THE DIMINISHING RETURNS OF QE…
Pretty interesting commentary from David Rosenberg this morning on the diminishing returns of quantitative easing. Like myself, Rosie has noted that QE2 did little to nothing and the equity markets appear to be coming around to the realization that QE is not the savior that so many believe it to be:
It’s not as if QE2 accomplished anything except a blip on the screen as far as the market was concerned, and it elicited no lasting impact for the economy either. QE1 did work but that was when the system needed to be saved – the S&P 500 rallied 74% on that program. QE2 was nothing more than a gimmick shrouded in deflation concerns that never materialized, and during this program the stock market ended up just 16%. And so what will QE3 bring except more in the way of diminishing returns and resource misallocations caused by central bankers attempting to play around with mother nature by manipulating asset prices? Call it the equivalent of the Godfather Trilogy: Godfather I was epic; Godfather II not quite as good but still fine; and Godfather III was a dud.
I agree with just about everything except the comments about Godfather 2 being “not quite as good”…
Source: Gluskin Sheff
Godfather 2 was epic, but yes the half life of QE3 is on my mind.
QE1 was in response to an emergency; even if you didn’t like it you understood why the Fed did it, and it had the desired result. QE2 did more harm than good economically, had a weak justification, and had far reaching negative impacts in the world. QE3, if adopted, will make the Fed many powerful enemies at home and abroad and perhaps ultimately cost it its franchise. After all, the Soviet Union seemed all-powerful and immortal too, and it was gone in a relative flash.
Bernanke could be the Fed’s Gorbachev; a well meaning guy who set forces in motion that brought down the whole edifice. Ron Paul might be the Pope John Paul figure giving the whole thing a shove off the cliff.
Benrnanke is a coward, Gorbachev wasn’t. There is no comparison. Bernanke is more like Breznev. Through his incompetence the whole structure will rote from within.
[Most] economists [Bernanke included] really believe their profession understands the economy better than the rest of us. Bernanke does not care about what others think. Unfortunately, he will continue to implement his dissertation work.
Gee Octavio, why do you suppose the conformist economists behave so smugly? Could it be that they have a monopoly on credit creation? MMT’ers demand the same. Traitors, all of them. Just like Greece. Thats your model.
why does everybody dog GFIII so bad? it followed the same template as the other two.
Hey Cullen, help me out please.
Quote from Rosenberg above “And so what will QE3 bring except more in the way of diminishing returns and resource misallocations caused by central bankers attempting to play around with mother nature by manipulating asset prices?”
Wha??? I have read most if not all your pieces on QE and my understanding is that QE is swapping cash for yield producing assets with the private sector by moving those assets from interest bearing accounts to demand (no interest) accounts at the Fed. The Fed makes keystrokes up in one account and keystrokes down in another.
Where is the manipulation of assets by the central bank? I thought QE was a simple accounting identity. Moving privately held assets from interest bearing to non-interest bearing accounts at the Fed.
Thanks in advance.
It *doesn’t* move them to non-interest bearing accounts. That is the myth peddled by people who don’t understand the MMT model.
The Fed pays interest on reserves like most central banks do these days.
Therefore all QE does is replace a government liability at interest with another government liability at a slightly lower rate of interest.
QE is an attempt to lower interest rates in the certain belief that the magic of monetary policy will save us all. Er, and that’s it.
It does one thing for certain – it slightly reduces the amount of government spending going into the private sector in the form of interest.
Therefore any monetary effect has to be greater than the deflationary effect of the interest payment withdrawal or QE is actually detrimental to the economy at this point.
Neil … thankyou for that comment… I went to your site and read “MMT Transaction Model – A Variation”:
http://www.3spoken.co.uk/2011/07/mmt-transaction-model-variation.html
Thanks
What about the anticipation period just before the QE episodes and the depression periods just after?
Just because a period is correlated with secondary market moves doesn’t mean there is any causal relationships.
My feeling is that anybody who sees much effect from QE are seeing patterns in the inkblots.
MMT describes Fed and Treasury as ‘Husband and wife, ‘…but the husband may have 2 wives & a boyfriend now with Fannie and Freddie?… possibly a back door QE after FED arranges massive Mortgage re-fi’s with no Republican approval needed…details in Business Insider
http://www.businessinsider.com/the-feds-plan-rumors-of-news-2011-8?utm_source=Triggermail&utm_medium=email&utm_term=Business%20Insider%20Select&utm_campaign=BI_Select_083111
The husband/wife analogy is a good general analogy in business as well. Especially longer term business relationships such as the technical consulting business that I have been in. Sometimes you need a wife, but don’t know it. Some will act like prostitutes. Some will demand a prostitute or treat another like a prostitute. Getting this relationship wrong can be quite costly.
Cullen –
Is there a way to figure out how much “profit” the Fed has made on their QE trades? When you think about it, with the recent bond rally, I would guess the prices they “paid” were quite a bit less than what the bonds are worth now. That will bloat the Fed balance as well and get the hyper-ventilators all worked up in a tizzy too.
Or does that profit not truly exist because the “debt” is basically “gone”.
Their annual statements are a good source. They made $80B or so last year. Not all was QE, but most….And yes, it is int income removed from the pvt sector…
dear Cullen,
Have you written a recent piece with references to Milton Friedman’s ideal money growth target of 3%/year vs. recent money growth the last few years of what? 6% ?
I read James Galbraith’s 2008 piece where he sought ‘not to honor Friedman but to bury him’…I found it too busy blaming Friedman for non-regulation and free market politics…and neglecting a more pure economic approach.
The fact that we have had low inflation despite high money growth ia described by Galbraith as arising from influences outside USA monetary policy(which would respect Friedman but call him a bit outdated) AND used as an attack on Friedman that he is as stupid as Newt Gingrich & Co…
RATHER than respecting Friedman’s work (at all) and adding a more current, global perspective on monetary policy.
Have you or anyone here written anything with direct references to Friedman?
I believe Chaos Theory says:
First there is positive returns.
Then there is diminishing returns.
Then there is a bifurcation or random action.
Then there is negative returns.
and the negative returns can be dramatic.
the 80B may have been removed from the private sector but it is 80B less removed from the private sector in the next year/fund raising cycle, no?
Rgds
WeekendTrader
Cullen,
This was exactly what i meant when I asked you why do you think the current level of us government deficit would support economic growth. I think, under the conditions of balance sheet recession, deficit/spending should increase to support constant growth. There is no chance now to increase deficit, moreover it will likely be cut. Thus, we might experience a contraction just because of this.
Could be, but don’t make the mistake that QE “funds” the deficit. I personally think the deficit will remain very large. Large enough to sustain some moderate growth or at least keep us from collapsing.
Apparently, deficit, as part of the budget, is created and/or approved by Congress. Hopefully, too small deficit would not be a cause of next depression – we have a lot of other causes looming…..