If QE Is Ending Because It Was So Successful, Then Here Are A Few Simple Questions

Tyler Durden's picture

Several very simple questions from Guy Haselmann of Scotiabank:

If QE is ending because it was so successful, then why is aggressive forward guidance necessary? If QE worked so well, then why will Yellen likely need to mention ‘the elevated number of part time workers’, ‘under-utilization of labor resources’ or ‘room for improvement in the labor market’? In regard to its inflation mandate, there is no evidence that QE has had any impact other than causing asset price inflation.

Central bankers and academics have propagated QE as an elixir for all economic ailments. Eurozone economic stagnation has now unleashed vociferous calls from proselytized market pundits that it is the ECB’s turn to administer QE medicine. Shouldn’t the lack of success at achieving the desired results in the US and Japan have curtailed such hasty Pavlovian responses?

QE is a powerful, but flawed tool; especially for Europe. Adaptation by the ECB will not boost aggregate demand across the Eurozone, or fix Europe’s structural problems. Those petitioning for QE consistently fail to address the costs of the policy. Those bullying Draghi also fail to recognize the inherent differences between the economic drivers of the US and Europe.

The benefits of QE are, for the most part, visible immediately. The costs and unintended consequences show up later. In the US, they may already be flashing red. The fact that there is (arguably) a poor tradeoff between benefits today, and unstable longer run outcomes (resulting in lower potential growth), is conveniently ignored.

Advocates fail to adequately explain how ballooning the central bank’s balance sheet through asset purchases leads to an increase in investment in new productive capacity. This modern day Phlogiston Theory fails to prove how the first order effect of widening the wealth divide through asset price inflation, trickles down into the second order effect of satisfactory job creation.

Certainly, QE-induced perpetually rising asset prices, and sinking volatility, likely boosted consumer confidence through the interpretation of lofty prices as ‘all must be well’. However, those aspects dangerously conspire to produce a false perception about the true state of economic fundamentals. The loudest voices regularly remain silent about how capital ends up being pushed into mispriced assets.

Debunking ECB QE

ECB QE would cause even-greater market distortions and misallocation of resources, undermining the long-run proper functions of the Eurozone economy. In addition, questions remain about its legality. If ECB purchases were made in asset-backed securities (rather than just EU sovereign debt), questions about fairness would likely arise.

European sovereign rates have already fallen many hundreds of basis points to multi-century low levels. 10 year rates have fallen to 0.99%, 1.38%, 2.38%, and 2.58% in Germany, France, Spain and Italy, respectively. In a sense, markets have already done the job for the ECB. The yield plunges are partially due to the binary aspects of the European Union. In other words, the common union will either work (converging yields) or break apart (diverging yield spreads). Great optimism (complacency?) is priced in.

Trying to navigate a QE drop in yields, of say another 25 basis points, would do little, if anything, to lift loan demand. It could even decrease overall lending. This is because those looking for a loan often received one when rates fell to historic lows; or alternatively, they were not able to get one due to the lousy quality of their credit. Since lenders typically receive marginally less for a loan when sovereign rates fall, the decline in the marginal worth of the loan means that the lending institutions should have less incentive to lend (i.e., loan supply falls).

At least the US has the benefit of a well-established corporate bond market. The EU has to rely more on bank loans to stimulate investment spending. In addition, it is difficult to argue that the benefits of QE would manifest via a depreciated Euro when global trade is so weak.

Often times, central bank policy attempts to ‘buy time’ to allow economic activity to self-correct or for politicians to agree on better remedies. Draghi had remarkable success after uttering “whatever it takes”. However, Draghi is fully aware of the quandary that doing too much (QE) for too long enables fiscal stalemate.

Brussels may have recognized that attempts to bring public sector debt under control have been counter-productive and resulted in higher debt-to-GDP ratios. Europe does not need QE. It needs serious reforms in state expenditures and taxation (in all non-productive subsidies) as well as flexibility in labor markets. Above all, the EU needs growth. Its current structure is faulty and QE from the ECB will not change that.

Stay tuned tomorrow following Yellen’s 10 a.m. speech as the exceptionally shrewd Super-Mario Draghi gives the keynote lunch address at noon.

“One time the police stopped me for speeding, and they said, ‘don’t you know the speed limit is 55 miles an hour?’ I said, ‘Yeah, I know, but I wasn’t gonna be out that long’”. – Steven Wright

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fonzannoon's picture

Look at this guy steal my Steven Wright stuff...

QE is ending because they now have control of the stock market and the bond market. It ain't that hard Guy.

nope-1004's picture

ScotiaBank should know the answer, the idiots.  QE was an explicit bank infusion because they are all INSOLVENT.

