This Is Why, To An Economist, QE Refuses To Work

Tyler Durden's picture

There is practical, everyday common sense... and then there is economics. Because when it comes to explaining why a square peg won't fit into a round hole, only an economist will tell you, over and over, that it will eventually happen, one must just tweak the theory a little first, and then reality will promptly follow. And while even economists have enough of a frontal lobe (and realize there is little grant money) to pursue intractable pegs and hole problems, when it comes to the theory at the heart of their beloved Keynesian voodoo religion, namely Quantitative Easing, the answer is always one, and it is very simple: we need more! Yet even economists are not naive enough to not recognize that QE has not worked in any of its 4 previous iterations (logically, as if it had there would be no need for a fifth, open-ended one). Where it gets fun is watching them come up with amusing yet convoluted, involved and outright demented explanations, some even in chart format, why QE keeps on failing. Below, we present just such a graphic explanation which only an economist could love, or care about.

First, this is how an economist will trace, visually, courtesy of Bloomberg, the monetary "pathway" starting with the policy rate, going through financial conditions, and ending up with output and employment. Not there is no mention of the real pathway: if print trillions, then stocks go up. But economists have never been known to actually simply things if there is grant money to be made from writing research papers on intellectual dead ends.

The above chart is how in an ideal economist world, i.e., that which is 100% disconnected from reality, QE should work.

Now, because even economists realize the deranged theories they concoct in their ivory towers sometimes need defending, especially since billions of lives are at stake, and may die a painful death of starvation once food becomes so expensive it results in food-based genocide, they try to come up with explanations why the chart above explaining the work of QE may, just may, not quite work.

The first reason for this is shown in the chart below.

This is how Bloomberg explains it:

In Figure 20 we plot two different financial conditions schedules in Quadrant B—an elastic schedule corresponding to a Risk-On financial environment (FCON1) and an inelastic  schedule corresponding to a Risk-Off financial environment (FCON2). When investors’ appetite for risk is high, i.e., the market is in Risk-On mode, a decline in the real yield on relatively safe assets should signifi cantly raise the demand for risky assets and, in the process, significantly boost the level of overall fi nancial conditions along the elastic Risk-On financial conditions schedule (FCON1). A signifi cant rise in overall financial conditions should then, in turn, give rise to a signifi cant boost in output and employment (from Y1 to Y2 in Quadrant C).


If, on the other hand, the level of risk appetite was low and the market was in Risk-Off mode, then the financial conditions schedule would be relatively inelastic, which we show as FCON2 in Quadrant B. Because of this relatively inelastic financial conditions schedule, the response of output and employment to a change in the policy rate would be modest at best, increasing only from Y1 to Y3 in Quadrant C.


What Figure 20 indicates is that in order for monetary policy to be effective in boosting output and employment, the real policy rate not only needs to be lowered significantly, but that central bank communication needs to play an equally important role in fostering an environment in which  investors’ appetite for financial risk is high. It would appear that the Fed’s latest open-ended asset purchase program coupled with its forward guidance as to the expected future path of its policy rate is playing an important role in creating a more risk-friendly (Risk-On) financial-market environment (i.e., Federal Reserve communication is helping to contribute to a more elastic financial conditions schedule), which is required for monetary policy to be effective in boosting output and employment.


A relatively elastic financial conditions schedule represents only half the story for the successful implementation of monetary policy, however. For monetary policy to be ultimately successful, output and employment must respond favorably to the policy-induced change in financial conditions. This latter half of the story is depicted in Figure 21, where we shift the focus from financial-sector risk taking to real-sector risk taking.

Or, to paraphrase, one of the lines is crooked. And that is how reality for an economist can be simply reduced to just a line that is angled askew.

But just in case one angled line is insufficient to explain the failure of QE, economists have a Plan B: a second crooked line.


In Figure 21 we illustrate the impact of economic uncertainty on output and employment decisions by comparing the response of output to a change in financial conditions under varying conditions of economic uncertainty. In a world where the level of uncertainty is comparatively low, the output-response schedule will tend to be steeper (shown as IS1 in Quadrant C) and output and employment will tend to respond more favorably to a change in financial conditions. But in a world plagued by high levels of uncertainty, the output-response schedule will tend to be relatively fl at (IS2). Under such circumstances, easier financial conditions might not elicit much change in the level of output and employment, increasing only from Y1 to Y3 in Quadrant C.


