QE is Not Just a Mistake, It's DANGEROUS

Phoenix Capital Research's picture

By maintaining artificially low interest rates, the Fed was hoping to drive investors away from bonds and into stocks and other, more risky assets. The Crash of 2008, combined with a retiring or soon to retire Baby Boomer population that is more interested in income than capital gains, resulted in a mass exodus away from stocks in the 2009-2013 period.


By keeping interest rates near zero, the Fed has been hoping to push investors into the stock market. The hope here was that as stock prices rose, investors would feel wealthier (the “wealth effect”) and would be more inclined to start spending more, thereby jump-starting the economy.


This has not been the case. Instead the entire capital market structure has become mispriced.


Individual investors have been fleeing stocks for the perceived safety (and more consistent returns) of bonds. Since 2007, investors have pulled over $405 billion out of stock based mutual funds.


The pace did not slow throughout this period either with investors pulling $90 billion out of stock based mutual funds in 2012: the largest withdrawal since 2008.


In contrast, over the same time period, investors have put over $1.14 trillion into bond funds. They brought in $317 billion in 2012, the most since 20008.


This had the effect of pushing yields even lower (precisely what the Fed wanted).

As you can see, today rates are the lowest they’ve been in over fifty years. This is not a sustainable trajectory.


Real estate and all other assets that have been financed via cheap debt have been pushed higher due to excess leverage. This includes GDP.


In the 1960s every new $1 in debt bought nearly $1 in GDP growth. In the 70s it began to fall as the debt climbed.


By the time we hit the ‘80s and ‘90s, each new $1 in debt bought only $0.30-$0.50 in GDP growth. And today, each new $1 in debt buys only $0.10 in GDP growth at best.

Put another way, the growth of the last three decades, but especially of the last 5-10 years, has been driven by a greater and greater amount of debt. This is why the Fed has been so concerned about interest rates.


You can see this in the chart on the next page (Figure 4). It shows the total credit market outstanding divided by GDP.


As you can see starting in the early ‘80s, the amount of debt (credit) in the system has soared. We’ve only experienced one brief period of deleveraging, which came during the 2007-2009 era.

As the alleged expert on the Great Depression, Bernanke couldn’t stomach this kind of deleveraging because it meant deflation which he has devoted his entire academic career to researching.


There was also career risk here. Those who have accumulated great wealth as a result of this system are highly incentivized to keep it going.


Bernanke doesn’t talk to you or me about these things. He calls Goldman Sachs or JP Morgan. And most of the Wall Street wealth of the last 30 years has been the result of leverage (credit growth). Take away credit and easy monetary policy and a lot of very “wealthy” people suddenly are not so wealthy.


Let me put this in terms of real job growth (created by startups) vs. the “job growth” of the last five years.


According to the National Bureau of Economic Research, startups account for nearly all of the US’s net job creation (total job gains minus total job losses). And smaller startups have a very different perspective of debt than larger more established firms.


The reason is quite simple. When a small business owner takes out a loan he or she is usually posting personal assets as collateral (a home, car or some other item). As a result, the debt burden comes with the very real possibility of losing something of great value. And so debt is less likely to be incurred.


This stands in sharp contrast to a larger firm, which can post collateral owned by the business itself (not the owners’ personal assets) and so feels less threatened by leveraging up.


Thus, in this manner, QE and other loose monetary policies maintained by the Fed favor those larger firms rather than the real drivers of job creation: smaller firms and startups.


For this reason, the Fed’s policies, no matter what rhetoric the Fed uses, are more in favor of the stock market than the real economy. That is to say, they are more in favor of those firms that can easily access the Fed’s near zero interest rate lending windows than those firms that are most likely to generate jobs: smaller firms and start-ups.


This is why job growth remains anemic while the stock market has rallied to new all-time highs. This is why large investors like Bill Gross have applauded the Fed’s policies at first (when the deleveraging was about to wipe him out in 2008), but then turned against them in the last few years as a political move.


This is why QE is so dangerous, because it increases concentration of wealth and eviscerates the middle class. And the coming inflation is has unleashed will only make things worse.


