Is QE the Future of Monetary Policy?

One thing I’ve mentioned a number of times in recent months is my belief that we could very well enter the next recession in the USA with the Fed still at 0% interest rates.  If I am right then that would be the first time the US economy has ever entered a recession with rates at 0%.  In other words, we’d be entering a brave new world for monetary policy.

Why do I think this?  Well, first of all, the Fed’s balance sheet is going to remain large for a long time because the Fed isn’t going to shrink its balance sheet by selling assets.  So the effects of QE are here to stay.  But more importantly, I think the economy is operating at a muddle through pace for reasons I’ve discussed previously and that means that the Fed will maintain an accommodative interest rate structure for some time.

The interesting thing about this potential world is that it means QE is the new policy tool of choice.  In other words, QE could potentially replace interest rate policy as the primary policy variable.  This means a number of different things:

  • Investors have to come to grips with the potential reality that QE is not a temporary event.  It could very well become a sustained policy process.
  • The Fed’s repo tool and interest on reserves will remain the primary way through which the Fed will control interest rates if and when it decides to.  In other words, the IOER rate is the de facto Fed Funds Rate.
  • Investors must adapt to the varying transmission mechanisms of QE and the different ways this sustained policy can influence the economy over the course of the entire business cycle.

QE is probably here to stay in some form for the foreseeable future.  In fact, it could become THE policy tool of choice in future business cycles….


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • SS

    I wonder if the sustained implementation of QE will actually reduce how influential it is? If the Fed’s forward guidance is sustained and becomes viewed as permanent then doesn’t it lose some of its effectiveness?

  • GLG34

    If you’re right then that means the US economy is screwed because that means the economy is operating well below capacity for way too long.

  • William Combs


    Is it logical to expect we will recess in the near future when growth is already so low? I have had the working assumption that a recession is usually followed by much stronger growth (i.e. 4%-5% GDP growth). Or maybe a recession is caused by an international shock from Europe or Asia?

  • Johnny Evers

    If the only way to grow the economy is by expanding lending, then the only way to grow lending in a climate in which the private sector can’t grow fast enough to pay its creditors is for the Fed to keep rates at zero and begin buying other kinds of debt.
    I believe the Fed will eventually begin buying student loan debt, for example, and then move on to municipals so the looming infrastructure bills can be paid, and of course continue to buy Treasuries to smooth the way for the trillions in new and maturing Treasuries needed to keep the non-working population afloat.

  • Ramanan

    “In fact, it could become THE policy tool of choice in future business cycles….”

    Cullen, as a prediction, bang on. But people confuse prediction and suggestion. I think a lot of your readers may think that you are suggesting QE does something great for the economy. So you have to unconfuse it for them.

  • GRock

    Yikes, god help us…LOL

  • john-retailinvestor

    How is this a good thing?

    And at point does this become perceived as outright monetization and not simply a temporary asset swap?

  • LRM

    Yes, it would be great if Cullen could detail the transmission mechanism of QE to the general economy. Is there a way to predictably measure the results of a certain $$$ amount of QE to the resulting improved employment, larger GDP, and higher S&P . What % of ones wealth effect would be released into the ecomomy from what has been described as an asset swap. It is confusing why increases in bank reserves is doing anything if they can not be used.

  • Boomer

    Cullen, I think you are right on with your prediction. What disturbs me most about this possible scenario is what the rest of the world will think about what we are doing. The ramifications for the dollar and interest rates could be really frightening. I think we all better have are chin straps firmly secured.

  • Dennis

    How is this a good thing? Cullen: “Investors must adapt to the varying transmission mechanisms of QE and the different ways this sustained policy can influence the economy over the course of the entire business cycle.”

    The central misconception is that deficit spending and the downstream process of QE causes inflation — because of currency dilution. We all know that too much CREDIT chasing over priced assets and stuff is the cause. As long as the central banks of the world all dilute their currencies a tiny bit this makes no contribution to inflation at all. Currency traders will set the relative values of the world’s currencies. QE therefore is a net benefit to the businesses and in direct competition with the banksters that want to add only debt dollars to the world’s economies.

    So, how is this a good thing? As long as the banksters don’t force the central banks to stop the QEs we will be OK. Today those same banksters refuse to issue credit at these low interest rates. Therefor, we will continue to muddle along and along and along. The boom/bust business cycle will stay in low gear as long as this continues. Keep excess credit out of the system, and there will be no boom and thereafter no bust.

  • Dennis

    By “inflation” I mean of course any inflation beyond the 2% compounded annually that is the plan.

  • S.E.

    As long as there is no inflation and the currency isn’t tanking, what’s the difference. I guess using inflation assets and short the dollar should be considered as a hedge then!

  • S.E.

    Cullen, maybe you could provide all of us the text book business cycle and your opinion on where we are at in that cycle. Doesn’t feel late cycle to me as there is no inflation and cap utilization has not recovered completely.

  • Dennis

    You would short Uncle Sam’s dollar against what currency?

  • Dennis

    In ten years I’ll bet economist will be writing: “What happened to the old business cycle?

  • AnonymousOne

    More than a fair share of economists (some Fed members and Kovacevich from WFC) have expressed their doubts regarding the efficacy of the latest rounds of QE. The gameplan is clear taper on with QE ending. I seriously doubt Congress would allowed open ended QE. To quote the legendary Texan golf instructor Harvey Penick… “most people need an aspirin or two NOT the whole bottle”.

  • jt26

    Cullen, I think all you are saying is that the economy will be weak so short interest rates will never rise above 0 (whether controlled by FF or RRP/IOER) before the next recession. Right? I *don’t* think you’re trying to imply that the Fed will only try to control MP through QE *just* because the balance sheet is large. Or are you?

  • Tom Brown

    Cullen, kudos for reality gut check here. I think this is something we really have to consider happening.

