QE Confusion Reigns Supreme

I’m still basically convinced that no one really understands the impact of Quantitative Easing.  Obviously, I think I have a pretty good grasp on how the policy works and my predictions about its impacts at various points have been pretty accurate, but there are still great unknowns here.  This has become increasingly clear as we’ve seen various pundits shift their views over the years from that of “money printing” to “asset swap” to “diminishing returns”.  Even Ben Bernanke has changed his rhetoric about how the program works.  Just 10 years ago even he called it “money printing”.  Now he’s completely changed his rhetoric.

Anyhow, this all came to mind while reading this post at Also Sprach on the different reactions to QE in four different countries.  It’s generally believed that QE is “money printing” and therefore currency negative, but that’s not at all how countries have responded.  Not only has it not caused raging inflation anywhere, but it also hasn’t caused dramatic currency declines.  As I said years ago, this remains the greatest monetary non-event….Here’s more via Also Sprach:

We could not have put this better than David Bloom and his team at HSBC:

Before the Fed and the Bank of England initially embarked on the quantitative easing programmes, the perception in the market was that QE would be unambiguously currency negative. This was based on the simple transmission mechanism that the more of a currency printed, the more the currency should depreciate. The market also believed that it would also create inflation thereby undermining the currency’s value i.e.keeping with the Quantity Theory of Money (MV=PT). These perceptions have changed.

QE is no longer viewed in such simple terms, and there is considerable debate in the market as to what QE means for a currency. With the US, Japan, Eurozone and UK all embarking on expansionary monetary programmes, we discuss with the demise of carry what we believe the impact of QE is for their respective currencies. These ideas are held by the market now but could change on a dime, or perhaps trillions upon trillions of dimes.

So what are theses ideas currently held by the market now:

US: QE = USD negative : Resultant “risk on” mood takes us to higher yielding more risky currencies. “Risk off” and the USD’s safe haven status kicks in.

Eurozone: QE = EUR positive : Non-conventional easing as lowering the probability of EUR default and disintegration, thereby boosting the EUR.

Japan: QE = mild JPY positive: JGB purchases have little JPY effect, but equity market boost encourages foreign capital inflows.

UK QE = GBP neutral: Little currency impact as un-conventional monetary easing seen as an appropriate mirror to the ongoing tightening in fiscal policy.



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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.

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  • Andrew P


    this article argues that the main impact of QE is a reduction in savings and malinvestment. What do you have to say about that?


  • http://www.concertedaction.com/ Ramanan

    Blind faith by central bankers on what Milton Friedman said. Think he recommended QE for Japan.

    (Although for the Euro Area, buying government bonds has its role in preventing self-fulfilling prophecies from building)

    You rightly point out that Bernanke has changed his view. 10 years ago, he thought of it as helicopter drops and now he has changed – emphasizing portfolio balance and capital gains etc. Even over the last 2-3 years he may have changed his view after having started QE1.

    So we have to wait for another 2-3 years with lower output worldwide till he again changes his views (hopefully – wishful thinking)

  • Guest

    so the facts are up for debate and vary based on country…great.

  • http://www.intangibleinvestor.com Aaron

    That’s typical. QE at first is “useless”, then the market starts to roar.

  • Dave

    Theorists are ignoring the fact that individual expectations can be much more powerful then all the wishful thinking of MR and the FED.
    It is not about what the theory tells you, it is about what the market expects. So any intervention of the FED can turn out to be right (in the sense that it confirms a static theory like MR) or it can turn out to be wrong. So we find in the result of QE some evidence that correlates with MR, but we also find evidence which doesn’t correlate with MR. So how authentic is such a theory where the chances are 50/50 to be right?

    “Not only has it not caused raging inflation anywhere, but it also hasn’t caused dramatic currency declines.” This is again wishful thinking. If I compare the dollar to other assets and other currencies it lost a lot of its purchasing power. Or one has just to look at trade balance which doesn’t indicate a strong currency. Just to ignore these facts makes a wrong theory not right.

    And then again everyone who understands inflation knows that there are different types of inflation and not all can be handled the same way. A price increase caused by undersupply (i. e. excess demand) won’t happen any time soon (output gap / saving rate). An inflation caused by too much money purchasing too few goods might be underway.

    Even though QE is not money printing in a sense of “printing” it has unintended consequences. The Individuals (incl. private corporations) might expect inflation so they counter act by buying hard assets. Companies know that the todays government deficit is tomorrow tax increases. This might cause inflation by tax burdens. At some point they even might use credits to buy hard assets as protection. They will turn stock profits into hard assets. And if the Individuals lose faith in government securities they will liquidate them to purchase hard assets. But if the FED might expect deflation so they counter act by increasing liquidity. Now it is clear that the FED is no longer the counterpoise of the market.