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Best Regards

Phoenix Capital Research






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elwind45's picture

I have to disagree about your idea that rape and pillage has been eliminated and has been dropped from American economic model. Both models Russian or American end in a atmosphere that consolidates rape an pillage more than elimanates it?

mt paul's picture

enjoy life

play hard


leave the vault


lasvegaspersona's picture

oddly enough the message I got from QE was 'buy gold' paper is too risky....and for that I say...thanks Ben...

Pee Wee's picture

"The entire capital market structure has become mispriced."

Fascism swallowed this bitch whole.

"Mission Accomplished, sucker."

I Write Code's picture

I just don't get it, who would buy (treasury) bonds in this environment?  The yield is barely better than zero, the real yield is probably negative, and the risk is that inflation spikes and eats your principle.  You can get the same yield with the biggest, most conservative stocks that grow slowly and reliably and are mostly protected against inflation.

The answer I guess is only the most desperate, AND the banksters who buy the bonds at no risk with ZIRP money. 

So this article is confused.  Only hot money and fake money is going into bonds, the fed may haircut itself a little, and haircuts the Chinese and other foreigns who hold trillions of this stuff.  This is almost an economy in itself, it has little enough to do with the real economy.

The small business slowdown is due to the slowdown in net demand, and the uncertainties and certainties (!) of the Obamation, very different subject.


elwind45's picture

The middle class is a television fantasy or the Corp. Would be a family and not just an individual

elwind45's picture

Not too many years ago oil traders used to pass the same contracts back and forth. Got oil to $147 before it wasn't and then down to forty seven back again to $100. Screwed everything up for 5 years. Now its in the future and another bunch of traders doing same thing to stocks? At same time little guy scared shitless goes to bonds and makes a killing following trend and ignoring EVERYBODY does better than good entire fucking time while gold the first choice of hoarders gets monkeyhammered? They see you coming? They pass stock back and froth knowing everyone is hoarding and the FED is painted into a dry corner? The trader cant lose because none is his money except the fees he gains? When that 10 year goes below 2.5% it will get troublesome for dowboys!

Diplodicus Rex's picture

There's somethig wrong with the logic of this article. On one hand it (justifiably) critices the Fed and policy-maker's actions but on the other hand it implies that the failing is the lack of "growth". I created a word cloud of the article and the word "growth" stood out from all the other words in the article. What is it about compound growth that these authors fail to understand? What makes them think that any exponential function can carry on indefinitely on a fixed planet? We need Growth for one reason and one reason only, to feed the Fractional Reserve Banking model. When our "currency" consists of IOUs and where only the principal of any loan is printed out of thin air (and never the interest) then the only environment where the model can survive (for a limited period) is one of exponentially rising GDP (measured in ever-depreciating currency). Why would anyone advocate that the system has any desirable features other than the recipients of the skimming which takes place as a consequence.


I read the above types of article voraciously anticipating that at a certiain point in time the tippin point will arrive. However, when I read that the author blames the lack of "real growth" on the policies of the FED and that if it were not for the FED we'd have our magical, componding, exponential growth back I  become very despondent.

Is it me?

I Write Code's picture

I don't see that the article talks about exponential growth, just any normal innovations that are at least required to even hold things in check, as old things become obsolete and die.

Orwell was right's picture

You are correct.....unlimited growth can NOT continue.   All thru history, when a society reached the limits of it's current resources, it had to "go conquer" or "go explore" somewhere else.    In the "Good Ole Days" there were other continents to rape and pillage.   Those days are gone.

If mankind continues to function like an out-of-control virus...(or cancer cell)....then they are doomed.

At some point, we have to come to grips with a sustainable, repeatable process (both Economic and Philosophic) that achieves some level of balance.  

elwind45's picture

I had to stop at Ben only talks to GS or JPM! When the Fed talks to GS for examples calls them to tell them not ask them something? When the chair calls the banker the banker fucked up period speciallyNOW! The committee controls every aspect of the credit market! I say the sky is red you better believe its red! If we see that inflation is getting out of control good bye banker hello ME mthrfkrs

RaceToTheBottom's picture

The FED used to consider it's job to be to manage the punch bowl. 

