QE Breeds Instability

Tyler Durden's picture

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.

What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.

Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.

That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.

Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.

Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.

But the lack of scrutiny should still puzzle. How central bankers managed to pull off the move from admitting they had no idea what they were doing, to being seen as virtually unquestioned maestros, rulers of, if not the world, then surely the economy. Is that all that hard, though, if and when you can push trillions of dollars into an economy?

Isn’t that something your aunt Edna could do just as well? The main difference between your aunt and Janet Yellen may well be that Yellen knows who to hand all that money to: Wall Street. Aunt Edna might have some reservations about that. Other than that, how could we possibly tell them apart, other than from the language they use?

The entire thing is a charade based on perception and propaganda. Politicians, bankers, media, the lot of them have a vested interest in making you think things are improving, and will continue to do so. And they are the only ones who actually get through to you, other than a bunch of websites such as The Automatic Earth.

But for every single person who reads our point of view, there are at least 1000 who read or view or hear Maro Draghi or Janet Yellen’s. That in itself doesn’t make any of the two more true, but it does lend one more credibility.

Draghi this week warned of increasing volatility in the markets. He didn’t mention that he himself created this volatility with his latest QE scheme. Nor did anyone else.

And sure enough, bond markets all over the world started a sequence of violent moves. Many blame this on illiquidity. We would say, instead, that it’s a natural consequence of the infusion of fake zombie liquidity and ZIRP rates.

The longer you fake it, the more the perception will grow that you can’t keep up the illusion, that you’re going to be found out. Ultra low rates may be useful for a short period of time, but if they last for many years (fake stability) they will themselves create the instability Minsky talked about.

And since we’re very much still in uncharted territory even if no-one talks about it, that instability will take on forms that are uncharted too. And leave Draghi and Yellen caught like deer in the headlights with their pants down their ankles.

The best definition perhaps came from Jim Bianco, president of Bianco Research in Chicago, who told Bloomberg: “You want to shove rates down to zero, people are going to make big bets because they don’t think it can last; Every move becomes a massive short squeeze or an epic collapse – which is what we seem to be in the middle of right now.”

With long term ultra low rates, investors sense less volatility, which means they want to increase their holdings. As Tyler Durden put it: ‘investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This is how QE increases the likelihood of VaR shocks.’

QE+ZIRP have many perverse consequences. That is inevitable, because they are all fake from beginning to end. They create a huge increase in inequality, which hampers a recovery instead of aiding it. They are deflationary.

They distort asset values, blowing up prices for stocks and bonds and houses, while crushing the disposable incomes in the real economy that are the no. 1 dead certain indispensable element of a recovery.

You would think that the central bankers look at global bond markets today, see the swings and think ‘I better tone this down before it explodes in my face’. But don’t count on it.

They see themselves as masters of the universe, and besides, their paymasters are still making off like bandits. They will first have to be hit by the full brunt of Minsky’s insight, and then it’ll be too late.

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Kirk2NCC1701's picture

Ah, but QE breeds Content.

Among the 0.1%

ZH Snob's picture

hey, if you wanna get down to it, fiat currency is the biggest illusion of all.  there's no saving it.  markets, manipulated or not are all doomed as is the baseless paper they print.  it's just a matter of time.

This is it's picture

Tell us something we don't know.

MonetaryApostate's picture

It was all part of the plan, to collapse the US banking system / Dollar to usher in digital currency...

There is a reason why China is rising, the elite have been feeding that dragon for a long time now...

Imagine a world ran by China....  (Scary?)

froze25's picture

Yes, in the Chinese system of Government the people are openly property of the State, at least in the US the people are only secretly the property of the State and we have guns that force them to keep it secret.

LawsofPhysics's picture

Fucking duh...

such "let the majority eat cake" monetary experiments have been tried before...

e_goldstein's picture

If you think QE creates instability, then look and see what happens when they raise rates.

disabledvet's picture

600 billion for defense against the Taliban sounds just about right to me actually.

How's everyone's healthcare these days anyways? That's only a "cool trillion."

lordbyroniv's picture

steak tastes real to me.  ignorance IS bliss.

kchrisc's picture

Central banking is centralized grifting.

Liberty is a demand. Tyranny is submission..


Decentralized guillotines.

Lady Jessica's picture

The FED have finally come around to admitting (to themselves only, NEVER publicly) that QE is deflationary because of capital destruction (or they may indeed have known this all along).

A gently ascending rates trajectory will put an end to the capital destruction.

The PPT will, for as long as possible, prevent an equities collapse from upsetting their plans.

Joebloinvestor's picture

You can't defeat Darwinism, not even the economic kind.

Sages wife's picture

Maybe it's the heat, but he lost me at "What it does do...".

headhunt's picture

It does not let the economy and the markets find their actual values

The entire thing is held up by sky-hooks - eventually gravity wins.

Bobbo's picture


"I do wish the illusion of recovery could paid me as well as has paid them!"

rex-lacrymarum's picture

Minsky's "insight" is merely distracting from the true cause of "instability", namely money printing on a grand scale. As a Neo-Keynesian, Minsky's recommendation was to fight the period of instability with even more government intervention, mainly massive deficit spending. The boom-bust cycle is not the result of some mysterious "stability-instability" paradigm. All non-monetary theories of the business cycle are ultimately untenable.