Insolvency + Illiquidity = Bankruptcy


Bankruptcy looms if Mr. Yellen is truthfully removing QE.  QE will NEVER end.


i_call_you_my_base's picture

Yep. It was always to save bank balance sheets through asset inflation.

Edit: and fraud.

EggSlayer's picture

Well fucking obviously it was to save the banks' balance sheet. Thats why they're called TBTF. The assets weren't inflated they were brought closer to their "par" value if you will. The problem with the crisis in '08 had much to do with a lack of regulation and greed that ultimately led to banks' sources of funding being cut off (i.e. repos with huge haircuts). Where do the commenters on ZH get their information/education?

philipat's picture

Yup. After Belgium come Luxembourg, Lichstenstein, Andorra, Virgin Islands etc. until the Fed is buying all newly isssued Treasuries AND all those being sold by China, Russia et al.

AgeOfJefferson's picture

Come on guys. We all know QE ***NEVER*** ended at all (not one penny). Apart from Belgium we just don't know where the purchases are being hidden. Any (serious) ideas or theories?

EggSlayer's picture

Whatever you're smoking, I'd like to have some.

How are the banks insolvent?

Yes the banks held illiquid assets that resulted in the crisis in '08, but the problem of illiquidity has been addressed. That was the point of buying MBS, wasn't it? Now that the market for MBS has recovered and regulation has addressed the problems that caused its illiquidity in the first place, I don't see your point.

philipat's picture

You can't assess the financial position of Banks by reading the financial statements. Much of the garbage is hidden "Off Balance Sheet" through SPV's and the like. And, of course, the infamous "Repo's" at reporting periods to disguise the lacck of liquidity. Oh, and don't forget Trillions of derivatives leveraged at 100 times. It IS true that much of the garbage has already been offloaded onto the Fed's Balance sheet but there remains ample garbage. Until we return to proper accounting standards, including GAAP and Mark-to-market, you will never know, until it's too late. So go ahead and invest or deposit at your peril because next time there will be shareholder wipeouts and depositor bail-ins.

spastic_colon's picture

exactly....as long as the appointer in chief is still in charge her speech will be full of nothing that rocks any boats.

BuddyEffed's picture

"QE is ending because they now have control of the stock market and the bond market. It ain't that hard Guy."

Not so much control that Belgium doesn't have to provide an alternative backdoor funding source to keep the levitation.

Muppet's picture

Well worth $4 trillion.  

Ima anal sphincter's picture

I'm not even going to read this. QE will NEVER end. Interest rates will NEVER rise.

Either of these will kill the dollar. It's dead already, but only a few have figured it out.

Escrava Isaura's picture

Ima anal sphincter,

I think you misspoke.

How can stopping QE will kill the dollar?

Greenskeeper_Carl's picture

He measn(I think) that no one else, except apparently "Belgium" wants to buy US debt at these unrealistic rates. All QE is is a bank and govt bailout. Stop it, both of these institutions are bankrupt, death of the dollar. Interest rates rise, so will govt deficits, since they won't be able to pay all the entitlements and pay interest on the debt. Eventually, this will result in default, which means death of the dollar.

Escrava Isaura's picture


So, you highlighted my point, thanks: QE is not the death of the dollar.

QE is the death of the US economy by NOT having it.

And everything that follows, a byproduct of it.

Honey Badger's picture

The fed doesn't give a shit about us. Look at me steal George Carlin's stuff.

Not Too Important's picture

If the Fed can't be audited, how do we know if QE does end? How do we know if there is even a 'taper'?

We don't even know if ther was an obligation to repay - from anyone.

We here all know the Fed has pumped trillions to the wealthy, to buy up everything of value when they crash this fucker on purpose. Just like last time - only massively bigger now.

When you think about it, what has .gov NOT lied about? Please enlighten me, I can't think of a single thing.

Bastiat's picture

Right on.  Where's the Belgian UST buyer getting the money??

ebworthen's picture

Oompa-Loompa's chipping in their pensions.

bid the soldiers shoot's picture

We don't even know if ther was an obligation to repay - 


Oh, there's an obligation to repay (repurchase) all right.

At the discretion of the seller: in 200 years or when National Debt is paid off, whichever comes last. 

MayIMommaDogFace2theBananaPatch's picture

When you think about it, what has .gov NOT lied about? Please enlighten me, I can't think of a single thing.

It needed to be said.  Thank you for that.

jez's picture

Bacon. I can't recall any bacon-related lying.


And gangrene. I don't remember the last time I heard anyone in gummint even mention gangrene.


