Richard Koo On The Weakest Links In The Bernank's QEasy Logic

Tyler Durden's picture

Richard Koo's just released note has the usual set of insightful observations into the fringe Keynesianism which we all suffer on a daily basis, where one false move will lead to a systemic collapse, and as usual deals exclusively with the aftermath (and concurrent-math) of the Fed's QE. First, he brings forward the "ketchup declaration" which is a sad harbinger of what may soon happen to the US. "The “ketchup declaration” was made about a decade ago in the context of
an argument between the Bank of Japan and a group of overseas economists
that included Paul Krugman and Ben Bernanke. The BOJ’s position was
that quantitative easing could have no impact as long as there was no
demand for loans among businesses and households." What has happened, is that the BOJ adopted precisely what Bernanke espoused in the beginning of the last decade... to an abysmal failure. But that won't stop the Chair from repeating Japan's faults here. The scarier thought is that it is precisely Bernanke who will next proceed to monetize all equity-related assets: ETFs, REITs, and everything else. Yet the most notable argument, and the one which even Bernanke does not get in his push for reflation whose only hope is to get consumers to purchase on credit instead of just cash, is what happens if the US consumer is consuming, but is content to do so without leveraging again. That is by far the weakest link in Bernanke's argument. A link which will be broken soon enough by his relentless exporting of  inflation, until such a point is reached that the entire world takes America aside, and tells them to get rid of the Chaircreature, or else.

Key excerpts:

Overseas, it seems some distrust of the Bernanke Fed remains and the Chairman’s proposal that the Bank of Japan buy ketchup in an attempt to reverse deflation is often cited.

The “ketchup declaration” was made about a decade ago in the context of an argument between the Bank of Japan and a group of overseas economists that included Paul Krugman and Ben Bernanke. The BOJ’s position was that quantitative easing could have no impact as long as there was no demand for loans among businesses and households.

Meanwhile, Mr. Bernanke argued that the Japanese economy would improve if the BOJ would start buying up things—including ketchup.

The concern appears to be that Mr. Bernanke will ultimately have the Fed buy ketchup and every other available asset in an attempt to prove the validity of his argument, and that the dollar will ultimately be turned into confetti.

However, the Fed chairman has adopted a much more pragmatic stance over the last year, a stance encapsulated in his remark that monetary policy alone cannot solve all the problems facing the US economy and that now is not the time to discontinue fiscal stimulus.

If many large Treasury investors overseas also remember Mr. Bernanke’s ketchup declaration and see QE2 as an extension of that view, there is a real possibility that further easing under QE2 will prompt them to sell US Treasury securities, which in turn could send US interest rates in an unwanted direction.

Whether there were overseas investors who agreed with and acted on this line of reasoning is uncertain, nevertheless, the sudden and unusually steep rise in long-term US interest rates following the QE2 announcement suggests we should at least consider the possibility.

Far more important, is Koo's observation that Americans, even in the aftermath of the biggest (dud of) shopping seasons in recent years, refuse to relever:

The Beige Book also noted that US households and businesses continue to deleverage, creating a situation in which banks’ preferred customers are not interested in borrowing. This is also identical to the situation in Japan more than a decade ago.

Banks hurt by the crash in commercial real estate are naturally reluctant to lend more to the sector, but potential borrowers in other sectors are not interested in borrowing despite current low interest rates. This has arrested growth in banks’ loan books—including consumer loans.

The implication is that during the Christmas shopping season consumers paid for their purchases with cash instead of credit. This reflects changes in the US credit card market and also suggests that US households are beginning to emerge from their dependence on debt.

If US households were to begin consuming only what they can afford without relying on debt, it would represent a sea change and would also be a first step on the path to a sounder US economy.

However, in that case, GDP and demand for commercial real estate would be unlikely to grow substantially amid modest growth in employment and incomes. Continued private sector deleveraging also means the government will need to continue generating demand for some time.

And that is, as we all know, is precisely the silver bullet that will one day go straight through the heart of the Chairwolf:

The Fed’s zero-interest-rate policy and quantitative easing will have almost no effect as long as the private sector continues to deleverage and demand for loans remains weak. No matter how much the monetary authorities ease policy, money will not start flowing and the money supply will not increase without private-sector borrowers.