    If for for some reason the Fed wanted to raise the FFR > IOR rate (IORR) without first unwinding its balance sheet, then one quick and dirty way to do it would be to simply raise the reserve requirement (RR) so as to eliminate all the excess reserves, i.e. convert all the excess to required. Then the Fed could again use pre-2008 style OMOs to set the FFR > IORR. I’m assuming that the IORR applies to both excess & required reserves. Maybe there’d never be any reason to do this, but I thought I’d throw it out there!

    In order to accomplish that right now, the Fed would need to raise the RR to 167% = $2.5T in reserves / $1.5T in checkable deposits.

    A potentially negative consequence for banks with reserves / checkable deposits < 167% is that they'd need to borrow at the rate of (FFR – IORR)% to meet the requirements.

    I ran this idea past a few people, and none of them seemed that thrilled with it, but generally didn't find any huge problem with it either. Sadowski suggested that using IOR would always do the same job and is the more "modern" way to do it.

    He also suggested that the Fed would be making more use of the facility that JKH pointed out recently:

    (I couldn't locate the pragcap cross posting)

    Did you happen to look at JKH's article or the one he references in it? Thoughts?

    Also, although the following departs from "monetary realism" in that it doesn't describe our current reality, I thought this Miles Kimball post (one in a series on this subject) was pretty interesting:

    He mentions here how an all electronic money system would free us up to target inflation at 0% (since negative interest rates are quite possible then), amongst other things, thus potentially muzzling the inflation hawks (amongst other benefits). My gut tells me that an all electronic system like Miles describes would certainly provide a means for us to get away from our endless QE scenario. Your thoughts?

    David Beckworth also has an interesting article comparing and contrasting the Kimball approach vs the MM approach, that I thought was worth reading:

    Then comes the concept of using negative IOR: I guess Sweden did this (with some success?). But I think one main problem with negative IOR is flight to cash: something that would be solved with Miles' all electronic system (i.e. getting rid of cash)

    So basically just a collection of loosely related random thoughts here. :D

  • Tom Brown

    Also I’ve heard that gov agencies don’t get paid IOR, thus even right now the actual FFR is slightly less than the IORR. Does that have the potential to punch a hole in my quick plan to get FFR > IORR?

  • Cesar

    I think Cullen has previously suggested that QE’s major impact is through portfolio rebalancing when enacted with the private sector (rather than a Primary Dealer). I could be wrong though and he can probably clear it up himself!

  • Cesar

    Kaminska at FT Alphaville has been on the e-money road for a while, with some good posts; most recent one here

    “Most important of all, however, Bitcoin has helped to de-stigmatise the concept of a cashless society by generating the perception that digital cash can be as private and anonymous as good old fashioned banknotes. It’s also provided a useful test-run of a digital system that can now be adopted universally by almost any pre-existing value system.

    This is important because, in the current economic climate, the introduction of a cashless society empowers central banks greatly. A cashless society, after all, not only makes things like negative interest rates possible, it transfers absolute control of the money supply to the central bank, mostly by turning it into a universal banker that competes directly with private banks for public deposits. All digital deposits become base money.”

  • Dennis

    I would like to post something on this very topic posted on PragCap years ago by whoever RXXT60 is. It began as a discussion about how QE actually functions in China. The big difference there is that rather than taxing its big companies, they just own them and take the profits. That way they don’t really have nearly as much “deficit spending”. (please ignore the use of the “MMT” reference, this was long ago.)

    03/13/2011 at 6:04 PM RXXT60
    China has four big state banks and they did a quantitative easing movement (Brown, Galbraith) to eliminate their communist debt. Bonds were issued, and the debt moved from one hand to the other, and then off the books. The state theory of money is chartalist. China issues debt free money from their State banks to companies, allows their companies to beat each other up in the marketplace, and then the strongest emerges to go on and export. The state then can forgive the loans. So, the debt free money became infrastructure, knowledge, and a mercantilist export industry. The money began as a ledger entry and ended up as an entry on a business ledger. Extra yuans that enter the money supply are non-inflationary if the economy increases in proportion. This is more chartalism.

    China trades out Yuans for dollars that enter their economy, and recycles those dollars back to U.S. treasuries. In this way, the dollar is propped up higher (supply and demand) and Yuans are held down. It is not inflationary if you can do the hat trick of growing your economy faster than the Yuan supply increase. With more than 1 billion people coming off the farm, this can probably go on for awhile. More chartalism.

    China is buying Gold on the world market. They trade out Yuans for that Gold. Yuans leave the country to buy Gold. This helps remove extra Yuans from the supply. Chartalism.

    With regards to the author’s comments on hyperinflation, it always happens when your money needs to be paid in something else. For example, after the Versailles treaty Germany had to pay debt in pounds and francs. Bear raids by money manipulators sensed weakness, knowing that Germany would have to issue more of its currency, thus driving it down. The private banks of Germany issued extra marks to make the short position. This fed a downward cycle of more money issued, more gambling on wealth destruction, and the hyperinflation. It was private banks, not State banks that caused the problem. The underlying issue was paying war debts in other currencies. This is the opposite of chartalism.

    It took state money to unwind the damage in Germany. The state money could only circulate in Germany, and could not be exchanged for foreign currency. Later Federer money (MEFO bills) was issued to prove even further that State theory money is superior. The MEFO bills built out the autobahn and built industry. Germany emerged as the richest country in Europe. This was done without gold. Some say Germany was attacked by the West because their non-gold system was a threat. Chartalism again. Federer most likely learned from America’s greenback experience. During the great depression, Congress threatened the private banks with the Thomas amendment if they didn’t issue enough money. (The treasury could direct spend new debt free greenbacks into the economy.)