  • Explorer

    Operation twist gives banks that bought long bonds with early QE the opportunity to now capitalise the remaining excess yield by selling the bonds or just marking to market and holding (but in this case they are subject to the risk of increased rates and lower bond prices.

  • Dunce Cap Aficionado

    “Not only has it not caused raging inflation anywhere” my new favorite saying

  • KB


    Your description of QE is correct with one addition – we have not seen yet any single conclustion of QE experiment. By the conclusion i mean reversal of QE process and return a country to the normailzed historic pre-QE economic statistics such as debt level, GDP and GDI growth, personal imcome and conusmption growth, inflation (let’s say CPI), and some other key metrics.
    The most advanced QE case – Japan, is not even close to such resolution.
    By my opinion, only after we see such resolution in several QE countries happening without any singificant disruptions, can we state that QE is “non-event”. Until then the question remains open.
    If you think otherwise and care to discuss, please, provide your agruments.

  • Dave

    KB, good to see that at least some guys here don’t think just in present terms.

    I hardly get answers to similar question from MR theorists. I just can’t see how the FED will reverse the QE policies since the bond market relies on it. An increase in the discount rate (if economy stabilizes) will force bond rates to go up, which means in turn that old bonds will drop in price. Since not only the FED sits on a huge pile of government securities but also banks heavily rely on bond prices they will lose liquidity and a collapse is near again. So will the FED then buy back again the same securities to prop up the price and keep interest payments low? Of course with todays fraudulent accountings one can paint a barn that it looks like a condo from the outside.

    Another thing that bothers me is the fact that the government finances itself mostly through short term debt which has to be rolled over constantly. Earlier years government financing through short term securities were only exceptions and not tolerated by central banks. All the guys that shout for banking regulations should probably first claim standards for government financing. Most severe inflations in the past were due to government deficit spending and not private bank credit expansion.

    Big business is now used to low interest payments on credits. If the discount rate should go up they won’t let that “happen” since the banks are interested in big business and under competition. So a discount rate or prime loan rate hike to control credit could be ineffective.

    As you pointed out Japan never came out of this mess and downward spiral of ever lower rates and higher government debt (for 25 years now!). I would argue that the BOJ already lost control over its currency.

  • http://Www.rmdfx.com RMDfx

    HI Cullen. Looking just at currencies, One reason that I believe makes Fed QE initially USD negative is because commodities , globally, are priced in USD. Hence the initial rush for risk and euphoria , on the announcement and few days after QE, requires an exit from USD and rush into commodities purely as a reallocation dynamic. Eventually , as has been seen, when fundamental underlying demand for these commodities has weakened , we have returned to USD. This dynamic doesn’t apply to JPY , GBP or EUR as no commodities are priced in them. This of course is just one side of a few explanations.

  • KB

    These are my concerns too. More than that, even in Japan they not even close to formally/informally statiting that QE achieved its goals and to be unwinded soon. So, we have not even seen QE “culmination” yet….

  • jt26

    re: BOE
    Even an insider acknowledges that they have ignored the existence of the financial system … http://www.voxeu.org/article/what-have-economists-ever-done-us. My guess is that, in regards to forex, they have also ignored the existence of other countries (their gov’s, CBs, SWFs, etc.)!

  • Johnny Evers

    It’s a great point that we have to see how this unfolds.
    Even the inflation argument hasn’t been resolved yet. The hyperinflation naysayers might be right … just until they are wrong.
    Remember in 1913 you would have been saying for 30 years that the balance of power arrangement in Europe was working just fine.

  • Geoff

    Dave, you made the following points:

    1) The bond market relies on QE
    2) The govt finances itself mostly with short-term debt

    Neither of those is true. You seem to have a great fear of QE reversal. QE itself was not a big deal, and neither will be its reversal. Personally, I would be more concerned about a reversal of the ZIRP policy. Long rates are mainly a function of short rates. When the Fed hints that it will be raising short rates, look out. But that does not appear to be any time soon.

  • Colin, S.Toe

    Regardless of the ultimate effects of QE in any of its forms, the greater question is: have we really addressed the root causes of the GFC or merely bought time with both massive stimulus (unlikely to be repeated here) and extraordinary actions by the CB’s? (I too have been thinking about 1914 a lot.)

