Can Endless Quantitative Easing Ever End?

Tyler Durden's picture

Authored by (and originally posted at) Detlev,

Bubble trouble: Is there an end to endless quantitative easing?

The publication, earlier this week, of the Federal Reserve’s Federal Open Market Committee minutes of January 29-30 seemed to have a similar effect on equity markets as a call from room service to a Las Vegas hotel suite, informing the partying high-rollers that the hotel might be running out of Cristal Champagne.  Around the world, stocks sold off, and so did gold.

Here is the sentence that caused such consternation:

“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases (the Fed’s open-ended, $85 billion-a-month debt monetization program called ‘quantitative easing’, DS). Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behaviour that could undermine financial stability.”

Here is how one may freely translate it: “Guys, let’s face it: All this money printing is not without costs and risks. Three problems present themselves:

1) The bigger our balance sheet gets (currently, $3trillion and counting), the more difficult it will be to ever load off some of these assets in the future. When we start liquidating, markets will panic. We might end up having absolutely no maneuvering space whatsoever.

2) All this money printing will one day feed into higher headline inflation that no statistical gimmickry will manage to hide. Then some folks may expect us to tighten policy, which we won’t be able to do because of 1).

3) We are persistently manipulating quite a few major asset markets here. Against this backdrop, market participants are not able to price risk properly. We are encouraging financial risk taking and the type of behaviour that has led to the financial crisis in the first place.”

All these points are, of course, valid and excellent reasons for stopping ‘quantitative easing’ right away. Readers of this site will not be surprised that I would advocate the immediate end to ‘quantitative easing’ and any other central bank measures to artificially ‘stimulate’ the economy. In fact, the whole idea that a bunch of bureaucrats in Washington scans lots of data plus some anecdotal ‘evidence’ every month (with the help of 200 or so economists) and then ‘sets’ interest rates, astutely manipulates bank refunding rates and cleverly guides various market prices so that the overall economy comes out creating more new jobs while the debasement of money unfolds at the officially sanctioned because allegedly harmless pace of 2 percent, must appear entirely preposterous to any student of capitalism. There should be no monetary policy in a free market just as there should be no policy of setting food prices, or wage rates, or of centrally adjusting the number of hours in a day.

But the question here is not what I would like to happen but what is most likely to happen. There is no doubt that we should see an end to ‘quantitative easing’ but will we see it anytime soon? Has the Fed finally – after creating $1.9 trillion in new ‘reserves’ since Lehman went bust – seen the light? Do they finally get some sense?

Maybe, but I still doubt it. Of course, we cannot know but my present guess is that they won’t stop quantitative easing any time soon; they may pause or slow things down for a while but a meaningful change in monetary policy looks unlikely to me.

The boxed-in central banker

I think that in financial markets and in the press the degrees of freedom that central bank officials enjoy are vastly overestimated. I consider central bankers to be captives of three overwhelming forces:

1) Their own belief system which still holds that they are the last line of defence between dark and inexplicable economic forces and the helpless public, and that therefore, whenever the data or the markets go down, it is their duty to ride to the rescue. Thus, when the withdrawal of the Cristal, whether actual or only prospective, dampens the party mood, the Fed will soon feel obliged, by its own inner logic and without any motivation from outside influences, to open another bottle. Just wait until the present debate about an end to QE leads to weaker markets and until, in the absence of the diversion from rallying equity markets, the almost consistently uninspiring ‘fundamental data’ becomes the focus of attention again, and we will witness another shift in Fed language, again back to ‘stimulus’. We had these little twists and turns a couple of times without any major change in trend. Anybody remember the talk of ‘exit strategies’ in the spring of 2011?

Of course, like most state officials, central bank bureaucrats are largely preoccupied with the problems of their own making. It is precisely the Fed’s frequent rescue operations that have created the dislocations (excessive leverage, asset bubbles) which cause instability and repeated crises in the first place. However, there are no signs anywhere that, intellectually, the Fed is willing and able to break out of this policy loop.

