine who have decided to remain sentient throughout this clusterfeck are of similar minds. We do SEE what’s going on, but what is Plan B? And will that ever be implemented? We all knew that Yellen was a sell-out, had already drunk the Kool Aid and would follow the Yellow Brick Road to Oz.

      Now what? I am no financial or economics guru – far from it. In fact, I’m pretty stupid when it comes to this stuff. But if you are even halfway awake – and willing to witness what’s going on – it’s plain as day that the system is all effed up.

      Now what?

      1. OpenThePodBayDoorsHAL

        Just the current QE (not counting the 16 other acronym giveaway programs) would come to something like $943 per month to every household in the US. Per month. For the last 6 years. I find myself thinking of the economic boom we would have had if we had gone that route…and ask precisely why they chose not to let us have it.
        We came pretty close…until Hank Paulsen decided to steal the money instead:


      2. Moneta

        If you are in your mid-60s, those investment dollars might mean something but malinvestment does catch up. It can take up to a generation… today’s 40 year olds watch out…

        If you are I your 40s, those investment dollars in your portfolio are probably not worth much… I would not be surprised to see the older generation and elite voting its way into my savings and sacrifice. I am not angry, I would probably do the same thing if in that cohort but I see it coming…

    2. Moneta

      For the last few decades, the entire economy has been built on bad foundations, yet people still expect the Fed ad other leaders to fix everything everything quickly.

      First, none of them can because they do not have the skills and the space. They will repeat what they know and it’s more of the same until it reaches its natural limit.

      The other issue is that even if they did the right thing, that would mean huge upheaval that would destabilize the economy for at least 1 decade. That is the last thing the top 30% wants (mostly 55+). They want the status quo until they kick the bucket.

      1. porge

        To paraphrase and generalize a variant of Max Planck’s famous quip:

        ” Society advances one funeral at a time.”

        everyday the demographics shift to favor the young and disenfranchised.

        The only way change will occur is when enough of the “stake holders” of the farce are dead and gone.

  4. Ignacio

    It’s nice to read posts like this but I wonder if I will ever see the day in which all those flaws, mistakes and lies will be widely recognized.

    1. backwardsevolution

      Ignacio – they’re NOT flaws and mistakes, but they are LIES. They know exactly what they’re doing. They engineering, steering – but to whose benefit? Figure it out. This has all been INTENTIONAL AND PURPOSEFUL. Stop with the “flaws” and “mistakes”.

  5. PaulW

    “It’s nonsense” never a truer word written.

    Let’s see if I can get this math correct. The Fed will create $2 billion today and give it to who knows who? it’s a shame that money couldn’t be divided up into $100,000 packets then given to 100,000 average Americans. Hold a daily lottery with no one allowed to win twice. A non-rigged lottery, if it’s possible for these people to not rig something. Seeing QE has been going on for some time now and not too far back it was closer to $3 billion a day – every day! – that’s a lot of lottery winners. Imagine what good that amount of money would do for just one person. Instead it just gets dropped into a black hole as the US dollar, the cornerstone of the global economy, continues to be undermined.

    1. dannyb2b

      The fed could conduct monetary policy with the broad public by directly expanding money into citizens accounts with reference to its inflation or growth targets. cmamonetary.org

    2. Ben Johannson

      The dollars the Fed puts into reserve accounts aren’t like the dollars you use to buy a Honda. Their uses are exceedingly limited, which is why efforts to stimulate via QE never worked.

      1. dannyb2b

        Thats why the reserve accounts shouldnt be so limited in function. They should be just as functional as bank deposits and be widely held by anyone.

        1. F. Beard

          Yep. We should all deal in reserves which are really just the real money that the banks use to settle differences among themselves but which we all could use for everything else too.

          Bank credit is an exercise in embezzlement and counterfeiting via government privilege.but the endogenous money crowd can’t conceive of any other way.

  6. Hugh

    QE and ZIRP were instruments of looting which allowed the rich to blow bubbles in stocks and commodities, support real estate prices in what little was left of the housing market to the benefit of those holding this paper: the banks and the rich, and so thereby allow the rich to recoup their losses and increase their wealth relative to the rest of us.