Now, it justs makes sure the band gets paid and the music keeps playing, at all costs.

dontgoforit's picture

Well explained.  My family and I were amongst those who pulled out of the stock market in 2013 due to the risk.  We're close to retirement and couldn't afford another March 2009 at our age, so this article fits with us.  I'm wondering how the Fed is going to play their hand over the next year or two.  IMHO they have failed miserably; however, if QE had not been done, one can only guess at where things would have landed (Great Depression II?).  It's all a crap shoot for the average joe like me.  At age, conservative moves are better than no moves at all.

Diplodicus Rex's picture

It is very difficult to come to any other conclusion except that you are a shill. If you don't understand that QE is theft then there is no hope for you. Furthermore "they" have not failed miserably. "They" were never out to look after your interests. "They" were always looking out for the 0.0001% and given that remit they have done very, very well.

madtechnician's picture

Oh man I think everybody on this forum knows that QE is a form of theft along with fractional reserve banking (since 2008 that is) , and you are preaching to the choir. What is going on here with QE is the minimalisation of devaluation . without QE everybody's bank accounts would have already been raided with bank bail-ins. Don't you see that this is a strategic mechanism to minimise the chaos and disruption ? Until the Ponzi ended in 2008 pretty much everybody was doing fucking really great with the fractional reserve banking system , yes it was a ponzi , and now people are looking for the cause of the problem - Nixon 1971 and you blame the Fed , the president , the rich. This is a managed decline we are seeing ,  it's pointless screaming and shouting about we need to work towards solutions.

dontgoforit's picture

It's just my statement dude.  I'm not a shill or a troll.  I'm a working stiff who considers himself lucky to still have a job at this point.  I find it interesting how many people attack others on ZH when they don't know shit about the other person's situation.  401K, pensions and SS are working for us.  My concern is what's going to happen to my kids and grandchildren.  And on top of that, Obamacare with it's costs piled on Medicare and Medicaide with who knows how many trillions in unfunded liabilities makes me worry for the next generation.  So, IMHO, QE has only delayed the inevitable.

Comte d'herblay's picture

Agree with all you wrote with the sole exception of the .0001%.

EVERYONE who owns shares-----and that is more than just .0001% have 'done well' with the FED pumping the market when you use 2008 crash as the base point.

My cousin who just retired this month from IBM saw her IBM shares crash in 2008 and was wondering if she could work past the mandatory retirement age because so much of her accumulated assets were in that stock, from a low of $68 in 2008 to over $200 last year. 

She's just one of tens of millions who benefitted by this pump.  Her worries are over. 

There are many more whose paper assets have recovered to new highs. This was no accident. The .0001% will always benefit in outsized ratios to the rest of us, but 401Ks, SEPs, and other retirement vehicles, in the Mutual Funds, have all done so.

And, of course, screwed the shorts into the ground.



digitlman's picture

Well, no shit?


GS is being fucking useless again.

AdvancingTime's picture

The value of "something" is not an issue to take lightly. Value is not a constant and can be derived from several factors such as supply and demand or utility value, things can spoil or become obsolete making where you invest very important. Value is not as constant as many people think or always destined to rise.

The distorted markets we have today increase the chance of a crash. May I mention just two of the great teachers of what I call financial reality, Bernie Madoff and Enron. Below is an article that looks deeper into the issue of value and touches on inflation and deflation as major factors.


GetZeeGold's picture



Food prices up 19% this year....but that only hurts the little guy.

cbaba's picture

Yes that's true for now in US but think about the ripple effects, we also sell food to all around the world, the price of food goes up in China, Asia, Africa, then they have less savings to buy other goods from us, hence our sales of machinery, computers etc will also drop..everything is connected, its a small world. 

madtechnician's picture

Quite simply it's now a managed decline. They know (even the likes of Krugman now realise) that infinite economic growth is impossible on a finite planet , but you cannot just suddenly turn the supply off. It needs to be done in small , managed steps hopefully avoiding too much chaos in the process. But yes it is interesting , each time there is a round of QE another country's economy blows up , and I no longer think this is deliberate because of all of the unintended and unforeseen consequences. We certainly do live in interesting times.