End Of QE?

Tyler Durden's picture

Submitted by Detlev Schlichter of DetlevSchlichter.com,

A new meme is spreading in financial markets: The Fed is about to turn off the monetary spigot. US Printmaster General Ben Bernanke announced that he might start reducing the monthly debt monetization program, called ‘quantitative easing’ (QE), as early as the autumn of 2013, and maybe stop it entirely by the middle of next year. He reassured markets that the Fed would keep the key policy rate (the Fed Funds rate) at near zero all the way into 2015. Still, the end of QE is seen as the beginning of the end of super-easy policy and potentially the first towards normalization, as if anybody still had any idea of what ‘normal’ was.

Fearing that the flow of nourishing mother milk from the Fed could dry up, a resolutely unweaned Wall Street threw a hissy fit and the dummy out of the pram.

So far, so good. There is only one problem: it won’t happen.

Now I am the first to declare that the Fed SHOULD abolish QE, and not only in the autumn of this year or the summer of next, but right now. Pronto. Why? –Because a policy of QE and zero interest rates is complete madness. It distorts markets, sabotages the liquidation of imbalances, prohibits the correct pricing of risk, and encourages renewed debt accumulation. It numbs the market’s healing powers – by enabling more ‘pretend and extend’ in the financial industry – and it adds new imbalances to the old ones that it also helps to maintain.

This policy may have prevented – for now – debt deflation but maybe debt deflation is what is needed.

QE is nothing but heavy-handed market intervention. It is destructive. It doesn’t solve the underlying problems. It creates new ones.

Larry Summer’s getaway car

However, none of these objections even register at the Fed. The Fed has a completely different perspective: This policy was a roaring success and as it has worked so well it can now be faded out. Soon there will be no need for it. Larry Summer’s dreadful phrase captures that thinking probably best: The economy will soon have achieved ‘escape velocity’.

Most analogies are somewhat poor but this one is particularly inept. Ironically, though, the reference to mechanics captures beautifully the logic of Keynesians and other interventionists: the economy is like a physical object moving through space and is occasionally in need of a little push to get moving again at an appropriate speed. Policy provides the push.

Bernanke doesn’t use these terms but his thinking is similar. He explained QE to the American public in 2010 by announcing that his job was to occasionally manipulate interest rates and asset prices to encourage lending, borrowing, spending, shopping, and other healthy economic activities, and that once his machinations had stimulated enough of those activities, the economy would again enter a virtuous cycle (his words) of self-sustained growth. Escape velocity has been restored.

I think this is nonsense – however appealing it may sound to many laypersons. The economy is not an object that needs a push, or a machine that needs to be jump-started, or a lazy mule that needs a gentle slap on its behind to get going again (of course, you should never hurt an animal!). The economy is a complex process of coordination, an elaborate tool that allows an extensive and diverse group of actors with different and frequently conflicting goals and interests to co-operate with one another peacefully toward the best possible realization of their own material aims. A crisis is a failure of that coordination process. It is a cluster of errors. The only explanation for the occurrence of such a cluster of errors is a systematic distortion of the market’s coordinating properties, such as occurs when monetary expansion distorts interest rates and other relative prices, and leads to imbalances that unhinge the economy.

The economy went into recession because of massive financial deformations. Easy money had led to excessive indebtedness, a housing bubble and dangerous levels of leverage. The problems were such distortions, not lack of momentum. The real question is not whether the GDP statistics exhibit the right velocity but if the underlying dislocations – which, to the chagrin of the econometricians, cannot be easily ascertained from the macro-data – have now dissolved.

No Escape

The Fed believes it has healed an economy that was sick from easy money with more easy money. The patient is feeling better and can soon be released from intensive care. In my view, the patient is still sick and now suffers from a dangerous addiction to boot. The ‘feeling-better’ bit maybe, just maybe, a lingering drug high from Dr. Bernanke’s generous medication. Withdrawal symptoms may surface soon. If they do, Dr. Bernanke will simply open the medicine cupboard again. Don’t forget, only a few weeks ago the man appeared on TV and tried to talk up the Russell 3000 stock index.

I do not doubt that, if measured by overall GDP, the US economy is presently doing better. I would be foolish to take on the Fed on this point. The Fed has a staff of 200-plus economists, most of them, I assume, from America’s finest universities, which doesn’t mean they are good economists but at any rate probably good statisticians. If they say there are signs of life in the economy, that’s good enough for me.