    For WW2 the bankers issued new money at 3/8 of 1%. Normalized to the economy it was 5X greater than Reagan’s deficit spending. At the end of the war, efficient industries were left behind, and the debt was relatively small. Those efficient industries were then turned inward to fuel consumption. China will probably do the same, now that their industries are becoming efficient. Steven, (above) is right that we needs some recessions now and then to clear out the deadwood.

    Chartalism can be abused to keep inefficiency in an economy. With regards to the U.S. being selfish, then consider that we just put the industrial age into hyperdrive with the advent of high technology. Virtually all of the great inventions of the modern age come from America. If we played hard ball like other countries, we would be hundreds of years ahead. Our private banks and private markets allocate their money where they think they can make a buck. That means sending it overseas where overhanging labor is. Private banking uses debt money that stands in for money; debt money must be serviced due to the interest inherent in its nature.

    Chartalism and MMT describe this mechanism but don’t necessarily discuss the morality. And here we are at the crux of the problem. Chartalism and now MMT are criticized for failure, when all they are doing is describing the mechanisms. Personally, I find private credit money to be the failure mode. Allowing money power to be in private hands eventually distorts governments and usurps political power. The issue with China is that it is using State money theory to all of its advantages. Their buying gold is a minor side issue, which helps make their fiat money economy look even resilient. China will have a problem if they inflate their money supply beyond what their economy can take. I doubt China will drop their currency peg, because it allows foreign industry and knowledge to be sucked into the country. China’s state theory of money has the problem in that it is not supervised by the people; fascism could arise with a despot in control of the money power. In the U.S. deficit spending is malinvestment in order to buy votes. In both cases, China and the U.S., the money power is not controlled by the people.

    03/14/2011 at 10:56 AM Peter D
    This is a very interesting and thought-provoking comment, thanks!

    03/14/2011 at 12:35 PM RXXT60

    MMT/Chartalism is superior to Gold systems. When we had gold-based systems, private bankers would make paper on top of said Gold. Usually the ratio was 10 to 1. That means that if a gold dollar of goods left in trade imbalance, then 10 dollars of economic activity would leave with it. Private credit money means that horizontal banking can inflate quickly, causing bubbles, and can deflate just as quickly into depressions. During depressions, the bankers would want their loans paid off, loans that were given with a basis of fraud/deception. That is, they would want payment in gold or land, when their initial loan was debt paper money. So, the issue isn’t Gold, and it isn’t Chartalism, it is the nature of money and who holds the issuance power.

    In America, the private banks wanted their debt money backed up by Taxation. This is the original sin, started by Hamilton with the first bank. Jefferson said later that if he could have one do-over, it would be to disallow the Government from borrowing. A country that has to borrow its own credit from people who make that credit with ledger entries, is engaging in fraud/deception. The taxpayers then have to vector their life energy (in the form of money) to pay the issuers of that money.

    If one examines our vertical deficit money issuance, it is actually a pretty good deal when compared to the total usury load of private debt money. People get mad at the debt money issuance because they don’t like the fact that interest has to be paid in order for that money to come into existence. This element of fraud does not condemn Chartalism, it condemns the law. In other words, we can change our law and have law based money that is much more fair. Chartalism money would then adapt to the new LAW.

    I characterize our government as a Statist Oligarchy of private banks/corporations/government. The private banking money power has undue influence on the affairs of the state, and hence the “people” are disenfranchised. That this is operative, witness the recent TARP episode, and too big to fail; MMT is not responsible for the system, it describes the system.

    03/14/2011 at 12:58 PM clydeDNA
    Thank you very much RX, your comments are very helpful. ..’
    Is your last point that Chartalism/MMT is not a “belief” or the utopian goal of some screwed up economist, but instead is an honest attempt to describe how things actually are in today’s economic world so that we can try to figure our way through this stuff?

    03/14/2011 at 8:50 PM RXXT60
    Henry C.K.Liu says that when humans figure out that money can be debt free, that will be the equivalent of figuring out the world isn’t flat. Henry is a chartalist, and China dials him up for advice. Yes, MMT folks are making an honest attempt at defining our modern system as it evolves. Their notions of using government as employer of last resort (ELR)is a moral attempt at moving our money forward.

    Personally, my ideal system would be the 1930′s Chicago plan with some blend of ELR and clearing banks. With a system like this, the fraudsters would have nowhere to hide, and the system would not easily go out of equilibrium. The Chicago plan absorbs the FED into the treasury. The treasury then can issue vertical money debt free. Horizontal bank credit money goes away, and becomes real money. The horizontal banks become 100 percent reserve, so they only loan out money that already exists. Money pops into being only by way of the treasury, so in effect there is only vertical money.

    The borrow short to lend long problem can be taken care of with mutual fund type operations. Clearing banks, or bancor types systems, can bring political control over the exchange rate. In other words, if a good leaves your country, your account is credited up, and when an import comes in your account is credited down. Money doesn’t leave the economy, it is insulated by the clearing bank. That means your money circulates only in your economy.

    If a trading country becomes mercantilist, they will be penalized for having too high of a trade imbalance. Yes, Keynes was a bit radical. You can then control better for the total money supply than we do today. The FED lost control of the money supply volume with the rise of non banking finance, like GE capital and others. So, the FED only controls for interest rate windows. This is a potential danger to us, as the huge unkown volumes of dollars overseas can come flooding home if we fall out of reserve status. The big thing to remember is that money is a fiat of the law. It is not gold, or something magical. Money is codified into existence by the law.

    Currently we allow debt money (horizontal) to be used for tax payment. This is our major weakness. Most people instinctively know it is wrong to shift wealth and create debt. They are unable to articulate the subtle mechanism by which this wealth shifting occurs.

  • MyUsualName

    The word youre searching for, but cannot find because you cannot abide the tide ‘of I-told-you-so’s, is Gold.

    You know it.

    You were told a long time ago that QE would result in disaster.

