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This Is Why, To An Economist, QE Refuses To Work
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.
'Explained':
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"
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missed you as well JR.
There is no free lunch unless you are a politician and pay with future promises.
Of course QE +++ are a "failure"......that's the point: A success for the banks; failure for the people. God forbid it ever actually succeeds and we have the velocity of money at warp speed with full employment and all the kind of fun stuff that brings.
Im trying to understand Chart 1
I think it means or goes to say that
As the fed prints money -> Inflation rises -> as inflation rises -> Financial Conditions get worst-> As Inflation Rises and Conditions worsen Investment Savings Rise (stock prices go up) because people are scared and are trying to save their money because they fear a depression/recession.... and they no longer know how to save by stuffing a matress so they buy stocks.
I think thats what the charts are trying to say, correct me if im wrong?
The only real world correlalation seems to be with QE and stock indexes priced in steadily worthless dollars that after 4 years of adjustment has resulted in a slight and slow increase in real output. Stagnation withg a real promise of painfull inflation later.
QE is working PERFECTLY—for the financial elite!
That is why their shill economists are screaming for more QE.
Everyone else can go suck eggs.
Awe come on guys! This is Caddy Shack infinity. The first chart shows flows.
Condition /Response (over zero line), with projected outflow, based on 3% employment increase. The +_- was 1% on 3 million.
Next chart; Output Fc,1-3 are based on financial conditions. Look at the x axis above. Risk on )financial conditions(.
That takes us to chart #3, " chop stix; limited employment (output & financial conditions).
Where is that set of "chop stix pointed"? Even the most fuzzy "axis" is pointed down!
How about the "primary wave three down" line? A line that is typically close to vertical and pointing down and implies "an unmitigated disaster" is pending.
http://bullandbearmash.com/chart/big-drop-today-sp500-channel-support-br...
I suppose the QE was intended to inject optimism into the markets to get money flowing again.
If someone runs into a movie theatre and yells "Fire" it would cause a immediate reaction, but if you do it four times the effects may deteriorate somewhat.
The next step to stimulate the economy could be to organize a fire sale at the federal reserve, sell everything, incl Ben's printing press and computers and send Ben and his crew on a permanent vacation to Papua New Guinea, where they would be a vital and appreciated addition to the economy.
http://www.telegraph.co.uk/news/worldnews/australiaandthepacific/papuanewguinea/9396846/Police-arrest-members-of-cannibal-cult-in-Papua-New-Guinea.html
A lot of gobbledygook used in this article trying to explain: “counterfeiting”, “theft”, “speculation”, “debt”, “taxpayer’s obligation”, “bankruptcy”, “homeless”, “jobless”, “starvation”, “anarchy”, and “FEMA camps”.
Mr. Hudson you must confirm, your ability to read charts before entry. What is "one handle" in any trade? What is VWAP?
Mr. Hudson, when trading)describe one big figure(! Not your Wife stupid!
Charts?? haha!! In college I came up with the an example and explanation (to the head of the math department) of X/0...(That is a number "X" divided by "Zero"). He was astounded at my brilliance! And, uh , yeah I used an X axis versus Y axis chart to explain my significant discovery. So, yeah, I understand charts. I also understand smokescreen economic bable jargon that is used to cover up theft and counterfeiting. I was being humorus, Mr. Yen Cross. Get a sense of humor!!
Basement Economics! I love it! (FWIW x is not divisable by "zero")... "X is a reference point for "equations".
Just answer one question Mr. Hudson. " What is one "big figure" , in any trading move?
Hmmmm…I don’t know if you are serious, or if you are joking. But I will give the benefit of the doubt. I will assume you have had college algebra, so as I explain this I am not talking down to you; I just want to make sure I am clear. “X” is a variable, an unknown number. It could be “1”. It could be “50”. “X” is also, as you stated, a point on the “X axis”. While I was working on a problem using eletrohydrodynamics in determining a better coefficient in manufacturing a new process in thin film deposition (I will be able to plate with gold a film thinner than any other available process), I discovered a brilliant observation. Our tests revealed that a molecule close to absolute zero can actually be in two places at the exact same time. It has always been believed that any number divided by “zero” is undefined. Not anymore. My contribution to science was proving that it can be defined by the very example of a molecule being in two places at once, and I demonstrated this with a very simple X, Y graph that was “time versus distance”. Now, because of me, both the Physics Department and the Math Department at the University I attended use my example to show that a number divided by “zero” can be defined.