From the market’s and policymaker’s vantage point, the success or failure of a central bank’s policy actions will hinge on what the slopes of the financial conditions and output response schedules look like in the real world.

So there you have it: It's all about the slopes. And the economists in charge of the world will continue repeating the same mistakes over and over and over, until the first of two events occurs: i) the slopes of the lines end up "just right", or ii) everyone dies from a hyperinflationary genocide or war, or both.

And now you know how economists "think"

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
SheepDog-One's picture

OH it's 'Y2's' fault!

The Wizard of Oz's picture





idea_hamster's picture

That's how the people in charge think?

We are sooooooooo f'kd.

knukles's picture

It's really because we're caught in a liquidity trap from which we can only escape if there's an alien invasion.
(courtesy, Paul Krugman)
Honey, could you come talk to the gardener, I don't understand a fucking word he's saying... speak English, fer Christ's sake...

NotApplicable's picture

Those charts look like a bunch of mirrors. Now all they need is to do is add a little smoke, and they've got themselves an economic system worthy of their stature.

francis_sawyer's picture

No wonder QE doesn't work... It's the goddamned New York City Subway system map...

economics9698's picture

Models at the macro level are useless and a waste of time. 

When money is printed the beneficiaries are the recipients of the counterfeited cash and the victims the public that must pay for the counterfeited cash with higher prices.

One sentence, done.

Second do not classify monetarist, supply siders, and Keynesians with Austrian economist.  We hate the bastards and think they are 18th century John Law retards or just government pimps who sold out 100 years ago.

We fucking know QE doesn’t work, we live this shit everyday.  


NidStyles's picture

I was educated traditionally in Monatarist Theory, but I am an Austrian. I still get confused on where they come with half the shit they do when I look at their models. Oh, this is a Monetarist Model BTW. 

Manthong's picture

It's so nice that complex systems respond to economist's notions in a linear fashion.

Vanderdekken's picture

That's because its a simplification. Ever heard of a "loglinear" model?

centerline's picture

Is always funny to see complex systems being painfully represented by simple lines and linear relationships.  

Hulk's picture

I always wondered how Stephen Hawking finds the time to announce the subway train schedule...

t_kAyk's picture

Mmmm, this sounds...  BULLISH!!

3rdgrader's picture

The act of printing  a Trillion brand spanking new dollares in effect steals a thousand dollars from every living person's pocket (whether they like it or not) 

Now everyone knows that stealing money from someone else only benefits the person that steals it.

If, for example, Bernanke gives it to the War mongers, then the War mongers also benefit.

If he were to give it to you and I, then you and I would benefit.

I don't know about you, but since I have never personally met the cock sucker, then I guess I'm out another ten thousand dollars this month.


And take those retarded godamned charts and shove em up your ass!

francis_sawyer's picture

The Taking of Pelham 1-2-3 ^^^^

flacon's picture

Interesting movie about the rigging of the gold price. 

Panafrican Funktron Robot's picture

Last call for alcohol.  Blackout levels advised.  Holy jesus.

RockyRacoon's picture

Did I miss something?  Has QE worked?  Since the sole purpose was to save insolvent banks (and things that weren't banks until TSHTF) then I'd say it has worked pretty well.   Where was the REAL reason to save anyone who didn't already make a few mil a year?  Them shore is some purty graphs in this here article, but they ain't about whut QE was fer.   Hell yeah, it worked... or is working... so far.   Bailing out just enough bilge water to keep this garbage scow of an economy afloat, but not for long.

Leknam's picture

Spot on Rocky !!

Hear what Ben says but LISTEN TO WHAT HE DOES NOT SAY ;-)

Leknam's picture

Spot on Rocky !!

Hear what Ben says but LISTEN TO WHAT HE DOES NOT SAY ;-)

New_Meat's picture

dang, we need a new feature around here!  when someone double-posts and I give a greenie on each, my rights are that I should have the ability to double-greenie the post.  And, if this doesn't happen immediately, then I'm off to the ACLU for triple damages.