    Then when you were told that QE was permanent fixture, you laughed at the idea that it was anything but temporary.

    Then you were told that any decrease in the rate of increase of QE would be catastrophic. But you claimed more QE was what was needed, because the actual mistake was that not enough QE was implemented in the first place.

    Now you claim that any decrease in QE is unthinkable.

    So Cullen, and as any fool in the future will be able to read in the archives, heres what happens next; you will claim that any retreat in the rate of increase of QE will result in economic failure. We must have exponentially higher QE in order to……. what?

    ……….I’ve forgotten what all of this was for!

    Can you remind us Cullen and quantify its myriad successes to date?

  • Tom Brown

    Ceasar, regarding power to central banks: yes I figure that would undermine one of electronic money’s selling points (placating the inflation hawks): some inflation hawks I imagine are libertarian types, Austrian thinkers, gold bugs or gold standard advocates, who don’t trust government fiat type money in the 1st place: so although they might be happy with a 0% inflation rate, they’d probably be really unhappy with an all electronic system (makes it easy for the ATF to track your ammo purchases!). I poke a little fun… I realize there may be less paranoid concerns.

    Another group that would hate electronic money: drug dealers.

  • Tom Brown

    … and I guess in light of recent NSA news, perhaps not so paranoid either. Ha!

  • Judson

    This seems eerily reminiscent of Japan’s situation. Low rates for a very long time and a bloating balance sheet.

  • Mikej77

    Investment requirements will be so high throughout this century that Federal Reserve purchases will be essential. Reason is that there will be no other adequate source given the demand for money as the massively undeveloped areas of Africa, Asia, Canada, and South America must be built out to some sort of minimal infrastructure. All this will have to happen almost simultaneously hence the Fed will become a kind of sovereign wealth fund.
    Bear in mind that the Fed is the only possible buyer of last resort anyway so if the private banks were to float this kind of issuance nominally the Fed would have to be the cosignor.

  • El Viejo

    Boomer demographics and major loss of US manufacturing jobs and possible loss of reserve currency status trumps everything.

    When the US sneezes the world catches a cold because all the world wants a positive trade balance with us. The golden goose may be dying.

  • Fed Up

    Let’s say a private entity announced QE and was allowed to do it. Describe how it would work. Thanks!

  • SE

    UDN or long puts on UUP

  • SE

    This time its different? Dennis, your an idiot.

  • wallyfurthermore

    If QE is here to stay then we must confront the fact that QE increases the disparity between the poor and the wealthy.
    If we don’t, well, the eventual end of such increased disparity is well documented in history books.

  • LVG

    Gold has been an idiotic investment for 5 years now. Every idiot who thought high inflation was coming and ran out and bought gold, has been wrong. Cullen is one of the few people who actually told us QE wouldn’t cause high inflation.

    You gold bugs are just pure fools.

  • Lance

    I was waiting for someone to say that. Thank you. Yellen seems to think that an additional Fed mandate is narrowing wealth disparity, which continues to widen at alarming speed, particularly due to the policies that Yellen has been complicit in implementing and which she promises to continue. It’s hard to see how the system falls in violence, but then it’s equally hard to see how it continues without violence.

  • Hans

    What the author is suggesting will be nothing short of a disaster
    for America and it’s economy.

    But then, as long as the Reserve is in control by the JMKs this
    may indeed be their long term goal.

  • Cullen Roche

    Let’s not call people names. Nothing positive comes from it. Thanks.

  • Cullen Roche

    No need for the ad hominem. Let’s keep the conversation productive. Thanks.

  • LVG


    Hey, I was wondering what you thought of Tom Palley’s latest on M M T? Have you read it?

  • Cullen Roche

    I haven’t seen that. I might have a look in the next few days, but I am not trying to spend much more of my time critiquing MMT. I think I’ve spent enough time thinking about that topic….

  • Tom Brown

    Another thing that would undermine electronic money’s selling point (if that selling point was that 0% inflation could be achieved with it), would be the fact that 0% inflation probably means that deposit rates would almost certainly be < 0%. How could that be? Well, there's no cash: so no easy way to get a 0% nominal return on money.

    I think the dismay at negative returns on electronic money would more than undo any good feelings about a 0% inflation rate…. even though in real terms it's EXACTLY the same as 0% nominal returns on cash and bank deposits, and a small positive inflation rate.

    psychology is important!

  • Tom Brown

    LVG, is he saying to invest in it, or is he saying we should go back to the gold standard? I couldn’t tell.

  • Tom Brown

    I recently discovered this guy, Jim Caton, who has some interesting things to say about the history of the gold standard:

    He’s got his own blog too:

  • Derek R

    It should actually be the opposite. While I am no believer in strong form efficient markets and purely rational expectations, markets are still forward looking. There is a strong case to be made that temporary QE (asset purchases the market expects to be reversed in short order) will have little effect, especially in an environment without liquidity constraints like today. However, If the market believes that a Treasury which migrates to the Fed dies at the Fed, supply and demand–and therefore asset prices–will be permanently affected. I think this “Ricardian” argument is more accurate for monetary policy than fiscal policy: asset managers are more likely to internalize Fed asset purchases than Joe Sixpack is to internalize the budget deficit.

  • Mark Caplan

    Virtually every successful recession forecasting model relies on an inverted yield curve preceding the recession. Since the yield curve can’t invert as long as the Fed maintains a zero interest rate policy (ZIRP), economic forecasters insist there is at present no chance of recession starting within the next six months.

  • Derek R

    That’s why we need new models. I believe Japan has had five recessions since its ZIRP began.

  • Tom Brown

    I’m not sure what you mean by “suggesting” but he’s not recommending it, he’s just describing in, but maybe that’s what you meant.

