Quantitative Easing: "The Greatest Monetary Non-Event"There is, perhaps, no greater misunderstanding in the investment world today than the topic of quantitative easing. After all, it sounds so fancy, strange and complex. But in reality, it is quite a simple operation. JJ Lando, a bond trader at Goldman Sachs, has eloquently described QE:
“In QE, aside from its usual record keeping activities, the Fed converts overnight reserves into treasuries, forcing the private sector out of its savings and into cash. This is just a large-scale version of the coupon-passes it needed to do all along. Again, they force people out of treasuries and into cash and reserves.”Some investors prefer to call it “money printing” or “stimulative monetary policy”. Both are misleading and the latter is particularly misleading in the current market environment. First of all, the Fed doesn’t actually “print” anything when it initiates its QE policy. The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset. They’re not “printing money” or dropping money from helicopters as many economists and pundits would have you believe. It is merely an asset swap.[..]
The most glaring example of failed QE is in Japan in 2001. Richard Koo refers to this event as the "greatest monetary non-event". In his book, The Holy Grail of Macroeconomics, Koo confirms what the BIS states above:
"In reality, however, borrowers - not lenders, as argued by academic economists - were the primary bottleneck in Japan’s Great Recession. If there were many willing borrowers and few able lenders, the Bank of Japan, as the ultimate supplier of funds, would indeed have to do something. Butwhen there are no borrowers the bank is powerless."[..]No, no - Mr. Bernanke hasn’t failed. He just hasn’t tried hard enough….But perhaps the reader believes Japan is different and not applicable. This is a reasonable objection. So why don’t we look at the evidence from the last round of QE here in the USA. Since Ben Bernanke initiated his great monetarist gaffe in 2008 there has been almost no sign of a sustainable private sector recovery.
Mr. Bernanke’s new form of trickle down economics has surely fixed the banking sector (or at least bought some time), but the recovery ended there. It did not spread to Main Street. We would not even be having this discussion if we were in the midst of a private sector recovery. [..]
What is equally interesting (in addition to the fact that QE is not economically stimulative) with regards to this whole debate is that this policy response in time of a balance sheet recession is not actually inflationary at all. With the government merely swapping assets they are not actually "printing" any new money. In fact, the government is now essentially stealing interest bearing assets from the private sector and replacing them with deposits.
This might have made some sense when the credit markets were frozen and bank balance sheets were thought to be largely insolvent, but now that the banks are flush with excess reserves this policy response would in fact be deflationary- not inflationary. Why would we remove interest bearing assets from the private sector and replace them with deposits when history clearly shows that this will not stimulate borrowing?
Monetary policy in a time of deleveragingWho cares what it costs to borrow when no one wants to take out a loan?[..]
The Fed has [..] flooded the economy with hundreds of billions of dollars. Instead of putting it to work, the banks have taken the Fed's money and parked it. [..]
... no one wants to borrow, and that's the biggest problem in getting the economy moving again.
The economy needs money to grow, and money is created by borrowing. No borrowing, no money growth. No money growth, no economic growth. No economic growth, no jobs.
Even 0% loans aren't attractive when you're deleveraging, when you're trying to work off the hangover that inevitably follows a binge of borrowing.
"And there isn't a damn thing Chairman Bernanke and company can do about it,"says economist Stephen Stanley of Pierpont Securities.
Fed Reverses Exit Plans, Sets $2 Trillion Floor for Holdings"There is absolutely zero evidence that if you let the balance sheet run down $10 billion to $15 billion a month that it would be a binding restraint on the economy," said Stephen Stanley, chief economist at Pierpont Securities [..]
"They have given us no evidence why quantitative easing works," Stanley said.
Some observers said yesterday’s decision took them by surprise after Bernanke and other officials in recent weeks maintained their outlook for a pickup in the economy over the next year. While weakness in housing and commercial real estate will restrain the recovery, and the job market’s "slow recovery" weighs on consumers, "rising demand from households and businesses should help sustain growth," Bernanke said in an Aug. 2 speech in Charleston, South Carolina.
"It seems like communications is a problem, particularly around turning points," said Timothy Duy, a University of Oregon economist who formerly worked at the U.S. Treasury Department. "It seems odd that 10 days ago you had a speech that hardly acknowledged the weakness of the recent data."