    As allcoppedout notes, these bubbles are Ponzis. They need to be constantly juiced and pumped up by QE and ZIRP. It’s why the taper is such a dubious concept. You cannot taper a Ponzi.

    1. allcoppedout

      Rather than the 5 year late recognition of QE as something that didn’t work rather than the scam it was, we could do with a money-trail. It was crooked.

    2. backwardsevolution

      Hugh – your posts are consistently on the money. You can taper a Ponzi if you allow the top to get out while you shove the losses onto the public.

      allcoppedout – yes, it was a scam and this “late recognition” is nonsense, as is “we didn’t know, we couldn’t have seen,” etc. There was intent, the one thing in criminal court that lands you in jail. You are so right, we could do with a money-trail.

    3. Ben Johannson

      If QE and ZIRP are how looters create bubbles, then how do you explain these phenomena in the absence of those policies? There was no QE prior to the financial crash.

      1. allcoppedout

        It had already been policy in Japan by then Ben. You are right to ask the question though. Just as Japan was in trouble before its QE with a property Ponzi, clearly we had run into a similar situation. QE was a continuance rather than original cause. Before this we had deregulation that left property highly regulated (Thatcher-Reagan) to boost prices. The Ponzi problems precede QE and bailouts.

        1. monday1929

          Agreed ACO. It takes credit and the Publics willing participation to have the bubble. The bubble’s focus may even have some validity, it is just that 30 years of promise gets crammed into 3-5 years of market action. And the criminality during 2003-2008 just made things so much worse.

          This latest 5 years action might better be thought of as “Death Throes”. We do know how those resolve.

  7. Aaron Layman

    Thanks for the link to the Gambles piece Yves. He is absolutely correct, and it’s important to point out the fallacy in the story the Fed is selling. If QE was such a positive for the economy, then how come M1 and M2 have fallen off a cliff? Anthony Sanders (Confounded Interest) has a host of charts showing the damage that has resulted from Fed policy. The reason is simple, the Fed has little control over the demand equation, particularly when they have already handcuffed most of the population with their crony capitalist policies. It’s the same reason we see the floundering labor market. The Fed pretends they can fix it, when they know they have little means to do so.

    When you start picking winners and losers and choose to inflate to save your friends (banks, wealthy, first-access to capital), it’s downright deceitful to suggest that you are doing so to save the real economy. To believe the shit the Fed is selling, you first have to start from the assumption that the system they helped save was actually worth saving. Knowing that the system blew its top as the result of massive leverage and systemic fraud that’s a pretty big stretch. But just for humor’s sake we say that bailing out a bunch of criminals was the right thing to do to save the economy, that still doesn’t excuse the Fed for their blatantly duplicitous behavior and policies. QE is just one arm of the corporate tentacle known as the Fed reaching out to save the other corporate parasites which continue to leverage their political and capital interests in their own favor.
    As is typical of any accomplished psychopath, the consequences/collateral damage are merely an afterthought, and as we have seen the Fed will exercise all sorts of revisionist history and spin to keep themselves in a job.


    1. allcoppedout

      I didn’t get what you say from Gambles Aaron – though I agree with you. QE was a political decision not an economic one. Here’s a classic BoJ paper on their 2001 QE:
      There was a mass of evidence that QE would fail long before it was implemented – or rather work exactly as it has, including FED and BoE papers. The consensus is that more QE gets less and less ‘effective’.

      Meanwhile, no re-structuring of our bent, planet burning economy.

    2. Hugh

      The Fed has worked against employment by pursuing a policy of wage suppression for the last 35 years under cover of combatting “inflation”, i.e. wage growth. This policy has had the effect of transferring gains in productivity upwards to the rich who use it to blow bubbles, buy politicians, and financialize everything in sight. This in turn results in overt job cutting to support share prices and indirectly the same thing through suppressing demand.

      The Fed is a major engine of kleptocracy. It is operated by and for the looters. That is why Bernanke intervened massively to save the banks and the rich but not the rest of us.

    3. ian

      “As is typical of any accomplished psychopath, the consequences/collateral damage are merely an afterthought, and as we have seen the Fed will exercise all sorts of revisionist history and spin to keep themselves in a job.”

      As for me, I’ll just wait for Krugmans column.