    As for it being a disaster, I doubt that. This is not a Zimbabwe style printing and spending of money by the gov because they’ve lost their tax base

    The JMKs? I don’t know what that means: but I’m a little worried where you’re going with this… John Maynard Keynesians? Lol, … or something more conspiracy theory-ish?

  • Tom Brown

    Can you explain the mechanism?

  • Cesar

    Possibly use the Eurodollar curve to see it earlier . . . and closer to the front of the curve . . . .

    Not sure though.

    Cullen’s sectoral analysis would be very useful.

  • Detroit Dan

    From Wikipedia:

    The Recession of 1937–1938 was an economic downturn that occurred during the Great Depression in the United States.
    By the spring of 1937, production, profits, and wages had regained their 1929 levels. Unemployment remained high, but it was slightly lower than the 25% rate seen in 1933. The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 percent and production of durable goods fell even faster.

  • Detroit Dan

    These would be excellent steps, though relatively radical and therefore not particularly Fed-like. They might need some laws passed encouraging them to do these things…

  • Detroit Dan

    Outright monetization is no big deal — just a permanent asset swap of one type of government guaranteed note for another…

  • Detroit Dan

    We’re just following in Japan’s footsteps…

  • Detroit Dan

    And the Fed’s balance sheet is irrelevant…

  • jt26

    Cesar has it right.
    The inversion is really about tightening – government lead, then private liquidity followed. TED spread, CDS etc. for privates still remains good benchmarks. 10 year govs and Agency MBS have been the “new” gov targeting mechanism since QE began. 10s-30s has also inverted in recent recessions.

  • Lance

    In a nutshell, QE targets a structural problem, one that the policy is ill suited to address. (There is nearly zero transmission mechanism.) One of the byproducts of the policy is to starve savers by depriving them of yield. The winners in this game are the rather small percentage of people who have risk assets, and by that I mean either people who have youth and capital, or people who, lacking the former, have an abundance of the latter. Few others can really participate in the capital gains game. This longer this continues, the wider the gap is going to get. The rentier class is kicking butt.

  • Matt

    I think the Fed is preparing to let loose a “horse of a different color” on us, and is simply setting the table for new policy programs coming later this year. I agree QE, or its cousin, is now and will be a permanent part of government bureaucracy going forward. As long as severe deflation is a risk in the minds of the powers that be, then QE will be a tool held at the ready.

    Since the high and newness of QE has started to wane, I look for central banks to reload with another program if economic indicators turn down more significantly … how ’bout explicitly buying emerging market debt, or stocks, or even “mailing checks” directly to US taxpayers? At any rate, potentially some really desparate measures if a recession hits while at the zero bound.

  • http://pragcap Michael Schofield

    Someone correct me if I’m wrong but didn’t QE basically put unused bank capital to work leaving more cash in non-bank hands? While leaving a smaller pool of assets for that money to move to… so that those assets were bid up. The psychology probably helped through the notion that the fed was printing money, surprising that people still say that, although a new pole shows that 25% of Americans are unaware that the earth orbits the sun. Go figure. It’s clear that the main problem in the economy is that lack of demand means lack of jobs and wage growth, which means lack of demand. I don’t see that QE is a big hurt or help at this time since the fed has deep pockets and the banks are awash in money there is no demand for, and it isn’t that bidding up assets hurts the median income, it just isn’t any help. Somehow the economy has to grow fast enough to provide wage growth in excess of the cost of deleveraging, otherwise we will only see deflation. I think we may have missed our chance to avoid deflation, we probably should have spent an extra trillion or so on infrastructure years ago when the costs and interest were at rock bottom. I mean, are we really so stupid that we couldn’t find a way to get a two percent return on those things? Maybe it isn’t too late? Sorry for the bearish tone (I am still bullish for now) and really, no one knows for sure how this will play out. But my job in the markets is to assess the possibilities, and, at the moment, some are ugly. The problem many miss is that QE was and is not enough and if that’s all we got we’re in trouble. But most of you know that.

  • Gary-UK

    Like the fools who bought at $35, $300, and $1,000.
    If your investment horizon is 5 years, and you worry about a 30% dip! perhaps you ought to stick to cash.
    In 2015-16 most of you MMTers will have to think again, as the world evolves.

  • Dennis

    Thanks Cullen. I don’t really know much, but I believe (this is so weak!), that we can figure out what is causing these random fluctuations, then anticipate the up and the down, and fix it. The Fed and Uncle Sam’s treasury are doing pretty good since GM was bailed out in 2009.

    SE believes (and this is solid): “Karl Marx claimed that recurrent business cycle crises were an inevitable result of the operations of the capitalistic system. In this view, all that the government can do is to change the timing of economic crises.”

  • Dennis
  • Craig Jackson

    The fact that the velocity of money continues it’s downward spiral supports the notion that QE and ZIRP have been insufficient. There is plenty of money, but it is not making its way quickly enough around the pockets of Americans. Fiscal stimulus would be more effective, especially without concomitant increases in debt — i.e. print the money — and spend it on US consumption of US goods and services. I’d start by dramatically increasing services to mothers with children, everything from education and childcare to food and healthcare. Most children who attend child care are basically in holding pens for long hours with little stimulus. They tend to have more health problems and do poorly in school. This would the low hanging fruit that Head Start only started to pick.

  • Mr. Market

    Yes. I also fear QE – in one way or another – will continue to be around for many years. But currently the FED is issueing more credit in an attempt to keep the US economy upright. In the future that will be in the form of (literally) printing (A LOT OF) money. But then the US is on its way to Hyper-Inflation (Does one Vincent Cate read this post & thread).

