Why QE4 Is Inevitable

Tyler Durden's picture

One narrative we’ve pushed quite hard this week is the idea that China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves. Of course this week's posts hardly represent the first time we've touched on the issue of FX reserve liquidation and its implications for global finance. Here, for those curious, are links to previous discussions:

And so on and so forth.

In short, stabilizing the currency in the wake of the August 11 devaluation has precipitated the liquidation of more than $100 billion in USTs in the space of just two weeks, doubling the total sold during the first half of the year. 

In the end, the estimated size of the RMB carry trade could mean that before it’s all over, China will liquidate as much as $1 trillion in US paper, which, as we noted on Thursday evening, would effectively negate 60% of QE3 and put somewhere in the neighborhood of 200bps worth of upward pressure on 10Y yields. 

And don't forget, this is just China. Should EMs continue to face pressure on their currencies (and there's every reason to believe that they will), you could see substantial drawdowns there too. Meanwhile, all of this mirrors the petrodollar unwind. That is, it all comes back to the notion of recycling USDs into USD assets by the trillions and for decades. Now, between crude's slump, the commodities bust, and China's deval, it's all coming apart at the seams.

Needless to say, this "reverse QE" as we call it (or "quantitative tightening" as Deutsche Bank calls it) has serious implications for Fed policy, for the timing of the elusive "liftoff", and for the US economy more generally. Of course we began detailing the implications of China’s Treasury liquidation months ago and now, it’s become quite apparent that analyzing the consequences of China’s massive FX interventions is perhaps the most important consideration when attempting to determine the future course of global monetary policy. 

On that note, we present the following from Deutsche Bank’s George Saravelos, which can be summarized with the following snippet:

The potential for more China outflows is huge: set against 3.6 trio of reserves, China has around 2 trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go.   


What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates... Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT

In other words, first according to Deutsche, and soon according to virtually all sellside strategists who are slowly but surely grasping the significance of what we have been warning for month on end, QE4 is inevitable. The only problem is that when the Fed pivots from "imminent rate hike" to QE4, it will loose the last shred of credibility it had left. The Fed is now completely trapped.

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Beware China’s Quantitative Tightening

Why have global markets reacted so violently to Chinese developments over the last two weeks? There is a strong case to be made that it is neither the sell-off in Chinese stocks nor weakness in the currency that matters the most. Instead, it is what is happening to China’s FX reserves and what this means for global liquidity. Starting in 2003, China engaged in an unprecedented reserve-accumulation exercise buying almost 4trio of foreign assets, or more than all of the Fed’s QE program’s combined (chart 1). The global impact was indeed equivalent to QE: the PBoC printed domestic money and used the liquidity to buy foreign bonds. Treasury yields stayed low, curves were flat, and people called it the “bond conundrum”.

Fast forward to today and the market is re-assessing the outlook for China’s “QE”. The sudden shift in currency policy has prompted a big shift in RMB expectations towards further weakness and correspondingly a huge rise in China capital outflows, estimated by some to be as much as 200bn USD this month alone. In response, the PBoC has been defending the renminbi, selling FX reserves and reducing its ownership of global fixed income assets. The PBoC’s actions are equivalent to an unwind of QE, or in other words Quantitative Tightening (QT).

What are the implications? For global risk assets, they are clearly negative –global liquidity is falling. For fixed income, the impact on nominal yields is ambivalent because private safe-haven demand for bonds may offset central bank selling. But real yields should move higher, inflation expectations lower, and there should be steepening pressure on curves. This is indeed how markets have responded over the last two weeks: as if the Fed has announced it is unwinding its balance sheet!

The potential for more China outflows is huge: set against 3.6trio of reserves (recorded as an “asset” in the international investment position data), China has around 2trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go.

What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates. The alternative would be for China’s capital outflows to stop or at least slow down. Perhaps a combination of aggressive PBoC easing and more confidence in the domestic economy would be sufficient, absent a sharp devaluation of the currency to a new stable. Either way, it is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT.

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Tonald J Drump's picture

speaking of shockwaves...my soaring poll numbers are sending huuuuuge shockwaves thru DC, and the entire world for that matter...Let's make America great again !!    