  8. Schofield

    We need to understood that Piketty’s book is really all about the relentless construction of a “super-drain” by the super-rich that all the lobotomized Neocon economists, politicians and journalists wouldn’t recognize if they fell down it because they’ve been suckered into the theological fantasy that markets don’t get rigged and always self-balance!

  9. Reno Dino

    This explains why they can never, ever stop OE is one form or another since it’s the only thing supporting asset prices mostly held by the rich. What made the last boom possible is the lowering of lending standards. That drives loan demand like there’s no tomorrow. Today’s auto sales boom is the direct result of subprime lending and low or zero interest rates. Borrowers will pay their car payment before any other bill until they can’t. But, hey, when they lose their jobs, they can all drive for Uber. It’s capitalism (with bailouts, of course) for the one percent and the Sharing Economy for the rest of us.

  10. F. Beard

    people and businesses are not inclined to borrow money during a downturn purely because it is made cheaper to do so. Gambles

    Conversely, high interest rates would not necessarily prevent or reverse hyperinflation since the addition of new principal to the economy might exceed the removal of interest from the economy? So that the way to prevent or reverse hyperinflation is actual credit limits, i.e., quantity, not price?

  11. washunate

    “The Fed has brushed those critics off, its confidence based on the fact that the economy didn’t go into a Great Depression-style black hole…”

    To push the envelope here a bit, I wonder how bad things will have to get before the current depression is simply called a depression rather than comparing it to the last great depression in a lesser of two evils way.

    I’m pretty sure the Fed confidence is based on the fact that the criminals have been protected and the looting continues – I don’t think it has anything to do with ‘the economy’. The co-opting of the desire for change (expressed so overwhelmingly in 2006 and 2008) by the Democratic Party establishment was quite effective in the short-term. I am very curious to see how events unfold over the longer term now that the bipartisan nature of the system that close observers knew about is much more broadly unmasked.

    1. Moneta

      In the Great Depression, the poor looked like the poor everywhere in the world.

      When the bottom 50% in the US looks like the poor in China, India and other emerging markets, maybe we’ll be able to really call it a depression.

      Just like the 1% have been looting the 99%, the 99% of the Western world has been looting the emerging markets.

  12. allcoppedout

    I fear some may still not realise why QE comes around. It was invented in the 1990s by Richard Werner, but no one has implemented it in his formulation, which would have involved long-term government borrowing from commercial banks. And the idea was always to support asset prices, generally stuff the banks had lent money on hand over fist and where the pin had been stuck in the bubble. What they have done is dragged large numbers of the public into the bubbles through housing, pensions and other investments. QE comes around because no capacity-building work has been done in an economy that has allowed bankers to define what money is in cahoots with politicians who can choose what does not get deregulated (usually property) and thus is ripe for Ponzi.

    If we really understood what money is, none of this would matter because we would be able to redistribute to genuine need. In fact, our system has no proper understanding of money, only that of libidinous greed. If QE had succeeded as they promised, then we’d be further into the hole of burning the planet in this lose-lose game of drones. And weirdly, the first country to drop out of this madness and go green will lose too.

    Those who told us QE would boost groaf through investment should be sacked. They were either lying in public office, or hadn’t read the literature.

    1. F. Beard

      Sharing should be taught in kindergarten. Oh, wait! It already is but somehow people can’t see its application wrt money creation.

      Another thing(?) taught in kindergarten is not to steal but somehow that gets lost wrt to government-subsidized credit creation.

  13. Mel

    The wealth effect might encourage people to spend more, but corporations are not people; they are only persons.
    What about the amusing idea that QE lets corporations create profits directly, by writing money straight onto the bottom line, without having to get tangled up in that intermediate, complicated, confusing, business-doing thing?

    More darkly, there’s still the Club of Rome thing, and it’s a real problem that we’ll have to do serious things to solve, if we ever live through this fake problem.