    I think Obama is smart enough to have figured out by now that there are no quick and easy solutions, and to fear that the crisis is not over (perhaps the reason for his lackluster performance in the debate – while at this point I don’t trust the confidence that Romney was able to project).

    If Obama is re-elected, I hope he is prepared to reset his economic team with people who have the combination of nerve and prudence, to know when something more than half-measures are called for, and have the courage to do it. If Romney is elected, I pray that he and his team will be very fast learners.

  • krb

    Fair comments about Obama and Romney. One point to be considered though is that they started from significantly different starting points. Many of us here on this blog had deeper resumes and more life experience than Obama did when he ran for president in 2008. I’m not a Romney fan…..I think there’s at least a half dozen “republican” candidates that could have been more appealing, and frankly, we’d be better off with a reform candidate to move against the policies of BOTH parties right now. But what I thought was evident last night is that Romney had a better understanding of what he was talking about on economic policy than Obama, who seemed to be trying to explain the theories or beliefs that others were feeding him…..and that never goes well on any level…..what you “own” you can talk about more intelligently. We may see that dynamic flip on foreign policy or education. I think Obama’s lack of experience entering 2008, which may have motivated him to go back to Clinton advisers as a security blanket, was his major undoing. Geithner’s appt may go down as one of histories great epic failures. He has been at the table for almost all the bad economic events of the last 15 years…..Rubin staffer when Rubin/Clinton and republican congress botched Glass Steagall and derivatives regulation, a fed governor during too-easy-for-too-long policies of Greenspan and Bernanke, and lastly as the ny fed president the primary watchdog of wall street banks when they went on a fraudulent, drunken binge and took the global economy over the cliff. And was he rightfully tossed aside after such a poor track record? No, Obama promotes him to Treasury secretary! Who would be more motivated to sweep bank activity of the last 15 years under the rug than Bernanke and Geithner? It’s not surprising then that we have directed all our nations resources into a tbtf bank support program masquerading as a main street jobs program! I also put the feeble performance of atty gen Holder in not pursuing ANY wrong doing at wall street banks at the feet of Geithner….I suspect that is where the heavy pressure is coming from. Poor Obama is now paying the price for such a poor adviser choice. krb

  • freemarketeer

    “Theorists are ignoring the fact that individual expectations can be much more powerful then all the wishful thinking of MR and the FED.”

    Didn’t read the rest of your post, but this is what I’ve been trying to say. Too much discounting of psychology/behavioral finance.

  • krb

    Nice post Dave. I’m learning more each day about why Cullen and I seem to be talking past each other about QE and its effects, theoretical and real…..your observations may explain it better than any of my attempts. Thx, krb

  • Colin, S.Toe

    Agreed on experience. I leaned toward Hilary, even though I thought electing Obama would make a tremendous statement – which ended up instantly reversing much of the damage the previous administration had done to our standing in the world.

    Also agreed on Geithner – and Holder has proved a disappointment as well.

    However, I can’t believe Obama has not learned something in four years. The real question may be, if re-elected and no longer concerned with their campaign donations, does he have the courage to go against the financial sector (with a team equal to the challenge)?

  • Anonymous

    Geoff, dont know where you get your data from, but that the govt likes to finance itself through short term debt has a practical reason: interest paymant is lower.
    And that the bond market relies on QE is my personal view. Govt securities may be still a save investment even without the FED buying them. But the fact that Pimco already warned about a bond bubble shows that there might be serious concerns in the market.

  • Dave

    Geoff, this last post was written by myself, Dave. It is not “Anonymus”.

  • krb

    …..”ended up instantly reversing much of the damage the previous administration had done to our standing in the world.”

    How has that “improved standing in the world” been going anyway? Couldn’t resist. :)

    Seriously, just look at our comments…..its disappointing that our political system is such that these are the candidate choices we get for THE most important job in the world. On the job learners, only in second terms could they not be bought by campaign donations, nominee from the very industry most in need of reform, etc etc….depressing.

  • Colin, S.Toe

    Obama was inexperienced – but he is one of the sharper minds to hold the position. Romney is also no slouch – but seems seriously lacking in self-awareness.

    And when the comparison is to Obama’s predecessor, is it any surprise our standards have fallen so low?

  • Cowpoke

    Colin, would you concede that Obama is an ideologue?

  • Colin, S.Toe

    Also, every great president has had to learn on the job – there is no adequate preparation (and Lincoln was one of the least experienced).

    And neither candidate is personally to blame for the role money plays – we citizens bear ultimate responsibility for that.