  • cssecurities

    Anybody that follows the equity markets can see it just watching the tape. The ferocity with which every dip is bought is incredible. It is a self fullfiliing prophecy and the trader mentality and short term thinking in today’s markets is only making it worse.
    I think this may be the wild card, where the momentum chasing crowd takes the markets and disparity with it to a level where the fed can no longer deny the effect they are having in asset classes. Will we see another “Irrational exuberance” speech? I don’t know. It just ends bad one way or the other.
    I am sure they think fundamentals will eventually catch up but they do not appear to be very good at reading the psychology behind the markets and this time they have inflated the ultimate bubble.
    The housing bubble was much more difficult to inflate and they still did a “great” job with that one To get started most people need some capital and a little know how. There was also lots of paperwork, not the same with an Etrade account, you cathc my drift…. This ends the day we start seeing futures trading infomercials on late night TV. It’s only a matter of time. Over the past 5 years buying S&P futures has been the can’t lose trade. It is as simmple as that, the ES rules the world and keeps it in order. A substantial decline in them and the whole thing collapses. Obviously, the way down will be a mirror image of the way up fundamentals will disconnect and fear will take over. Disgraceful!! How did we get here?

  • Auburn Parks

    Hey Cullen-

    I remember something you said during a discourse of ours that contradicts this post.

    We were talking about the impacts of moving from a T-bond issuance deficit spending model to a reserve only model. As a point of disagreement, you said that reserve only was not realistic because over time it would ruin the aggregate bank loan to deposit ratio.

    Since reserve only spending is functionally equivalent to permanent QE, how come you didn’t mention your concerns about the health of the banks in this post? Do you no longer see that as a problem? Do you now agree that whether or not the USA issues securities is largely immaterial? Or were you just looking for an reason to disagree at the time and your initial worries about the banks were a stretch?

  • Cullen Roche

    Nothing is contradictory. QE results in some bank deposits to reflux back to the banking system. Either way, it’s not permanent and wouldn’t be the same as having the govt issue all of the money via spending. So I don’t know why you’re coming here trying to start another argument about MMT and your perpetual obsession with it. I will not engage you on this topic so don’t bother starting. Thanks.

  • Auburn Parks


    I am asking about YOUR position and you obsessively take it back to M M T.

    Lets see if we can keep this real simple:

    Do you believe that QE reduces the aggregate bank loan to deposit ratio?

    If it does, do you think this is inherently bad?

  • Cullen Roche

    QE is not fiscal policy. You’re making a mess of this discussion before you even begin. I don’t have the energy to discuss the flaws in MMT right now. Let’s just pretend that you MMTers have the whole world figured out and you have everything right. Okay? Then you can forget I exist, stop bothering me every day and just go on promoting your views on other sites. Cool?

  • Auburn Parks


    “QE is not fiscal policy”

    You cant possibly be this dishonest and intellectually lazy

    Do you believe that QE reduces the aggregate bank loan to deposit ratio?

    If it does, do you think this is inherently bad?

    Neither of these 2 questions has to do with fiscal policy nor with MMT. I just want to know what you opinion is on this specific matter, lets try not to digress umm-kay.

  • Cullen Roche

    Are you serious? You come here and call me “dishonest and intellectually lazy” and then say let’s not try to digress? Your entire approach to discussion is a digression. And for some reason 90% of all MMTers suffer from this. You all are incapable of cordial and mature discussion. It’s the reason why even most other PKers dislike you all. You just can’t deal with anyone who’s even slightly out of paradigm without calling them names and treating them like dirt. It needs to stop. So please just stop pestering me with your name calling and rude behavior. Good bye.

  • Auburn Parks

    you made a silly and erroneous comment and all I did was point that out.

    I just want to know 2 simple things:

    Do you believe that QE reduces the aggregate bank loan to deposit ratio?

    If it does, do you think this is inherently bad?

    Why won’t you answer?

  • AParks

    Why won’t you answer my two wimple questions?

    When have I ever called you names? Please provide an example, I don’t care about your “beliefs” about me or M M Ters

    Why must you resort to non-sequitur straw men attacks?

    Do you believe that QE reduces the aggregate bank loan to deposit ratio?

    If it does, do you think this is inherently bad?

  • http://pragcap Michael Schofield

    The way things are there may not be a tightening going into the next recession, the CBs may accomondate until the economy just runs out of gas. I’m watching things like corporate revenue and the personal savings rate, maybe just some out of the blue crisis. The old business cycle model may not be in play this time. Stock charts will give some warning but I’m expecting a really wild if things go bad.

  • LVG

    “reserve only spending is functionally equivalent to permanent QE”

    Not right. That would only be true if QE were always expanding. I don’t think Cullen expects QE to expand in perpetuity. But maybe I am wrong.

  • Cullen Roche

    Yes, exactly.

  • Hans

    Mr Brown, I was indeed describing Keynesians….Irrespective of whether money is being printed or not these monetary acts by the Central bank will have consequences.

    Look at GNP growth rates over the past six years, less than encouraging.

  • Hans

    LVG, there are more than a single reason to own PMs…

    And those pure fools have had the best returns of any sector
    this 2002.

  • Hans

    Mr Parks, lighten up on the boss, will you?

  • Anonymous

    What happens if it does become permanent?

    I suspect that the only way QE works on an accounting basis is that it must be considered a ‘swap’ and therefore ‘temporary.’
    Once it becomes permanent then we need a whole new paradigm.

  • Mr. Market

    Sooner or later the markets will call the FED’s bluff (=rising interest rates). And then QE will be turn out to be bomb that sank the US.

  • Matt

    Agreed. The central banks of the world absolutely need a Goldilocks economy and while a cold, gray slog doesn’t sound too appealing, it is what they want.

    Unfortunately the biggest risk today, at least for stock markets, is for a hugely positive economic data print to hit the tape — as that good news would be bad for stocks. Less QE support and a faster taper will bring fundamentals back into the picture faster. Perhaps a concurrent zing to the upside on short-term rates and likely a flattening yield curve whacks some bond investors.