Simply said, Bernanke will keep pushing more and more money into the system until the consumer, left with no choice, is forced to take out a loan just to subsist. The problem is that by then, not only all of Africa, but Asia, and possibly Europe will be gripped in the same daily riotous revolutions that have already swept away Tunisia and Egypt virtually overnight.

When the dominoes start falling, they fall very fast.

Full report:


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Misean's picture

BSBernutty's logic makes me queasy too.

fx's picture

koo vs bernanke - talk about one moron bashing another!

both adhere to the mantra that if a stimulus didn't work, it must have been too small

Fish Gone Bad's picture

When Bernanke was a young boy, he fell down and skinned his "right direction" chromosome.  Everyone knows what the "right direction" chromosome is.  It is the unspoken voice that keeps a person on track to get to where they need to be in life. 

Everyone should send Bernanke a cheap bottle of ketsup.

CrashisOptimistic's picture


and the money supply will not increase without private sector borrowers.



I thought M2 was spiking.

Misean's picture

Spikey things are bad around bubbles.

Robslob's picture

Then every asset class including gold is then also a "bubble"?

system failure's picture

It seems Dear ol'Ben cannot get enough takers to participate in the belief that Ferderal Reserve Notes have enough value for people to go into debt for anymore. Apparently, Ben believes that he prints it they will come.

Rule of 72's picture

The USA in 2010 is the Matrix, with the Bernank as the Architect.  Banksters as the Machines.

Watched this movie the other night.  I figured it all out.

ElvisDog's picture

This part is what I don't get:

Bernanke who will next proceed to monetize all equity-related assets: ETFs, REITs, and everything else

What I don't get is what will Bernanke do when he owns the entire stock market? What then? The whole thing seems silly.

Assetman's picture

From my recollection, the Fed cannot own equity or equity derivatives directly, so there is a misinterpretation that Bernanke will own the entire stock market.  But give them a few days to find a an 'exigent circumstance', though...

Still, there already has been an indirect impact from the Feds asset purchasing.  Overall market volumes have been lower than in the past, and are becoming dominated by HFTs for short term flipping, and a narrower contingent of longer term insitiutional (bank and pensions) and individual holders.  And obviously, asset prices for many things financial and non-financial-- are higher.

Bernanke is essentially is betting that if you offer to buy the ketchup that nobody else wants-- or needs, sooner or later people believe that ketchup has value and people will want to buy it back.

The problem with that logic is that buying of ketchup is just another gross misallocation of capital that will eventually expire or rot worthless.  As with what we are seeing with Treasuries, the Fed will overpay for the ketchup and the proceeds will go to narrower segments of the population that benefit from the trade (i.e. those who can only afford to go to the ketchup casino)-- but the transaction itself creates absolutely no societal value.  It's simply wealth transfer, and society (taxpayers) will absorb the losses through higher inflation and stagnant incomes.

When the gross misallocation is revealed, it is likely to result in a total loss in conidence for those responsible for pissing away the capital for ketchup than nobody wants in the first place.  Problem is, those victimized will need a real tangible sign they are being royally f$ucked by the ketchup man.

Again this is already happening in direct form with Treasuries and MBS, as the latter is ketchup gone very bad.  Again,at some point in time, there will be a general lack of confidence in the money printing and misallocation game.

In certain areas, the cracks of misguided Fed policy are already forming.  Exported commodity inflation from credit expansion has already had sigificant effects on third world economies where food is a high % of income.  When this spreads and the Fed is properly identified as the fire starter, the cycle of mistrust and currency rejection will likely take hold.

That might take awhile.  But you are already seeing stresses due to the asset bubbles that are being created-- the Fed just isn't being fingered a the culprit-- yet.  It's one thing to create a bubble in NetFlix stock-- its entirely another thing to buy milk or gasoline at $5 per gallon.

That is where we're heading.  And some areas of the world are speeding there faster than others.



Sean7k's picture

Nicely said. 

What I liked most is where Koos points out people paying in cash and having it lead to a stronger economy, but Bernanke is determined to subvert this through more QE- forcing debt and bad choices on the population. As if monetary growth is the only common good for America. 

Bernanke's policies are a destructive virus that is consuming the wealth of our society. In this, there is no more malevolent creature than the FED and by extention Bernanke.

gwar5's picture

They're all sociopaths

Krugman and Bernanke know this QE-X crap doesn't work already.