  • Colin, S.Toe

    @Cowpoke: I’m sorry, but that is not my sense of Obama at all. I think that is a projection from the right. If anything, he strikes me as a pragmatist – like CR.

    (Admittedly, I would probably be considered in conventional terms as pretty far to the left – although REN calls himself a conservative, and I find his song has a lot of appeal).

    I also don’t see Romney as an ideologue – far from it.

  • Geoff

    Dave, see the WSJarticle below:


    If you don’t have a WSJ online subscription, here is an excerpt:

    “The average maturity of the $10.49 trillion in outstanding Treasurys reached 63.9 months in May, the highest level in a decade and could soon near record levels. The push to borrow for longer is coming as yields are near all-time lows, meaning big Treasury investors, including China, are receiving relatively low returns.

    The average maturity is about 14 months longer than the 28-year low of about four years in October 2008, during the financial crisis.

    Extending the average maturity of the debt is “consistent with our long-term objectives of financing the government at the lowest cost over time, and ensuring regular and predictable management of our overall portfolio,” Colin Kim, director of Treasury’s Office of Debt Management, wrote in a blog post Monday.

    If the Treasury’s extension policy continues, maturities could soon near the record of 70.9 months, or nearly six years, reached in May 2001. The department is able to push for longer maturities as there is strong demand for the higher yields long-term debt provides.”

    Regarding PIMCO, I wouldn’t listen to everything they say. Of course, I wouldn’t listen to everything I say either :)

  • http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf REN

    This is an interesting article. The FED has asked the banks to quietly pass through some of the QE largesse to homeowners in distress. So, this would be a transmission mechanism most of us have overlooked.



  • http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf REN

    Hmmm. The U.S. deficit spends by Issuing a TBill. One of the TBTF primary dealers funds it by creating new money. The new money enters money supply as Gov spends into unemployment or other means, quite probably military. In practice that means deficit spend doesn’t leave productivity gains in its wake. The unemployed receive the money via a bank account transfer, which is seen as exogenous, hence the FED has to now buy down rates on the overnight market (more debt).

    When unemployed spend, they might/probably buy some POS Chinese good, especially since China now holds a large market position. Those former deficit dollars go to a Chinese manufacturer, are traded for a Yuan, and then said dollars shoot back at speed of light to buy a new TBill. (Actually swap accounts at FED, but you get the picture.) When they come back they now bypass primary banks to buy said new T-bills, and the cycle renews.

    So, QE keeps rates low, allowing deficit spend, which in turn allows the China dynamic. Looking at the loops, the dollar issues, makes no wealth improvement in U.S. economy, cycles to China, and then back to fund more deficit spending. All the while the dollar path creates debt in its wake.

    The velocity of this debt money is approximately 1, the lowest it can get, and it is pretty useless to the real economy.

    Usually an economy has money velocity that transacts about 10 times per month. People need money to trade their output.

    In the town of Worgl with stamp script money velocity of trades was 100 times per month.

    So, one dollar in Worgl vs one dollar in today’s U.S., pretty big difference in behavior. About 100 to 1. In a normal economy without “rusting” money (demurrage) the velocity is about 10/month. That would still put us in pretty bad shape today.

    Dr. Bernanke is another phd (piled higher and deeper) who seems to know a lot about nothing.

    QE is helping to maintain a smoke screen.

  • Geoff

    REN, as far as I understand, the MBS that the Fed is buying is already federally guaranteed. If so, where is the so-called “largesse” coming from?

  • http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf REN

    That’s right. Fed creates new money to pull MBS onto their balance sheet, and then tells their banks to pass thru to entangled homeowner. Home owner now relived to spend.

    Or, FDIC insures homeowner, but it remains tied up in litigation, no pass thru.

    It’s not much of a pass through, more of a legal untangle.

  • http://www.orcamgroup.com Cullen Roche

    This is not exactly right. The homeowner doesn’t necessarily get more money or “relief”. If a non-bank owns a bond and sells it to a PD then they’re selling by choice. Homeowners aren’t necessarily getting relief from QE.