That means that I'd be able to do a 6xgreenie!!!!!!

And Sac, don't screw around with this required feature, or my lawyerz will get the leverage up to 8x or even 16x by the time they're done with my new feature. ;-)

- Ned

JuliaS's picture

I'd say the goals are even simpler than saving banks. It's all about crooks keeping eachother out of jail.

Look at Enron and other similar fiascos. When a company shuts down, liquidations begin. Lawyers start digging. People get questioned, then it is revealed that they everyone was in on the scam.

Some crooks kill themselves, some escape, some go to jail.

QE's are all about keeping the buffers (the banks) in place, in order to protect people, who Bennie and Timmy went to high school and became friends with at some point.

Clashfan's picture

Notice how the mass shootings never happen at elite prep schools or at Harvard or Yale?

Vanderdekken's picture

Dude, I'm sorry that you don't understand simple f'king chart graphics. Remember all that bitchin that you did, saying that "lowing interest rates moar isn't going to do sh!t"? That's what we've been saying with the slopes of our f'king lines. Its okay to not understand something but its not okay to bash it because of your stupidity. 


that's just being a complete douchebag

chart_gazer's picture

this is f___g hilarious!

kaiserhoff's picture

It's worse than that...  No economist really trusts his data, unless he can use calculus or some totally inappropriate statistics.  As if higher math compensates for ignorance.

What rainman and I have posted for a while, is that this experiment has been run, in Japan, for 23 years, with the same crappy results Ben and Timmy are getting.  What was that definition of insanity?

knukles's picture

To let Timmah get involved?

NewWorldOrange's picture

Is it that they don't trust their data? Or that they just don't want to admit what it reveals? Apparently they know their data would actually prove "stimulus" doesn't work.

"The $831,000,000,000 economic “stimulus” that President Obama spearheaded and signed into law requires his administration to release quarterly reports on its effects.  But “the most transparent administration in the history of our country” is now four reports behind schedule and has so far not released any reports whatsoever in 2012.  Its most recent quarterly report is for the quarter than ended on June 30, 2011.""

Skateboarder's picture

"We're so transparent that our reports are invisible."

James-Morrison's picture

I wish those pop-over ads at the the bottom of the page were more transparent.

The Tylers must be economists: we seem to get more of them!

Oracle of Kypseli's picture

So you want all these zerohedge articles and advise for free to go with your free foodstamps?

WeekendAtBernankes's picture

Only if I can read it on my Obama phone while riding the light rail for free.

It doesn't cost anything!

Urban Redneck's picture

To the economists- if you can't reduce it to small words and simple arithmetic, then you don't actually understand it.

knukles's picture

I always said that if I can't tattoo it on the underside of my penis, I don't understand it.


nmewn's picture


(Spitting brew everywhere)

This just in's picture

Well, to apply that principle, sir, it would stand (pun intended) to reason that size matters.

nmewn's picture

It may not be very big around...but it sure is short!!!

Cheesy Bastard's picture

Sure.  I did the back stroke in Loch Ness once, and look what happened...

RockyRacoon's picture

Your tattoo says "WENDY" too?

"Welcome to Jamaica, mon. Have a nice day."

Hulk's picture

Mine has instructions tattoed on it.

Insert Tab D into Slot P...

NidStyles's picture

Honestly, there in no understanding that shit, because it does not actually make sense. It's not based on the real world. It's based on the idea that making something creates the demand for that something.


I had a Ph.D. in my department that taught these charts and they make no sense to him either, but he still went by them. His comment on the matter was that Keynes and Friedman were simply more intelligent than he was, so they were absolutely genius if they understand this shit. This is actually how almost all Econ departments are ran. There is literally no critical thinking anymore, just spouting and citing "facts" they get from other economists that are citing Keynes or Friedman/Irving.

RockyRacoon's picture

Rest assured that the more terms of art within a certain field, the less accurate and efficacious the execution thereof.   Ever seen Black's Law?

Either baffle 'em with bullshit, be it numbers or Latin, or just make it illegal as the last resort.