Seua's picture

We could sell opium to China for bonds! Or maybe they never forgot about the last time. Payback's a bitch.

TongueStun's picture




It does not push ABC's Zionist jew race baiting agenda of kneegrow victimhood...

Beam Me Up Scotty's picture

Don't worry, the Fed will sop all of those UST's up and more if they have to.  They will keep the bond market bid.  They've got unlimited resources to buy everything.

nope-1004's picture

So now with QE becoming QT, what is Edward Quince's updated name?  Twat Quince?

realmoney2015's picture

Yes, China is playing a role in the coming collapse. But they don't deserve the blame. The blame should fall on the Federal Reserve! Do not them wigggle out of this by blaming others for the eefects of their ponzi scheme. We need to stay focused on the root of the problems!

Four chan's picture

why is belgium ground zero for all the actions for bonds weather it be the fed china or others?

balanced's picture

I'm no cheerleader for Martin Armstrong (frankly, I don't like the guy), but to be fair, things seem to be headed exactly where and when he said they would during this interview back in April. Link skips to 00:50 ...


surf0766's picture

His model of 20 years ago predicts the september 2015 crash

McCormick No. 9's picture

Upwards pressure on yields not coming just fom China. The shale unwind will send bond yield contagion up from below, just as China squeezes yields higher from above. a Q(u)E'er policy won't have much effect on this. Systemic insolvency can only be solved by systemic debt forgiveness. The value of money will have to approach zero if this debt forgiveness is to be achieved via QE. If the 1% doesn't want to get screwed out of their money (and they don't) there is one other tried and true method of systemic debt forgiveness:


Mine Is Bigger's picture

I don't know much about economics. So, I am probably wrong, but is large-scale debt forgiveness actually possible under the current debt-based fiat system?

In the old days, the total amount of money in circulation did not change when debt was forgiven. So, it was basically the issue between lenders and borrowers.

But today, if you forgave a significant amount of debt, wouldn't that mean a significant volume of money would disappear? That would lead to significant deflation, making it harder for the remaining debt to be paid back. So, more debt relief would become necessary. And so a nasty spiralling effect would ensue?

Isn't it why the Fed has been doing QEs in the first place? The only way to ease debt burden is to have more debt. So, the system itself is clearly flawed and unsustainable? But they don't know how to solve it?

What's wrong with my thinking? I would appreciate feedbacks.

Victor von Doom's picture

Debt relief would have to come from the Central or Reserve banks towards the lenders first. Otherwise, should your local bank provide relief (actual forgiveness of debt), then they would be left in the lurch (being themselves in debt to the Central Banks). If both debts were forgiven simultaneously then the action would be massively inflationary, not deflatonary.

Remember - fiat paid back to bankers for debts goes into the magic money incinerator - after they deduct their cut, of coarse. Debt forgiveness stops this process from occuring. The inflationary act was printing the fiat to begin with, forgiving debts just kills off the seondary deflatinary part of the debt agreement.


"My greatest flaw. I surround myself with idiots."

- Victor von Doom

Stuck on Zero's picture

The debt is heaped on the backs of American middle class citizens. The trillions are handed to the bankers.  Any problem with this?

zhandax's picture

Tyler, there are a couple of points in your premise that I can't seem to resolve.

It may be only that you are in some cases referring to the official renminbi REER and in others you refer to the offshore yuan.  Can you post a price chart of the two over the last couple of years to give us a better point of reference?

My main point of confusion is why should PBOC have to burn through a $trillion in UST to support something that has been rising against their wishes?

The other minor point is if their equity meltdown continues, will the fallout not eventually spark a global panic into UST which will, in turn, swallow an otherwise 200bp rise in 10y yield?

zhandax's picture

Who suggested that was necessary whore?  Are we not discussing balance of trade, forex and central banking here?

bahaar's picture

IMHO, in the last few years, Renmenbi was falling not rising against their wishes due to ever increasing capital flight from China.  China papered over it but cannot do so anymore and has taken to openly defending it.  Hence the liquidation of UST.

As the article states China's liquidation of UST may be balanced by flight to safety by others but to what extent one cannot say.