  • krb

    The following post discusses the view many of us here have held for some time, that all claims to the contrary, QE is not “neutral” in its affect……this article illustrates at least one way QE is NOT neutral. By definition, QE may be asset/value/price/demand/interest rate neutral as all the benevolent followers of the Fed claim. However, we more cynical Fed followers believe there also seem to be many ways the QE exercise can be gamed making it NOT neutral in those variables. And if we just open our eyes and acknowledge what has taken place in prices and rates, changes in those variables would seem to support the fact QE is NOT neutral. krb

    Guest Post: The World’s Largest Money-Laundering Machine: The Federal Reserve
    Submitted by Tyler Durden on 10/08/2012 – 09:20

  • krb

    By the way, ignore the sarcasm, inflammatory, chicken little presentation……the point I’m emphasizing is how the money flows, impaired-made-whole, etc effects of QE gaming. If the above link doesn’t work, try this one… krb


  • Colin, S.Toe


    What do you make of the idea that the only way to limit the wealth and power that accrues to the financial sector is to limit the amount of credit/debt ‘money’ this sector can create?

    The ‘Chicago Plan’ would enforce ‘100% Reserve’ banking (advocated by REN at this site; I’m still not clear how this would work). I have asked if there is a practical (relatively straightforward) measure that could severely limit this capacity to ‘create money’. Any thoughts on these?

  • krb

    I’m not sure what I think about it…..I suspect there may be unintended consequences that I would want to identify and think thoroughly through first.

    My concern with the monster we now have with fractional reserve banking, federal reserve intervention, etc. is how UN-democratic it all is. We’ve enabled a system that potentially has trillions of dollars of economic impact, has the potential for private sector selection of winners and losers, potential for privatizing profits while socializing losses……..ALL without accountability and oversight by democratically elected people. The current system is completely corrupt from this perspective and needs reform at a minimum, in my view. How to reform it, I haven’t given as much thought. Good topic for another Cullen article, although that gets into the prescriptive rather than sticking to the descriptive. krb

  • Colin, S.Toe

    Agree with both your concerns.

    As to unintended consequences, I am not a big fan of math in the social sciences, but this is one place sophisticated mathematical modeling might be appropriate.

    On the second, I’m inclined to think reform needs to address fundamentals – piling on regulation a la Dodd-Frank will not be sufficient.

    Science starts with the descriptive, but at some point it generates hypotheses about how any system works. The next step is to think up experiments that will test for real effects that the hypothesis predicts will result from the experimental manipulation.

    MR is at a point of moving beyond simple description to constructing coherent hypotheses about how the system works. However, the only way to experiment in this domain would be to design real world reforms, try them out, and see if the results were as expected.

    This is admittedly much messier and less precise than a controlled laboratory situation, but for any school of economic thought to approach true science, as well as to be really useful, it must progress to this stage.

  • krb

    I agree with and like your last 2-3 paragraphs. I’ve been a manufacturing business owner, but my educational background is science……which aren’t incompatible by the way….my preference for fact based, provable, and reproducible solutions helped me make decision many times in my business career……our economists and politicians unfortunately become masters of the UN-provable claim……like “…3 million jobs created or saved…”, or “….it would have worked if we had just done more of it…”.

    I think getting into the prescriptive is where MR would get exciting (call me a nerd!). I would like to see it pursued from a truly centrist perspective…..I’ve spent years trying to understand and appreciate both sides of issues in trying to provide “neutral leadership” within roles I’ve held in personal and professional life. It is challenging, but also very gratifying when two supposedly antagonistic groups can come together to achieve something meaningful, and both sides get perhaps 80% of what they originally wanted. I think it’s the ONLY way we can pursue solving our substantial problems like adults, and make progress without having our social fabric come apart at the seams……so long as we continue pursuing 100% and 0% solutions we will continue the steady decline we’ve been in……just my view. krb

  • Mikael Olsson

    “limit the wealth and power that accrues to the financial sector”

    I have an idea. It might sound radical.

    Let private citizens make housing loans with the state. No other loans, just for their personal home. It isn’t largesse or business investment – everyone has to live somewhere.

    Suddenly we have cash flowing to where it is needed – supporting the public sector. No one got taxed harder. Banks got less revenue but I see that as a Very Good Thing.

  • Mikael Olsson

    (Sorry, I’m not american :))

    I just remembered FM&FM. But how do they work? Where do their revenue streams go?

  • Colin, S.Toe

    Ditto for your last paragraph. Unlike many who share some of my leanings, I have little interest in preaching to the choir – or sitting in it. It’s a big reason I like this site, because it seems to attract readers with a diverse range of experience as well as political views. I particularly value the contributions of those who have used their knowledge to solve real world problems.

    For me, trying to understand all sides of an issue is an extension of what science is about. It’s how I learn new things.

    In addition, when people with divergent perspectives are genuinely looking for common ground and for solutions to real problems, what emerges is often something that neither would arrive at alone. In those cases, each party may find itself gaining far more than ‘100%’ of its original aims.