Where I disagree is on the narrative. The deformations are largely still there. How can they not, given the enormous policy effort to suppress the very market forces that would – in a free market – have exposed and liquidated these deformations? They are still visible, among other indicators, in high degrees of indebtedness. And they matter. That is why I am mistrustful of the Fed’s projections. Their theories compel them to believe in virtuous cycles and ‘escape velocity’ and to disregard imbalances and distortions. Any sustained removal of super-easy money will allow these deformations to resurface and immediately cloud the near term cyclical outlook. According to my worldview, this should be allowed to happen as it is part of the essential healing process. But it runs counter to the Fed’s worldview and the Fed’s view of its own mission.

The one institution that lacks ‘escape velocity’ is the Fed. It will remain hostage to the financial monsters it created and the dangerous misconception of its own grandeur.

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lolmao500's picture

Bernanke and the next FED head are gonna end up with their heads on spikes...


The FED game is this : give free credit and free money so the rich can get richer... then bring in super deflation by ending QE so the rich are even richer while the poor get screwed even more...(they lose their job/salary get reduced... while the banks still collect interest on their debt)

Meat Hammer's picture

How does more purchasing power hurt the poor?

lolmao500's picture

More purchasing power? A lot of people are gonna lose their job or their salaries will get crushed due to deflation... and even if it doesn't happen, the purchasing power of a poor person increasing by a few percentages doesn't mean shit.

Meat Hammer's picture

Gotcha.  By poor I thought you meant EBT poor, who would still get their bennies but could buy more with them.  You meant the new poor, aka the middle class.

Troll King's picture

Deflation - even though gold has quadrupled, oil sits near $100/b, stocks have roared back from the lows to all time highs, and bond yields are rising.

Yeah, deflation.

Meat Hammer's picture

And people are running to cash which sucks it out of the system, creating less supply and more demand.  I may not be the sharpest knife in the drawer but even I can figure that out.

Troll King's picture

Running to cash - as in trading one piece of paper (in the form of a certificate) for another in which the only difference is that instead of the faith and credit of a corporation it is the United States Treasury that backs it.  Also, there is no return - just constant devaluation.

I'll take bonds or stocks over cash, thank you.

NidStyles's picture

Doesn't make it deflation, the total amount of currency is staying the same, it's just not being left at the hands of bankers. It's called people pulling out of the theft mechanism.

Meremortal's picture

Inflation, with a 10 year bond yielding 2.5%.

Inflation, with declining wages and low (and dropping) participation in the labor market.

Inflation with virtually NO velocity of money.

Inflation, with the antique, collectible and non-museum quality art values down 25-40%

Inflation, with the spread closing between regular 10-year Treasurys and TIPS.

Yeah, inflation.



Dingleberry's picture

Tuition, medical insuarance, car insurance, food, gas allwent up last year, MY FUCKING RENT UP BY 10%,.....yeah, deflation.


NidStyles's picture

Inflation doesn't require velocity of currency. When will people learn that MMT is wrong?

Meat Hammer's picture

Paging ekm....is this deflationary event the destructive drop in crude (circa W. Bush admin) you've been talking about?

FreeMktFisherMN's picture

I trade crude futures and while the move from 99.20 to 93 was amazing, keep in mind this was during OpEx as well as the chaotic markets in general mid to late last week. Thus I would expect crude to at least go back toward 97 before maybe resuming this new trend.



Dre4dwolf's picture

The poor have no savings... a rise in purchasing power without a job doesn't really benefit anyone.

Deflation is bad for business.... inventory drops in price.... 


its really just a math problem.... the businesses need time to adjust to decreasing prices of their inventory... its an accounting problem that will leave businesses in the red and force them to .... make cut-backs.... cutbacks lead to lower consumption, gdp shrinks govt and banks panic, stocks fall... its a mess.


The problem is the accounting system really.... its not designed for a real monetary system that doesn't involve printing money out of thin air... the accounting system is designed around inflation.... and if there is no inflation the accounting system bankrupts all the businesses.


Company X purchases 10 widgets for 100$

Company X's widgets won't sell for 10$ each because of deflation.

Company X's lowers price because they are stuck witn inventory that wont sell.

Company X sells inventory for 60$

Company X takes a loss of 40$ on inventory

Company X lets go of staff to stay in business.

If company X finds a supplier willing to sell widgets for 5$ ea. instead of 10$ea. company X may turn around and sell widgets for 6$ and make a profit.

If not, company x closses.

The accounting does not allow for a business to stay alive in a deflationary invironment.

Something has to fall... labor costs or something... anything to allow the companies to "profit".

Big companies will fail first (walmart/best buy ) etc... as they can not absorb giant shocks like this for prolonged periods.

Small companies will evade taxes to stay afloat for a while...