They better be careful or somebody will go Tunisian on them.

Spalding_Smailes's picture

Bank of England chief Mervyn King: standard of living to plunge at fastest rate since 1920s Households face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again.

Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis, Mervyn King warned.

With wages failing to keep pace with rising inflation, workers’ take- home pay will end the year worth the same as in 2005 — the most prolonged fall in living standards for more than 80 years, he claimed.

Mr King issued the warning in a speech in Newcastle upon Tyne after official figures showed that gross domestic product fell by 0.5 per cent during the final three months last year. The Government blamed the unexpected reduction — the first since the third quarter of 2009 — on the freezing weather that paralysed much of the country last month.



AUD's picture

Yes, well Mervyn King would hardly blame himself would he? After all, it's not as if the Pound Sterling is the obligation of the Bank of England is it?

CrashisOptimistic's picture

Tyler made a comment about this earlier re seasonal adjustments.  That was a solid comment, but truth be told, the UK winter has been far colder than normal and it's likely the seasonal adjustment would not suffice . . . BUT . . . bad weather is like oil scarcity.  The effects are real.  It doesn't MATTER whose fault it is, or if it's no one's fault (weather).  It's real.  It's devastating.  And there may be no fix for it.

It is widely thought that the winter of 1946/47 was so severe that the UK never recovered.  It was the end of their world power status.

There are no laws of the universe that say these problems have solutions.  It can be forever.

sushi's picture

Bad weather sends people out to buy energy, overcoats, snow shovels and a ton of other claptrap. Bad weather forces you to pay for services that you would not otherwise buy like snow clearing and insulation.

Bad weather will force an increase in GDP in exactly the same way that Hurrican Katrina forced a boost in GOM GDP.

I suspect the UK contraction would have been greater if were not for the forced spending associated with bad weather.

TheGreatPonzi's picture

"It is widely thought that the winter of 1946/47 was so severe that the UK never recovered.  It was the end of their world power status."

Yeah, blame the weather... the world power status of Britain ended far before, and I'd blame more the War than the weather for the final knock.

Many countries have gone perfectly though far worse weather and even territorial conditions. Japan has to manage permanent earthquakes and a ridiculously small territory.

I always wary of people who try to blame things on the weather, bad luck, maledictions or even scarcity of oil, like you always push. It promotes irresponsibility among societies and people.

cossack55's picture

I understand hospitals (houses of the pending dead) in UK are at crisis levels of patients (pending dead).  I also noted there seems to be 13 billion Cubic Feet of new ice at the pole.  I would recommend Uggs be imported ASAP. 

Moonrajah's picture

Starve the motherfuckers. Delever them to the 4th, 8th and 9th circles of Hell.

sushi's picture

"Let them eat cake"
Marie Antoinette 1789

"Have them buy ketchup"
"Bubbles" Bernanke 2001

boeing747's picture

Big insurance companies invested heavyly in commercial real estates. I don't think they are honest about their losses at this moment, but we will find out later one way or the other.

Miles Kendig's picture

Long have I desired to see the day here in the United States when our society views debt much the same way German society views inflation.

Hungary, are you going to show us the way its done, just as Iceland has shown us that you can recover more quickly when you force feed the loses to the banks?

mt paul's picture

let them 

lick ketchup

FatFingered's picture

It's called wealth transfer.  If 300,000,000 peeps would just BTFDs is trick would not work for long.

theprofromdover's picture

Steel costs (manufacturing & construction) are about to rise by over 30% in the next 6 months.

That is hyper-inflation in my book (or a wrong Euro and dollar value against the world).

Runaway train -either get on, or get off -quick.

Obnoxio's picture

With 22% interest rates, all types of fees, and the ability the change credit terms on the fly I think credit card companies have burned the bridge with American consumers. They may still be able to hook young people who haven't learned their lesson yet.

InconvenientCounterParty's picture

Mal-investment --an imperial privledge and an American cultural icon. Talk about worshiping a false idol.



markmotive's picture

I created a similar chart a while ago (comparing gold runup to NASDAQ during the 1990s). It's good to see confirmation of my findings.

(Sorry this comment is out of order...I'm referring to another comment above.)