Sorry, I got nothin' apart from that.

dead hobo's picture

As I have said elsewhere, The Fed will emulate the best parts of Japanese Monetary Policy, as they (she) understand it, while adding elements of Social Justice into future monetary policy. This will continue long past the most liberal theories of economics yet imagined.

RichardParker's picture

Dead hobo:

"Social Justice" is a euphenism for instituitionalized serfdom.

ramacers's picture

yes, QE is queer eroticism 'cause it's ripped us all a new one for a long, long time to come.

Max Cynical's picture

If QE has been so successful, why not double down?

ebworthen's picture

Exactly, and why not send every taxpaying citizen $3 Million tax free?

It would be less than what they give to Wall Street every month.

cn13's picture

Blaa blaa blaa.  I have been reading the same shinola since QE began in 2009. 

We have long passed the proverbian Rubicon.  The money printing will never stop.   Those in power hope they won't be when it all blows up.  That is game.

The timing of the implosion?  Literally no one knows but we are now in the zone of perpetual QE.

And the bubble will likely last far longer than we want to believe.


SilverIsMoney's picture

Silver Open Interest at All-Time Highs per The Turd. Why is that?

disabledvet's picture

The "e" stands for "extraordinary" not "easing."  The fact of the matter is that when it comes to markets...TIMING MATTERS. This was the theory espoused by Bernanke in 2008 (student of Japan circa Nikkei collapse) and so "they went for it."  Never been tried...it worked...move along.

Policy makers got addicted....but the folks who created QE also understood "this was no panacea" (fix it for everything that ailed Bailout Nation.) So now you just get "the Q.". Slap the "Mission Accomplished" sign on this bitch and move along.

An actual economic recovery is the responsibility of the "free debt Army" folks. You want a war effort?  No problem.  You gotta pay for that.  You can't blame the financial folks for the problems of cost over runs and fighter planes that don't fly.  Can't even back your fiat with silver? Too phuckin bad.

We're at war with the Taliban...not Nazi Germany and Imperial Japan.

And yes, the USA has friends going back decades in the Middle East.  You want a "Clash of Civilizations"?  You gotta pay for that.

This ain't no computer game either.  "Statistical method cannot substitute for actual Data" and Afghanistan ain't just around the corner.  50 billion a year sounds about.  Sorry that the ACA was total bullshit...not Wall Street's problem.

fuu's picture

Is this bullish or bearish for TOMO?


q99x2's picture

QE is ending because the Queens are going to pick up that trash, through Brussels, until the Jihadist's set the nukes off. Then they are going to kill us all.

JR's picture

Jim Quinn: This is Your Economic Recovery With and Without Drugs | Market Oracle

April 19, 2014 -- Wages have been stagnant since the START of the supposed recovery in 2010. Real median household income, even using the highly understated CPI, is on a glide path to oblivion. You just need to observe with your own two eyes the number of Space Available signs in front of office buildings, strip centers and malls across America to realize we have further to fall. Low paying, part-time burger flipping jobs aren’t going to revive this debt saturated economic system. But at least the .1% are enjoying their Federal Reserve created high. Fiat is a powerful drug when administered in large doses to addicts on Wall Street.

The S&P 500 has risen from 666 in March of 2009 to 1,972 today. That is a 196% increase in a little over five years. During this same time, real household income has fallen by 7%. There have been a few million jobs added, while 11 million people have left the labor market. According to Robert Shiller’s CAPE ratio, the stock market valuation has only been higher, three times in history – 1929, 1999, and 2007. He seems flabbergasted by why valuations are so high. Sometimes really smart people can act really dumb.

The Federal Reserve balance sheet was $900 billion before the 2008 financial crisis. Today it stands at $4.4 trillion. The Fed has increased their balance sheet by 220% since the March 2009 market lows. Do you think there is any correlation between the Fed puppets printing $2.4 trillion and handing it to their Wall Street puppeteers, who used their high frequency trading supercomputers and ability to rig the markets so they never lose, and the third stock bubble in the last 13 years? It’s so self evident that only an Ivy League economist or CNBC anchor wouldn’t be able to see it. …


Escrava Isaura's picture


You wrote it in bold: "Ivy League economist or CNBC anchor wouldn’t be able to see it. …"

Sorry, JR, you're wrong!

GreatUncle's picture

Think it fails.

1.) Pushes asset value ever high and an easy trick to try and justify if an asset is wroth the value where the bad debt is the overvaluation.

2.)  Where it fails remove the QE or stop using it and they are unable to support the asset price once more.

Where it does succed is it totally impoverishes the poorest sector of the population where in a society with all the inflation it requires 2x the amount to support a single person. So locked in continual QE hidden or not (hidden is in the leverage on loans) what changed was rate of creation dramatically increased.