  14. fresno dan

    “This is the exact opposite of the Fed’s beliefs, that the wealth effect encourages people to spend more”

    Wealth effect – the wealthy get the money and I get the effect (no interest on my savings and house prices going up – I don’t own a house so that and raising stock prices aint putting any spending money in my pockets)

    1. jrs

      The wealth effect: some older people that own houses feel more wealthy, and young people who don’t own them feel poor because they cant’ afford them. Meanwhile real estate investors buy up all the rentals threatening to create an oligopoly rental market which mean increased amounts of everyones pay check will go to literal and economic rents. That’s the “wealth effort” for ya.

  15. monday1929

    The fact that the head of the NY Fed, criminalgeithner, stated to congress that he was not a regulator in that role, and that he not only kept his job but was not laughed out of the room, or jailed, says all that needs to be said.
    Zero interest rates kills Capital.
    The fact that the Great Bernanke Still does not understand that the cause of the Great Depression was the Bubble that (co-incidentally) came right before it says even more.
    The fact that failedconsultantgreenspan admitted that his Entire World View was incorrect, and that, yes, Companies will succumb to criminality when left to self-regulate, got paid millions for books and speeches after making that admission,
    And the fact that assholehankpaulson stated the economy was the strongest it had been in his lifetime weeks before it collapsed,
    and the fact that they NOW claim to have prevented a New Great Depression, which they were blind to and denied even the remotest chance of it occurring while standing at its very precipice, and scoff at the advice of those who Did see that fact………………………I better end this before I say something I may regret.

    1. F. Beard

      Zero interest rates kills Capital. monday1929

      Let’s see:
      High interest rates are bad for some.
      Low interest rates are bad for others.
      So we can at least say that interest is DIVISIVE?

      Otoh, shares in equity, common stock, requires no borrowing nor lending much less for usury.

      But why share when government-subsidized credit creation allows those with equity to instead legally steal purchasing power from the poor? Cause if you don’t, your competitors might?

      1. monday1929

        I meant to edit that line out as I went in a different direction- I really have zero understanding of money and economics but sometimes think I have the smallest whisker of an understanding of Markets, Beard-man.

  16. ewmayer

    I feel we need a “groaf”-manglished summary of the quasi-religious delusion so excellently described in the article(s) above and the reader comments. My humble attempt follows – I encourage the readership to please point out any lawgic – erm I mean logical – flaws or sequencing errors and please supplement with their own “Tales of graofishness and quantitative dis-ease”:

    eKawn 101 fer Dummköpfe – Quantitaterish Dis-and-Dat-Easing and The Welf Effeck

    o Centirl banks force down int’rist raytes to boost EZ-credit-if-yew-kin-fawg-a-mirror-yew’re-approved lending…

    o Centirl banks also happytawk and pull out all the stawps to provide a bid for risk assets (stawksnjunkbawnds and so-kawled “temp’rarily illiquid financial insterments”), which boosts prices of stawksnjunkbawnds and other financial insterments…

    o Which causes owners of stawksnjunkbawnds and former owners of “temp’rarily illiquid financial insterments” to be flush with newprinted ‘lectro-monah, the so-kawled Welf Effeck, which snarky types sometahms refer to as “Autogyro monah” or “Centirl banksters Ctrl-Peeing of liquidity”, and even snarkier types call “un-Ctrl-Peeing of liquidity”, ’cause once you start its ahmost impossible to stawp. (NB: Not to be kinfused with the geawlagy concept of ‘inkawntinental drift’). Meanwhile

    o All the happytawk about rising stawk prices and EZ-credit-if-yew-kin-fawg-a-mirror-yew’re-approved lending leads to a burst of kinsumer awptimism, which

    o Stimlates demaynd, i.e. makes kinsumers run out to their local Wal-mart, K-mart and S-mart (“shawp Smart … shawp S-mart”) and try to one-up each other in terms of the contest known as…

    o Shawptilyewdrawp, and the resulting smell of overheated plastiCredit cards accompanying the Welf-Effeck-induced Prawduck and Sarvses Demaynd gusher causes…

    o Bidniz owners, a.k.a. the “jawbs creationists of the eKawnimy” to respond, as a result of which

    o Bidnizess expaynd and stawrt hahrin’gin, leading to at first a tricklin’ down and then an Ahmighty gusher of Welf into kinsumer’s pawkits, which combine to create the ahmighty Keynesian-countersickly-pawlicy-effected

    o Seff-staining recovery, whereby which…

    o The Virchooss Sickly is complete, and Evir’body lives happily furrever, praise be and Happy Black Friday, now-starting-on-or-around-July-4th to give kinsumers plenty o’time to stawk up for Eggsmass and other sec’lar shawpping-oriented Hauldays.