Victor von Doom's picture

Same as in every country. I wasn't endorsing the system, just describing it. 


"My greatest flaw. I surround myself with idiots."

- Victor von Doom

Usurious's picture

repayment extinguishes credit money.......

FreedomGuy's picture

Every trade has two sides and they ride in tandem. If government forgives debt which is actually it's own debt than everyone who holds it is out of money. That is probably your pension, 401k and even a lot of companies hold them as an asset. Your grandma is suddenly living with you. 

You can cut debt several ways. One, is forgiveness or default. That is direct but it is also quick and causes quick restructuring. It is painful and all risk gets reevaluated. The second way is through inflation. Each dollar becomes worth less. It is like an extra tax. Government owes a trillion, but if you make it worth ten bucks in present value then the debt is effectively erased. Governments prefer this way. It is chicken, less visible and gets around the legalities of formally raising taxes or defaulting. 

Your thinking is okay. 

12cmKAPJ's picture

There's nothing wrong with your thinking, though it bothers me that you use the term "money" when that is exactly what is isn't. We do not use money anymore.

The debt forgiveness spiral of death you describe has another problem: as debt is forgiven the "money" is destroyed, yes. But then remains the interest on debt. With what should that be repaid?

StychoKiller's picture



Rocky:  "But that trick never works!"

Bullwinkle:  "This time, for sure!"

Dubaibanker's picture

As China continues to open its economic door, ever so gradually yet so fast over the last few years, a major announcement occurred today, which is in line with the yuan recently being made more reliant on market forces. 

I hope everyone remembers that China is the only country whose currency has appreciated in the last 3 years, 5 years and 10 years, yet their exports have continued to rise over the same periods. Currently, there has been a blip but that is because exports from leading exporting nations like Canada, Thailand, India etc have also dipped massively! But since when did the media whores, bank ANALcysts and the sheepple looked at real facts or compare with other countries or look at medium or long term trends? Every country wishes to export but the question is if everyone is exporting then who is importing!!!???

Foreigners will be allowed to buy properties in China.

This is how demand is created for a currency and many countries do this around the world like HK, Singapore, US, UK, EU etc. No one exactly wants to invest in Somalia or Iraq...at least not yet! :)

But they tell me, that Somalia is so cheap that in 25-30 years, the beachfront property could rise 10,000% in value!

See you all in Somalia! :)

Easier rules released for foreign buyers of housing  Property investment rules eased


eforce's picture

Seems the elite want to drain China before they collapse the the global economy, no survivors allowed, other than maybe Russia because they already have the new model.

Carpenter1's picture

Sorry QE junikies, there'l be no QE4

Victor von Doom's picture

This is Fight Club Carpenter1 - not "let's make a statement". Make your argument for your cause or keep the trap shut.


"My greatest flaw. I surround myself with idiots."

- Victor von Doom

Athena's picture

Can Saudi sell enough oil to fund a war in Yemen against Iran and China while continuing to support ISIS?

Paveway IV's picture

The question is probably better phrased as "Have they sold enough..."

It's not like they haven't stashed away a few bucks in the last fifty years.

Tabarnaque's picture

Athena’s question is still valid and relates very well to the topic of this article. I am curious to know if Oil producing nations are now liquidating part of their reserves in US Treasuries in order to fund their new budget deficits. That would add fire to China’s QT and make the Fed’s life even harder. It’d also be great to see what other EM nations are doing, like; Thailand, Brazil, Turkey, India, etc. The dumping of US treasuries could be a lot bigger than we think on a global scale. I know that the Fed does publish a monthly update of treasury held by foreign nations. I just don’t know where to find it. Maybe Tyler and his team can look into that.

Alexandre Stavisky's picture

The world worried that holding treasuries was a terrible but necessary trap.  As they watch China unload and, due to the magic of thin air dilutive fiat, bond yields move hardly at all.  Such is the finesse of fiat.  But although they know their investments will have its guaranteed high return, they must worry about what mischief these excess dollars will do to their purchasing power.  Especially if they are exchanged through forex and used to buttress additional fractional reserve banking notes.

Deflation, Inflation, Deflation.  None of it creates peace, harmony, steady state existence, expansions of personal liberty, etc.