Meat Hammer's picture

Thank you for the illustration

css1971's picture

The concept of accounting makes the assumption that the money is a reliable and stable measure of account. Which it isn't. Ever. The value of money is different in every single transaction.

Deflation is self limiting though. As bank loans get written off the level of indebtedness declines. The credit which was created along with the debt is remains in circulation and can pay other debts off.

Dingleberry's picture

I will make it SIMPLE:

INFALTION=MORE wealth for those with assets. Who owns the assets? Like 90 fucking percent of them?

FREE CLUE: NOT YOU, or anyone else who reads this shit.

DEFLATION=EVERYONE takes it in the ass as assets drop. EVERYONE except for a ballsy short seller (Livermore) or a Rothschild.

Understand now?

This is why the Fed props up assets. Not for you, for their REAL constituents. 


Harry Dong's picture

I hope you're right. I really do. But I think the chips are all stacked in favor of the big companies. Just when you think it's stage right...they get the bailout and you (the small company) get the "turn left and cough".

Jam Akin's picture

You are correct HD, large firms do have more staying power for a number of reasons.  

And let's not forget the dynamic of producers having to raise prices to cover overhead on smaller volumes.  Costs of running businesses in a variety of market segments can only be cut back so far in the face of declining demand/volume.  Add in costs of long haul logistics with $90+/bbl oil and higher prices are a lock for damn near any material goods.  As one form of austerity or another takes effect for the "sufferers", this path to raise prices will be more necessary for more firms.

Snoopy the Economist's picture

"Deflation is bad for business.... inventory drops in price.... "

Q: What companies carry large inventories? A: The one that already went bk. Companies do not carry excessive inventories in this economy - 5 years of pain have taught the ones that have survived thus far.

Moe Howard's picture

Just in time inventories has been a business meme for at least a decade.

Midasking's picture

Rising Rates will blow this fake economy sky high and take the currencies with it... welcome to the inflationary depression.. http://tinyurl.com/mem7o7x

Banksters's picture

Taper most likely a deflationary collapse.   This scenario leads to revolt in short order.

Continue QE- Inflation and ultimately civil unrest.

Anyone who thinks the fed is going to allow treasuries to blow up is thick.  My bet, MOAR QE under new and improved jargon.




Dre4dwolf's picture

New Federal Reserve Chairman will continue QE when pressured.

The Fed will cave, because ultimately they like their pretty car and giant house and prostitutes visiting them in their limo, they will not give it up.


If they don't cave, they risk lossing it all too.... and 100years of social engineering/control gets thrown out the window.

reload's picture

Will they taper ? Well they might. Problem with rationalising what thhe effect on the economy is :they do not care.

I see bank reserve to loan ratios off the clock, the real possibility of a lasting sprawling ME conflict, and I wonder:are they ready? Those reserves will buy a lot of assets all over the globe in a sudden deflationary collapse. 

Dre4dwolf's picture

What are they going to do with assets that are depreciating in value in a deflationary environment? 0o thats suicide to buy assets in a deflationary environment (in the short-term) in the long term if they stay liquid enough they might be able to survive and make-out like bandits.


Most people will be forced to sell assets to eat in such a scenario.


Its time to become Farmers..... they will be in the best position to prosper.

Kinskian's picture

 People seem to have a romantic notion of what life is like on a small farm, but our grandparents and great grandparents left the farms for a good reason: life was difficult. In the future, we might end up back on the farms, but I doubt that many will prosper. As Warren Zevon put it, "there ain't much to country living, but sweat, piss, jizz and blood".


Bringin It's picture


Like most things in life, you make out of it what you want.  If you go in thnking it's gonna be pretty awful, then it probably will be.

In some parts of the world, people still know what they're doing.

Totentänzerlied's picture

They can cry me a fucking river. Life IS hard. The 100 year debt orgy merely allowed the lucky ones to forget that fact, and they happily did. That time is rapidly coming to and end. Anyone who thought was life was supposed to be easy has been hitting the hopium pipe. This culture of extreme lazy decadence has sent every empire in history on an express ride to hell, and this time will be no different.

Moe Howard's picture

Warren Zevon was a Chicago born Jew entertainer who I doubt spent more than 15 minutes on a real farm. Be that as it may, I agree with your first part.

Truck farming is time consuming, demands much physical labor, and is at the mercy of nature even today. It is not romantic. 

Not many fat farmers back in the day.

Totentänzerlied's picture

During the worst Weimar years, farmers were (literally) butchered.

TWSceptic's picture

"the rich"


you sound a bit like an Obamabot who hates people just because they earn more than they do... let's not use that word as a pejorative shall we? It's not the rich in general who are the problem here, it's the parasites on Wall street, the bankster buddies and the politically connected thieves.