  • Steve W

    Maybe this stuff is over my head, but isn’t the Fed trying to stimulate the economy by keeping interest rates low, thus encouraging borrowing? Of course, there’s the problem with demand for loans, but that’s not something I want to dive in to right now. I assume the Fed also hopes that by propping up asset prices (especially the stock market and residential real estate) that the so-called “wealth effect” will spur consumer spending and credit expansion. Seems like the wealth effect isn’t working too well and private sector credit expansion is just okay (and not trending well, according to some charts I saw on Mosler’s site).

    So, if QE isn’t really helping private sector expansion and the wealth effect is a myth, then why should I worry so much about continued QE tapering, especially if the Fed continues with ZIRP? Another way to ask the question: if QE isn’t that effective as a tool, then why would less QE cause harm to the economy?

  • Cesar

    Well……. it’s looking like “later” at this stage.

    And probably “never”.

    Rates will lift when rate hikes are (realistically) on the horizon.

  • Explorer

    There is also fiscal policy.
    If the private sector can’t repay it’s debt then Federal Gov’t deficits put money into the private sector.
    If the private sector can’t repay, it can’t borrow more, so it won’t matter to the private sector that the Fed is buying debt, it will only matter to the banks as they will only be selling at a profit.
    The situation you describe is largely the Balance sheet recession described by Richard Koo.

  • Steve W

    Would it be fair to say that the “wealth effect” isn’t really working because the small percentage of people who have risk assets? Lot’s of people have equity mutual funds in their IRA accounts and 401(k) accounts — and I would say those are risk assets — but it seems we need to put those in a different category. Those accounts are for spending later. Employees in 401(k) accounts are dollar-cost-averaging (even if they don’t realize it), and I suspect many don’t do much reallocating or rebalancing. The target date funds that are widely available in 401(k) accounts also might be lulling participants away any current economic news that might keep them up at night.

  • 4whatitsworth

    Sadly I think you are right. Unfortunately with continued QE there will probably not be any long term reform of policies that do not encourage work. Our once cherished land of the free and home of the brave looks more and more like the land of government intervention and home of the entitled every day.

  • jayedcoins

    Janet, please buy my student loans!

    Oh, wait, that’s now how it would really work. Whoops. :-p

  • Steve Roth

    Until we somehow correct the current off-the-charts concentrations of income and wealth, this unhealthy metabolic syndrome will continue.

  • Tom Brown

    Lance you write:

    “In a nutshell, QE targets a structural problem, one that the policy is ill suited to address. (There is nearly zero transmission mechanism.) One of the byproducts of the policy is to starve savers by depriving them of yield.”

    I disagree. I don’t consider myself to be an MMist, but I’m at least a little familiar with their views, and they have been one of the main proponents of QE. Now the reason the Fed did QE may have nothing to do with MM ideas, so I may be very far off base here, but I’m assuming that the Fed’s reasons are at least somewhat similar to MM ideas. MMists don’t think QE has anything to do with “structural problems” … it’s a direct attempt to offset a shock to demand for MOA, explicitly an excess demand. MM’s believe that in the long term money is neutral (and by money an MM means MOA, not MOE: i.e. physical cash and Fed deposits, not bank deposits). A recession like we’ve experienced recently or even the great depression in the 1930s is explained by MMs in terms of excess demand for MOA. Because money is long term neutral, eventually that shock will not make a difference, but in the near term it causes all kinds of destructive transients, like a loss of production and unemployment. In order to offset that shock you need to lessen the demand for MOA, which is what QE is all about. But even MMs will admit that QE can fail if it’s not clear what the goal is. If an increase in the stock of MOA (which to an MM is the purpose of QE) is not perceived to be permanent, then it has almost no effect. Again, nothing to do with structure here… it won’t help with booms or busts or anything structural about the economy: the purpose is to literally make Say’s Law appear to be true (even though it’s clear that it’s not actually true).

    And in terms of starving savers, I don’t think that’s true at all. As one MM (David Glasner) pointed out, inflation rates above expectations are bad for creditors while inflation rates below expectations are bad for debtors. Inflation rates at expectations are neutral to both creditors and debtors. It doesn’t really matter what the absolute value of the inflation rate is: only it’s value wrt expectations.

    And in terms of evidence about what QE has actually done to rates, I don’t think your statement holds up. Take a look at this:

    Noticed what long term rates did during each QE program and what happened to them once the program ended.

  • Tom Brown

    Hans, what exactly do you mean by “Keynesian?” Take a look at these articles and see if you don’t mean “Monetarist” instead:

  • Dennis

    “there’s the problem with demand for loans” I think there’s a problem with the marketing of loans. The normal loan channels are difficult to navigate. During 2001-2008 I was pestered with cold calls pleading with me to refi, and offering the money fast. Not anymore.

  • Tom Brown

    … and to an MM what prevents Say’s Law from being true is an too little or too much demand for MOA. Say thought that this could not happen, and that an economy with money is essentially the same as an economy w/o money (a barter economy). He thought it was irrational for there to be any excess demand for money itself, and thus that it would never happen. Many economists (not just MMs) think that Say was wrong.

    The problem boils down to this: if there’s an excess demand for any good in a barter economy, it essentially affects the market for that good but nothing else. If 1 oz gold = 1 chickens = 1hr labor, and demand for gold doubles then 1 oz gold = 2 chickens = 2 hrs labor, but still 1 chicken = 1 hr labor: only the gold market is affected.

    But if gold is the MOA (like it was back in 1929), and demand for gold doubles, now you have problems due to sticky wages and prices. That’s because a dollar is defined in terms of the MOA: say before $1 = 1 oz = 1 chicken = 1 hr labor. Now after demand for MOA doubles $1 = 1 oz still by definition. The problem is that nobody thinks a chicken or an hr is worth an oz anymore. Thus there’s downward pressure on wages and prices, but because they are sticky (chicken farmers don’t want their nominal chicken price to be cut in half and workers don’t want their nominal wage to be cut in half) other bad things happen: like nobody buys chickens and employers fire half their workers.