As to your question “What is one “big figure” in any trading move?” I would very much be delighted in hearing your definition.
"Our tests revealed that a molecule close to absolute zero can actually be in two places at the exact same time."
May we see your thesis then?
Because of investors and its commercial application, the thesis “Thin Film Deposition Using Electrohydrodynamics” is proprietary information. We substantiated our theory from the work done by the gentlemen in the link I have provided.
http://www.dailymail.co.uk/sciencetech/article-1258932/In-places-Strange...
What I see here is a pathetically soft science desperately trying to pass itself off as hard. Double entendre intended.
Miffed ;-)
Nothing like a little blue smoke and mirrors, and my beautiful assistant here, who goes by the name of MSM, to distract you while I rob, beat, and stab you in the back every chance I get.
What’s that you say, you don’t like it. Go talk to the police, aka my bouncer. That’s right, he works for me too.
QE works great..... just ask Hank,Timmy,Jamie,Barny,Chris, the "Honorable Corzine", Nancy, Bill, Angelo,Warren,Jeff,DSK,Sir Alan, the Speaker, the house,the Senate.
QE keeps the untouchables untouchable....for now.
Barack Obama - 'Mr Sensitive'
YouTube - "Things Screw Up" says Prez Obama, "Gaddafi promised me a Bugatti and left me with Bengzahi instead!
...
here's diplomat's mom:
http://www.dailymail.co.uk/news/article-2220241/Barack-Obama-Benghazi-attack-Mother-diplomat-criticises-Presidents-optimal-comment.html
Hey, when you're the smartest asshole in class at an Ivy league college and been told your whole life what an exceptional asshole you are this is what you get. Any questions? Yes? Oh, really? Sit down and shut the fuck up. Ben has already answered that question...LOSER. Next question.
The "poison"Ivy League, is responsible for this mess!
Yes, it is.
Behind every piece of shit social or economic program (from eugenics to Keynesianism) you'll find the Ivy League.
Ah, that's easy to explain. It's all about JOB SECURITY.
The only way to keep a useless job, like an economist for example, is to make it look complicated.
That is the only goal of the graphs, job retention, paycheck security.
Good comment EKM. Lest we not forget those "forever GREEK stye pensions">>>
Exactly. Right on the money.
You say true . . .
Thx a lot, sir.
I've often mused with the idea of developing a set of mathematics that has no real application, no bearing on reality, and only solves the problems created on a chalk board.
People would be so impressed with its complexity, and I could go on the Tee vee and make outlandish predictions, make absurd suggestions for the formation of public policy,get paid fees to spout gibberish coached in terms of my math, and no-one would be the wiser, because they could not get past the complexity of my "math".
So you are training to be a FED chairman I presume...
Just an fyi, but several different algebras were developed long before they had any practical application.
George Boole developed Boolean Algebra around 1850, which became the basis for digital computers...
Shortened summary of all the BS above. The economy can't recover from the multiple bubbles the FED has blown. No worries, we'll just print more money and all will be right with the world again. Move along, that should make you feel cozy...
delete duplicate
QE doesn't work. Time to Fight the Fed. Welcome to Fight Club
Think about it for a second. If the economorons had any incling about how the economy really worked, they would all be billionaires and not government employees.
I'm surprised they didn't just use this pie chart.
http://flowingdata.com/wp-content/uploads/yapb_cache/piechart_300x1981.6...
Risk FX is lagging the Equity market. Here is my chart from Friday. http://imageshack.us/photo/my-images/69/fridaychart.png/
Notice the bear flag/pennant forming below the lower channel line. I traded the 1.0356-1.0325 area back and forth during the last half of N.Y. This thing looks like it's going to do a false break up and then test the 1.03/10 level. The H-4 DXY still looks strong.