NidStyles's picture

Haven't seen you in a while...

xtop23's picture

Not sure why the kid in the caption is screaming. Anyone with any sense knows moar is coming :)

Take your Ritalin, kid. I give it 1 month of actual "taper" and Mr. FED will be printing so fast you'll be going number 1 on Franklin's face in no time.

Carpe diem fatuus faeneratorem!!

knukles's picture

Either way we're fucked royally.

tarsubil's picture

Yeap, it is like when an alcoholic gets so bad he'll have a seizure if he quits and his liver will rupture if he doesn't quit. The damage has been done at this point.

Dre4dwolf's picture

The market is going to be bombarded with shorts/naked shorts.

Stocks are going to plumet.

And as the govt strives to generate revenue treasury rate swill spike.


Its the end of the world as we know it.



Its about time.

This world was getting boring anyway.



Go Tribe's picture

Don't forget guns and golf clubs. These finely crafted tools will help blunt the collapse.

nmewn's picture

Gimme my debt binky!!!

Meat Hammer's picture

I have to admit, when i saw gold get blasted on Thurday I thought maybe we've been wrong this whole time.  Then I remembered that we've discussed the scenario of deflation as everyone runs to cash before Benny stomps on CTRL-P even harder.

Dre4dwolf's picture

At this point its fairly certain that we will have massive deflation before hyper inflation. (as they carpet drop bricks of cash everywhere) to save their control structure.


If people rush to cash / gold they lose all control over the slaves.... control that took them 80~ 100 years to construct.

They need the people dependant on credit or they lose power.


They will have to flood the streets with cash to get people OUT OF CASH (make it look worthless) to make them spend it/get rid of it to boost the economy.


Hoarding cash is the worst thing that can happen in their eyes.

Meat Hammer's picture

How will they sell the need to print money and cause inflation?  Let me guess...the much needed liquidity?  

Not challenging the idea, I'm just trying to learn.  

Dre4dwolf's picture

I think the govt will have funding issues.

Tax Revenue will fall very sharpely.

GDP will shrink

Unemployement will rise

Pressure will be on the Fed to "do something, do anything" and well....

They only have two tools

Increase money supply

Decrease money supply

But the tools they need are

Debt liquidation/discharge

Switching from credit system to debt free money simply putting money into circulation not as a loan, but simply as printing a currency to fullfill the need of a currency.

For every 1$ people will recieve 10 new dollars and this money will have no debt associated with it.

simply wipe the debt, and start over with more zeros...

People will use new money to discharge old loans and the economy starts roaring again since it has severed the chains of debt that have been holding it down causing it to drown.

The problem is, too much debt.

you can't solve that problem with more debt unless in the end the bank lending is willing to discharge the obligation.



What goes up, must go down, the Debt Clock is no exception.


The ability of the Fed and Government and Wallstreet to decrease future stability and certainty in return for short term profit is running dry.... the more they print the less effective it gets.

There comes a point where the required dosage is lethal.

Non Passaran's picture

> For every 1$ people will recieve 10 new dollars and this money will have no debt associated with it.

As long as POG stays the same and I am at the front of the line for handouts, I like the idea

Herd Redirection Committee's picture

Ka-Poom Theory

Ka= Deflation

Poom = inflation w/ a vengeance

We all know banks are sitting on huge reserves, and most agree that when those reserves are mobilized there will be a substantial impact on the real economy viz a viz inflation.

Now what makes the banks lend, when they have already sat on reserves for years?

The answer, when they are forced to pay interest to their depositors (!) and bondholders.  That time is fast approaching

SeattleBruce's picture

"simply wipe the debt, and start over with more zeros..."

I'm all for non debt based money, but the supply has to be statutorily controlled by a responsible Congress (now there's an oxymoron!), or else we'll continue to be plagued by too much inflation or deflation. For instance, the money supply needs to keep up with population growth (or you'll have deflationary issues), but can't be so much (to accommodate government excess say), that we have inflationary pressures.

So there must be strict controls on Congress' ability to print non debt based money (after all Congress' ability to coin money is part is the USC) - like inflation targets, and severe jail sentences for corruption. You can't have Corzines running around for such a monetary system to succeed!

LetThemEatRand's picture

Public (the few who pay attention) to Fed:  "we'd like to negotiate an end to QE."

The Bernanke:  "Negotiation is irrelevant.  Resistance is futile."

Gary J's picture

Nice read....needs a conclusion...stagflation?

NoClueSneaker's picture

It's time for PBoC to do some mega-QE : trashing the 1.17 Tr. T-Bond junk on the market. Shalom Ben Printer will be deli(gh)ted ....