The devil and his angels are busy in their workshop, yes?  The only way to distinguish?  By their works and countenance shall all men know them.

orez65's picture

"They've got unlimited resources to buy everything."

Yes, they can counterfeit as many dollars as they wish.

But the real issue is, what will the Treasury sellers do with the cash from their treasuries?

cherry picker's picture

You aren't a Martin Luther King nor a Ghandi.

Was America ever 'great"?

From the civil war to segregation to Mcarthyism to Japanese internment camps to toppling democracies to a war on Drugs the DEA makes a pisspot full of money on to preemptive invasions of nations based on unfounded suspicions to torture and secret prisons.

America used to lead the world in manufacturing and that was a big help in WW2, but now manufacturing has gone what is left?  Drugs, porno industry, regulations, reality shows and Caitlynn who now decides a man should treat her like a woman when they date and need I mention all the DC types connected to the non-existent gals at Ashley's place, oh and the fact there are more people per capita in American jails than in any other country.

Donald, you talk a lot, so does Obama.  The Americans got burned by leaders for a long time.  How are you any different?

Four chan's picture

"oh and the fact there are more people per capita in American jails than in any other country." this fact is due to the importation of low iq slaves who are not historically compatible with civilized humans.

viahj's picture

prison for profit is a multi-billion industry. 

TheInfoman's picture

Joe McCarthy actually had it right, but was defamed in order to shut him up.  The history books a hundred years from now (if TWAWKI still exists) will rewrite what we have all been taught growing up. 

Mayer Amschel Rothschild's picture

Many of those pinkos he was trying to out were, in fact, commie fucks.  Problem is he didn't seem to realize that 20 years before his time in Washington that a 2/3 majority of the federal government was already NWO: FDR and the entire Supreme Court occupied to the last judge of Fabian Society scum.

Ass Burger's picture

I actually produced a Pearson high school Social Studies textbook recently, and the message of the unit on McCarthyism was "Sir, have you any decency?"

Basically, the lesson was that McCarthy was an alarmist and scaremonger who was justifiably put in his place.

Of course we all know that there was (and is) a very real infestation of communists in government. 

alangreedspank's picture

Indeed. Soviets later revealed their spys were bumping into each other at the State Department.

Ninguna's picture

Hey Tonald, this is taking things a bit too far dontcha think?

I mean shoving your moniker into fake butter to get people to vote for you is not fair!


I MISS KUDLOW's picture

China getting out before japan blows eh?

bbq on whitehouse lawn's picture

Do you think that Japan has any intention of falling on its sword. Full of sound and fury sure, but the honor by suicide, has always been more myth then truth.

Oh regional Indian's picture

Single point analysis like this is pretty pointless.

The story that really matters right now is Oil...and it's derivatives, Dollar and Gold...

Fx and metals are finaicial plays, oil is about as real as it gets....

In this world, control of oil is control...

Who has it?

I'm going to weaken it...



KnuckleDragger-X's picture

The thing people tend to overlook is China is not just someplace far away. The Chinese slide is killing the econmy of countries all over the world that poured money into expanding their production and everybody thought it was forever, but forever is a damned long time.....

Oh regional Indian's picture

we knew...in 2006...

6 sigma is in the rear view mirror...

Kickaha's picture

It's called mis-allocation of scarce capital.  China printed an avalanche of digital yuans, far, far greater than what the Fed has done, and released them into their economy to build ghost cities, among other ideas, some reasonable, some ridiculous, fueled primarily by the desire of government operatives to skim a percentage of each construction contract, or give those contracts to cronies with whom they were in secret partnerships.

This greed has caused ripples to flow out to all other nations who contributed to this orgy of construction.  Other nations, mostly near China, were happy to take the newly printed yuans and feverishly expand their productive capacity to serve the new Chinese demand.  I doubt that anybody really looked this massive gift unicorn in the mouth.  

QE in any shape of form is ultimately destructive of capital.  The crash following the boom leaves you far worse than you were before easy money led to poor investment decisions that would have never been made under the discipline of real market interest rates. 

Blame the Chinese for the printing.  Thank them for stopping it.  Blame your own country and businesses for enjoying that fine meal of chinese QE.