If you look at the h-4 charts on the yen/crosses, (gbp,eur,aud,) they all have similar patterns. Be careful, Japan is "gung -ho" on devaluing the Yen.
For aud , watch the 2 year German and USD note yields. The SNB is selling Euros into strength, for aussie dollars. I'm guessing a big option @ 1.03 after the aud/usd held during N.Y.
You're a speculator. You seem to know your stuff. Good luck with that!
PROFIT!!!
here's POTUS again with the usual cast of Hill, Susan Rice and yes Cliff Robertson joined by Letterman and Stewart.
YouTube - "Things Screw Up" says Prez Obama, "Gaddafi promised me a Bugatti and left me with Bengzahi instead!
The taxpayer funded bailouts or QE for banks lead to lower standard of living for all the citizens of a country except for the beneficiaries of the bail outs. The poor people in any country live hand to mouth and do not contribute to tax revenues. The others who earn their living by small businesses or salaries pay taxes at a much higher rate than the rich individuals or big businesses. This is due to the loopholes in the taxation system which enable them to declare maximum profits in countries which have the least tax rates. So effectively in the long run the governments route the money collected as taxes from the middle class of people to the banks so that the bankers can enjoy enormous bonuses. We are in times of privatizing the profits and socializing losses for those who are well connected to the governments and the law makers.
http://www.marketoracle.co.uk/Article35345.html
QE is Welfare for Busted Banks engaged in an LBO of Sovereign States. It is not an economic policy, simply a Bank Rescue at the expense of the Real Economy. It is a question of how long VOTERS are prepared to tolerate living as SERFS to sustain a New Oligarchy,
The only question that matters is: how well has this model worked in practice? We're now on the third round of QE and how many jobs were created? Labor participation rate is at a 30 year low. How many times do we have to run this experiment before it's declared a resounding failure? The model is nothing more than a sophisticated lie. If printing worked, we should be rolling in jobs.
It's all about the slopes
famous last words.
All this says is: monetary policy may not affect the real economy if
- banks don't 'pass it on' (as looser financial conditions), or if they do
- firms and households don't respond - since they're not forced to borrow, or to invest the proceeds in real assets if they do. (Yet?)
I'm kind of gobsmacked they bothered with multiple charts to show this! (& I was an "economist"...)
Given the sheeple are demanding more money printing - now New Zealand wants to get in on the act - it's good for gold, good for ZH readers, everyone else....not so much.
They can't say they weren't warned....
explain
QE works - then doesn't work - then works - then doesn't work - depending on Market Sentiment day to day, week to week, and month to month.
You think the "Bond Vigilantes" are about to get much stronger.
I think they are experiencing their Last Hurrah and about to be obscured in favor of coordinated Worldwide Growth initiatives.
We will see what we will see.
And Koch Bots, darlings: Don't even bother with the by rote Thumbs Down. We all know what you think. The question is whether what you think is going to prevail.
I believe most of the World is no longer being hoodwinked. The only thing left is seeing a Growth Agenda put forth strongly and convincingly on a coordinated basis.
"I think they are experiencing their Last Hurrah and about to be obscured in favor of coordinated Worldwide Growth initiatives."
LOL...I hope you understand that your "Worldwide Growth initiatives" are about as realistic and useful as the crooked slopes in the author's charts. Where do you people come up with this stuff? The only worldwide growth initiative that we're going to see is the CLEANSING VIOLENCE that, as sure as the sun rises in the east, will be shoved straight up our asses...
You have such a charming way with words.
In fact, charm in general has always been Short Sellers' strong suit.
(Hint: That was Satire.)
.