    What’s a smart central bank to do? Redefine a dollar: $1 = 1/2 oz gold. Now nominal prices and wages don’t need to change and nobody gets laid off and chickens continue to sell just fine. All that’s been affected is the market for gold, just like in the barter case. Essentially Say’s Law has been made to appear as if it is true. Nothing whatsoever to do with structural changes.

    Thus on that level QE is just an attempt to lower the demand for the MOA. Make sense?

    Now again my purpose here is to give me interpretation for the motivation for QE, not to say that I agree with it.

  • Tom Brown

    Steve W, let me speak from the point of view of an MMist (to the best of my ability). I think an MMist like Sumner would say that low interest rates are not the goal of QE, but instead an indication that money is still too tight. Yes, you read correct: too tight.

    MMs would be much happier if QE resulted in an eventual rise in interest and inflation rates getting us away from the ZLB. That would (perhaps counter intuitively) indicate that monetary policy was loosening up. Why would this happen? If the increase in the stock of base money was perceived to be permanent (by the market), then this would (in theory) give rise to higher inflation expectations, which in turn would eventually give rise to higher interest rates. Actually higher inflation expectations are not really the goal, but higher expectations of nominal GDP (NGDP) are, and NGDP growth rate = real GDP (RGDP) growth rate + inflation rate.

    So what does an MMist mean by “tight money” if it doesn’t have anything to do with interest rates? He means that demand for “money” is still too high. And by “money” he means medium of account (MOA), not medium of exchange (MOE). What’s the difference? Physical cash and Fed deposits are simultaneously both MOA and MOE. Bank deposits, in contrast, are MOE only.

    That’s why MMs don’t care much about banks, finance or credit: it all boils down to demand for MOA to them. It’s a very different view of the world than MR! (and yet, there’s room for some overlap I think).

    Why am I telling you all this? Because I suspect that MM ideas overlap somewhat with Yellen’s and Bernanke’s ideas. Perhaps not identically, but I suppose there’s some similarity. Why do I think that? Well I don’t know much about Yellen, but Bernanke (I believe) was a fan of Friedman and Schwartz’s explanation for the Great Depression, and their explanation ties into some of these same concepts that MMs have. They thought that it was mostly monetary policy, specifically devaluing of the dollar, from 1933 to 1937 which was most helpful for getting us out of the GD. In 1937 these policies were reversed and we had a second dip. Bernanke was a student of that time period (from what I understand) and I suspect he shared the view of the MMs that it was an excess demand for MOA that caused the depression, and that the steps the Fed took between 1933 and 1937 to lessen this demand were the most helpful. I’m speculating a LOT here… because I’m inferring a bunch of stuff based on 2nd hand sources, but that’s my read.

  • Tom Brown

    When I write about “interest rates” above I don’t mean overnight rates: as long as excess reserves (ERs) > $0, then the overnight rate (the FFR) is going to be essentially equal to the interest on reserves (IOR) rate. MMs realize this too, so they mean longer maturity rates. Raising the IOR would not help, as that would just made demand for MOA even larger.

  • cssecurities

    I also see another dangerous possibility/outcome. The markets can’t drop because bad news means more QE and good news means the economy is recovering. Now, combined such thinking with human greed and voila! You have the what i think has been going on the past 5 years and th markets move straight up, which sounds great but higher prices bring in more buyers essentially guaranteeing fundamentals never catch up to market levels and the lassic tulip mania has just re-appeared. Then, when you have the inevitable correction, what does the fed do? Quadruple down on QE, buy stocks??? Will the fed credibility be damaged beyond repair at that point? I jus don’t see the happy soft landing scenario, where just keep rates low and fundamentals will catch up. Either we let it reset, or the bubble itself causes a more painful reset in the end.

  • Steve Roth

    “I jus don’t see the happy soft landing scenario, where just keep rates low and fundamentals will catch up.”

    Right: until the true fundamentals — widespread spending by a population with good incomes, who don’t have to rely on increased debt to improve their lifestyles — somehow re-emerges.

  • Tom Brown

    Gary, … this is not the best place to find M M Ters to taunt. Try here:

  • Andrew P

    QE THE policy choice. Huh? Sounds an awful lot like Japan to me. What was that about “the USA being Japan on fast-forward”? More likely, we are Japan x 10.

  • Andrew P

    There is only one way to redress the imbalances of wealth. Let the banks fail next time, and make the depositors whole with printed money only up to the legal limit of 250K per person per bank. Let everything above that level be lost forever.

  • Spinoza

    The Fed thinks the impact of QE will be lasting as it argues that the impact arises from the stock of bonds held by the Fed rather than the flow. I suspect they are wrong i.e as the Fed tapers to nil, despite the large stock of assets on the Fed balance sheet, bond yields will rise. The TICS data is completely misleading i.e some commentators became all excited by Treasury bond holdings rising in Belgium and falling from Asian countries but this just arises from the increased use of Euroclear. Nevertheless, I suspect (all forecasts should be made with humility especially if you have read the Fed minutes from 2008!) that foreign purchases of Treasury bonds will decline as QE taper proceeds and fear of higher interest rates rise. The only way that bond yields will not rise with tapering is if the economy slumps, inflation falls and yet tapering continues as the Fed internally starts to admit that QE has become in economic terms ineffective and its major effect is only on asset prices. This would be a particularly grim outcome but more likely is continued slow recovery with rising bond yields.

  • john-r

    Sorry, it took me awhile to understand the implication of this. And I wonder if you get this or not. But the future may be NOW.

    If monetary policy tool available for the fed is QE from now on, current taper may be de facto tightening.

    I’d be interested in what you think.