  17. Moneta

    In addition, QE and its fellow traveller, ZIRP, has imposed a huge tax on retirees and savers, who can’t find high yielding, safe assets. The central bank believe they’d of course do the rational thing of either spending more of their principal or going into riskier assets (Gazprom, anyone? It has a nice 5.3% yield, although you would have done even better buying it six weeks ago). Instead, most are hunkering down and trying to make do on lower income.
    In the alternate universe of limited bailouts, higher rates and no QE, we are wading in a smaller economy with a lot of bankruptcies and huge write-downs/write-offs.

    Pensions collapsed 4 years ago and Westerners are blaming everyone else for their indulgences/lack of self control and the failure of positive thinking.

  18. Christer Kamb

    In Sweden we have had a continued houceprice-boom since 1995(recovering from the biggest economic decline since the 30´s(induced by a commercial property-boom due to bank-deregulations 1985). Of cource Sweden was affected by the international GDP-downturn 2008/09 but consumtion was still pretty high and more important, it recovered fast thanks to the FED ZIRP/QE-policies. I think Sweden together with Canada, Australia/New Zeeland (among the “west-economies”) are a group of countries that still have not experienced a house-downturn in this cycle. During the price-boom(from 1995) income-taxes were lowered in several steps from 2006. Banks lended freely up to more than 100% of house-collateral(changes to 85% in 2013(in theory)). Prices are again soaring(up another 10% in a year for apartments) even though Sweden still have weak GDP-growth(as have Europe). Consumtion/construction(also immigration(lowering wages in different areas)) is holding up the economy. Swedish centralbank(The Riksbank) were very late to warn against the debt-growth in the household-sector. Debt is still rising and is now 3 trillion SEK(460 Billion $) with 4,2 million housholds(110.000 usd/houshold.) By far the biggest number ever(in real value). Debt-ratio net-income is 231%. Household´s RE-debts are 50% financed by foreign capital by banks(from almost zero in the late 90´s). Banks loan to deposit-ratio is just below 3(0,7 and sinking in the US I think).

    The main capital-city(Stockhom) and it´s strong urbanization by younger people and immigration/refugees is the maine price-driver(residental shortage they say). Young people that have never experienced a house-crises.

    RE-taxes taken away, income-tax reductions and a new generational urbanization together with lax banking have driven RE-prices to the sky already by 2008. Now the US ZIRP accommodation meant the start of the third leg up. The centralbank of Sweden were very surprised that prices started to soar again, after a small dip, from 2009. Of course the politicians didn´t expect this interest-rate development. But most of them, since long, think rates must be cut even lower(CB fund-rate at 0,75%). And I guess rates will go down further when ECB decides to start QE and/or negative rates.

    This will end badly. It is all about the tyranny of the majority and good intentions.

    1. Christer Kamb

      People borrow mostly at a variable rate(3-month) now at 2,7%. Money borrowed overseas, preferably in usdollars and some euros swapped for shorter durations and probably “well” currency-hedged. Hopefuly the international swap/currency market keep together in the next crises. Sweden have a very small budget deficit at the moment but normally a positive one due to consumtion, 50% of GDP(and a big positive current account) but are very sensitive to a fall in consumtion. Value-added consumtion-taxes are by far the biggest governmental revenues, 43%.

  19. Dave M

    I understand all that Ponzi etc arguments but more fundamentally it is only few options we have to place our bets on – USA is one – where else if things go south? Ask Chinese – biggest T paper holders. What I am trying to say is – while it looks like Ponzi – the FED QE is not because the dollar is ultimate destination – after that there is nothing only black holes in infinite universe. Obviously if Zimbabwe does it then the story is totally different…

    1. Yves Smith Post author

      The Chinese do not hold Treasuries as an investment in a discretionary manner, even though in their confused manner they have come to think of them that way.

      China has to hold dollars by virtue of running sustained trade deficits with the US. They convert those to Treasuries to get a yield pickup.

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