"In the past, politicians promised to create a better world. They had different ways of achieving this, but their power and authority came from the optimistic visions they offered their people. Those dreams failed and today people have lost faith in ideologies. Increasingly, politicians are seen simply as managers of public life, but now they have discovered a new role that restores their power and authority. Instead of delivering dreams, politicians now promise to protect us: from nightmares. They say that they will rescue us from dreadful dangers that we cannot see and do not understand. And the greatest danger of all is international terrorism, a powerful and sinister network with sleeper cells in countries across the world, a threat that needs to be fought by a War on Terror. But much of this threat is a fantasy, which has been exaggerated and distorted by politicians. It's a dark illusion that has spread unquestioned through governments around the world, the security services and the international media. This is a series of films about how and why that fantasy was created, and who it benefits. At the heart of the story are two groups: the American neo-conservatives and the radical Islamists. Both were idealists who were born out of the failure of the liberal dream to build a better world, and both had a very similar explanation of what caused that failure. These two groups have changed the world, but not in the way that either intended. Together, they created today's nightmare vision of a secret organized evil that threatens the world, a fantasy that politicians then found restored their power and authority in a disillusioned age. And those with the darkest fears became the most powerful."
The power of nightmares.
P.S.
http://www.youtube.com/watch?v=6sCioKnpHdY
qe is economic oxycontin..makes it feel better,produces a stockmarket high, while not curing the disease, puts the masses in a dream drug haze,while enriching the elite drug pusher...side effects are constipation of the economy, vomiting of debt, loss of reason, will and energy ,the economy slowly slides further as the disease grows from lack of rational therapy.
The people with the best understanding of the flaws of Keynesian economics are those educated enough to understand the basic concepts of MICRO- and macroeconomics, without being corrupted by the "advanced theories" of PHD-land. (When was the last time you heard the term "classical economics".)
Don't you love the sophisticated names for the plots: Monetary Response Scheduled, Financial Conditions Schedule and the famous High-/Low-Uncertainty Output Response Schedule. I stopped studying this level of macroecon a long time ago (except for recreational purposes) because the assumptions are unrealistic and the models are subject to regime changes in their data sets. It's just another case of social science parading as a physical science.
We are in a bad place where economic consumption is exceeding economic production. In a finite system, this state cannot persist forever. (Or in econo-speak: "units of economic utility consumed must be equal to units of economic utility production, or otherwise in a state of SEEKING EQUILIBRIUM.) Seems that the Keynesians-on-Meth don't really care for the complexities and complication of the whole equilibrium-seeking concept--better throw that one out the door to make the models work.
I wrote something very much like this on the website of the institute for new economic thinking
Those lines askew are askrewing up our swastika!
FISCAL YEAR 2012: FEDERAL GOVERNMENT TOOK IN $2.449 TRILLION, SPENT $3.538 TRILLION: (“Final Monthly Treasury Statement,” U.S. Department of the Treasury, Accessed 10/19/2012)
/sarc
Many thanks to ZH and the multitude of commenters (why is commenter a word and commenters is not according to the ZH speel-chquer?) ... and, of course, to the Dow being down 200 points (aiding my wonderful DIA Nov. puts) for brightening up this Saturday morning.
Special thanks to perelmanfan for mentioning "price discovery," which I personally saw in action the other day. Tomatoes at the overpriced supermarket chain: $2.79/pound (likely grown by agribusiness, from GMO seed, with an assortment of 10 to 12 pesticides and fewer nutrients since they were picked before ripening), vs. organically-grown, perfect tomatoes at a "cash and carry" small business, $0.79/pound. I was tempted to buy some and sell them outside the grocery chain store for $1.79/pound, but thought better of it, so went to the local OTB and made $12 blindly betting a horse across the board.
Then, richer, since I have my own tomatoes which are still producing exceptional fruit in my back yard, I went home, made salsa and drank myself stupid (well, stupider than I already was.), the vodka paid for by my race track winnings. What a nice country, and tax-free for so many, too!
Play nice, have fun, but don't keep score. That way, everybody gets a trophy.
P.S. Love the charts.
Most economists are ivory tower intellectual imbeciles! But imbibed with too much elitist hubris to recognize, much less admit, their idiocy!
Thanks Tyler, "...one of the lines is crooked."
Azizonomics posted today - "Incomprehensible Bullshit"
http://azizonomics.com/2012/10/20/incomprehensible-bullshit/
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