2) The size of the dislocations, which are – as I just explained – largely central-bank-made and now, after years and years of Greenspan puts and Bernanke bailouts and zero-interest rates, still sizable in my view, maybe as large as ever. The Wall Street Journal reported that total borrowing by financial institutions is down by about $3 trillion from its all-time high in 2008. That’s the widely heralded ‘deleveraging’. But does that mean that the current level of about $13.8 trillion is a new equilibrium? The Fed’s balance sheet expanded by almost $2 trillion over the same period, and super-easy monetary policy has provided a powerful disincentive for banks to shrink meaningfully. What is truly sustainable or not, will only be discernible once the Fed stops its manipulations altogether and lets the market price things freely. My guess is that we would still have to go through a period of deleveraging and probably of headline deflation. This would be a necessary correction for a still unbalanced economy addicted to cheap credit but nobody is willing to take this medicine.

3) Politics. Falling stocks, shrinking 401K-plans, and shaky banks don’t make for a happy electorate. Additionally, the state is increasingly dependent on low borrowing costs and central bank purchases of its debt. The chances of the US government repairing its own balance sheet look slim to non-existent so dependence on ultra-low funding rates and the Fed as lender of last resort (and every resort) will likely continue.

Look at Japan

When it comes to any of the major trends in global central banking of the past 25 years, Japan has consistently been leading the pack. It had 1 percent policy rates for years in the mid 1990s when such rates were still deemed exceedingly low in countries like the US, and when the global community still looked upon them in disbelief – and growing annoyance at the small pay-off in terms of real growth. Japan was the first to have zero policy rates and the first to conduct ‘quantitative easing’, albeit on an altogether smaller scale – thus far at least – than some of the Western central banks managed since 2008. Now the country seems to point the way towards the next phase in the evolution of modern central banking: the open and unapologetic politicization of the central bank and the demotion of the head central banker to PR man.

Any pretence of the ‘independence’ of central bankers has been unceremoniously dumped in Japan. Ministers take part in central bank meetings and give joint statements with central bank governors afterwards. New Prime Minister Shinzo Abe has made it very clear what he wants the central bank to do (print more money faster, devalue the Yen, create inflation) and to that end he is looking for a new central bank governor. Of course, only accredited ‘doves’ need apply. A few days ago, Mr. Abe also spelled out what skill-set he is really looking for: good marketing skills. Salesmanship.

“Since we all have our national interests, sometimes, there will be criticism about the monetary policy we are pursuing. The person needs to be able to counter such criticism using logic.”

The course of monetary policy is pretty much fixed. Now it is all about marketing.

In the meantime, the debasement of paper money continues.

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100pcDredge's picture

It will never end - ever.

Unless this dark matter-stuff has total mass-dominonance over everything else without mass, or whatsoever. Then it will probably be the last thing ever 'to be'.

Michelle's picture

Jumping off a high speed treadmill isn't without risks, only a mechanical breakdown will force it to stop.

tony bonn's picture

jim willie covered this subject 2-3 years ago with the emphatic answer that qe cannot possibly would be suicide for the fed's malignant tumor sometimes called a balance sheet....just because you swagger like you have a 12" dick doesn't mean you have one. same goes for talk of ending qe....

thewayitis's picture

Gold Bitches......Writing on the wall

Fix It Again Timmy's picture

Does a bear shit in the woods?...

Quinvarius's picture

Keynesianism is a political theory, not an economic one.  It has political goals and political methods.  That should let you know why it doesnt work to fix an economy, but we won't stop.

Paracelsus's picture

I am so sick of the term QE. Why don't the MSM say "hyper-inflate","value-destruction",or my personal favorite "currency-incendiarism".I remember the late Chris Hitchens coining the term "Islamo-Fascism",and I think it is important that we improve or modify the language as times change. Quantative Easing sounds like they are doing us a big favor.

They really do want to see if they can squeeze blood from a stone. How Biblical.......

dolph9's picture

Amerika was a nation built on innovation, hard work, and trust.

Now, the Federal Reserve is forcing the whole world into its roach motel.

For now, it buys time for the Amerikan sheeple to be supported.  The oil and fiat dollars on dudes!

But the deterioration continues.

Thank the stars that you have time to prepare for the inevitable.  People around the world will find that they don't have that luxury.  And it is they who will ultimately stop this, because they will be too poor and angry to support this system anymore.

Amerikans will sacrifice every last European if it means feeding their Mexicans and blacks at home.  Yes, it's true.

The revolution does not begin in Amerika, the system is designed to keep that from happening.

dark pools of soros's picture

you do know that 'feeding the mexicans and blacks' is just a ruse by the rich to sell their food with future tax dollars..  why play with market conditions when you can just grab money from the future??  Hell why don't we all just grab 100 years each of future tax dollars to ourselves.. screw those saps in the year 7013 or whatever

IridiumRebel's picture

Had a convo with the fellow plebes today and explained what QE is and how it's fucking them over.....watered down currency....milk, gas and eggs exploding in price.....they got it. People will get it. They're starting to awaken, but the whole MSM left/righ paradigm keeps fucking with them. Progress. Soon enough my aware friends....soon enough.

Bandit und Buster's picture

Have them watch the video...  2.5 hrs and fully clarifes the destruction and brings together a solution by and for the people!

Time to join forces!

Room 101's picture

The MSM paradigm is dying and people are getting it.  Some random examples:

- viewership of cable news (left) and talk radio (right) down.

- volume of sales for Ag.

- number of households starting to raise chickens.

- Ammo sales off the charts. Same with guns.

- few people talking about partisan politics. 

There is a sea change happening.


fijisailor's picture

Serious question:  Why can't the FED simply pull the money back from the banks like the PBOC is doing now?

Imminent Crucible's picture

Because without the capital supplied by the Fed at 0%, the TPTD banks would be capital-impaired. That means the primary dealers would fall below the tier capital minimums required by securities regulations for them to continue operations. Of course, it's difficult to run Treasury operations if your primary dealers have been taken into receivership by the feds.

No primary dealers = No POMOs = Failed Treasury auctions = bond market panic = end of the world as we know it.

dark pools of soros's picture

so how cheap are those love dolls now?

YHC-FTSE's picture

Some great comments here. The short answer to the question posed by the article is a resounding no until systemic collapse. It's called positive reinforcement and the volume and rate of money supply can only increase to offset the interest on the previous printing spree. Just a few years ago, billions of dollars were huge, unimaginable wealth, and now it's bandied about as though billions grow on trees (Which ironically is nearer the truth). We're in the realm of trillions now to describe the economy, and fairly soon they'll be telling us to suck it up because a quadrillion just isn't what it used to be. 

Diogenes's picture

Quantitative easing = money printing = drugs to stimulate  the economy


Everybody knows drugs are fun... at first. Eventually you get to where you have to have them to function. Then you get to where if you stop taking them you get sick... but if you keep taking them you die.

This is where the world economy is today.

The job of the central banks is to judge the dosage so as  keep the patient alive and functioning as long as possible. Although functioning might be too strong a word for it.

Bandit und Buster's picture

Yeah, it'll end soon enough when ya all in camp FEMA, OR we take the planet back from the Rothchilds et al!

Must see movie...  AMAZINGLY brings it all together, sort of.

Downtoolong's picture

I was suspicious all along when I noticed the Feds equation for  the right amount Quantitative Easing included the Infinity Symbol.

boeing747's picture

QEn will end after hyper-inflation arrives, then they will pull the plug. If you can not see thru latest smokes and noise, you don't really understand FED.

dunce's picture

Many years ago there was a popular book titled The Magnificent Obsession. It always struck me as odd that a obsession could be magnificent. I never read the piece of trash. Later i learned that there are obsessive compulsive people that were psychologically flawed. Now it seems we have a government that obsessively prints money absent any logical reason.

dadichris's picture

"We are encouraging financial risk taking and the type of behaviour that has led to the financial crisis in the first place." - you say that like its a bad thing.  How can it be bad when war or the destruction of the USD as reserve currency is your goal?

derryb's picture

tick tock, tick tock