The QE End-Game Decision Tree: Not "If" But "When" Central Banks Lose Control

Tyler Durden's picture

Make no mistake, the writing has been on the wall for quite some time and we haven't been shy about pointing it out.

Central banks are losing control.

Trillions upon trillions in post-crisis asset purchases haven’t given the global economy the defibrillator shock the world’s central planners were depending on to bring about a sustained and robust recovery.

Indeed, the opposite appears to have materialized.

Subdued demand and trade looks to have become structural and endemic rather than cyclical and rather than create "healthy inflation", seven years of accommodative monetary policy has only served to bury the world in a global deflationary supply glut. And that’s just the big picture. The more granular we get, the more apparent it is that central banks are no longer in the driver's seat.

Inflation expectations across the eurozone have collapsed despite Mario Draghi’s best efforts to assure the public that PSPP has been an overwhelming success and similarly, inflation expectations have tumbled in the US ahead of a expected rate hike which looks less likely by the day. Meanwhile, in Sweden, the Riksbank has sucked so much high quality collateral from the system that QE has actually reversed itself, giving the world its first look at what happens when QE demonstrably fails. And let’s not forget Japan, where the world’s most hilariously absurd example of central bankers gone stark raving mad has done exactly nothing to pull the country out of the deflationary doldrums.

And so here we stand, on the precipice of crisis with central banks having run out of both ammunition and credibility. In short, it’s time to ask if central banks have officially lost control. For the answer, and for the "QE end-game decision tree", we go to BNP.

Note that if CB's do lose it, the likely scenario is: "deflation, vicious cycle... economic depression".

*  *  *

From BNP

Not "IF" but "WHEN central banks lose control?"

The global financial repression pushed investors to invest cash in risky assets, such as property and equity. The scale of global policy interventions is trumping all fundamental factors for now. Investors should keep in mind that the road is never straight and next month should be full of potentially disruptive events impacting sharply overcrowded assets and trades. History shows that such misallocation of resources creates bubbles that can last before fully blowing; the question is not if, but when.

Risk assets and risk parameters would be massively affected in the event central banks lose control; in the meantime, EDS Asia believes that central bank maturities that use forward guidance matter more than the QE process itself. The Fed and the ECB have been providing guidance which partly explains the low short-term volatility. The BoJ is moving toward this behaviour, managing the news flow: therefore there is a case for the NKY index going up slowly with a lower upfront volatility and a term structure closer to the US one: in that sense, we have started to observe an "SPX-isation of the NKY Index" in the past few months before this summer’s risk-off, as short dated volatility was trading lower. In China, the PBoC intervention learning curve is steep; this is the reason we believe the next equity leg up will be accompanied by an elevated volatility regime.

The quantitative easing started in the US more than six years ago and the SPX index, as well as selective risky assets, are now hovering at the high end of their valuation histories. Recent price actions are testimony of the fragility of imbalances built over the years. Investors may recall the Japan easing experience in 2005 and 2006; an early exit, together with a global financial crisis, caused a Japanese equities meltdown (between mid-2007 and late-2008).

In the decision tree, EDS Asia addresses the potential "QE end-game scenarios" [attempting to] answer the question "Are central banks losing control?" and providing a time horizon and probabilities affecting each path, which should allow investors to get a clearer overview. 

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CaptainAmerika's picture
CaptainAmerika (not verified) Sep 2, 2015 5:56 PM

Quantitative alternative reality fiction....sleep the american dream...drink happiness.....zzz

Say What Again's picture

Taleb would get a good laugh from this abuse of statistics.  I think its rather funny too.

messymerry's picture

[Trillions upon trillions in post-crisis asset purchases haven’t given the global economy the defibrillator shock the world’s central planners were depending on to bring about a sustained and robust recovery.]

I think this whole QE thang was just a scam from the git go.  I think the central bank planners know full well that the economy was the walking dead and would never recover.  I suspect that this whole ploy was to buy time to prepare for civil unrest.  To gear up the goon defenders of the barbaric status quo and it's elite directors. The sickening wealth transfers are just a nice by product.

Pure and simple, we've been had...



Bangin7GramRocks's picture

I do believe you nailed it sir!

BarkingCat's picture

Let's examine it at a very simple level, because there really is no need to look for complicated answers.
Dental banks created money and used that new money to purchase real assets. It is nothing but full daylight robbery.'s picture

Well it's not the banks only, it was primarily the fed. Money printing never actually solves anything, just creates boom and bust cycles. QE is just a form of money printing in which we did not see the mechanism of biting back on our ass for a while. With helicopter money, money printing the mechanism is simple. More money chases the same amount of goods causing an inflation. The QE mechanism of money printing where money printed is distributed only to the very wealthy causing inflation in the assets being chased (art, financial products, most importantly BONDS) has a different effect. By having all this free to borrow money, investors do not need to invest into actual business to get wealthier. You just need to buy more stocks for your personnal wealth effect to occur. The real bussines through which the money should be created dies. This causes greater inequality in income and wealth and causes the bottom not to be able to buy many things they used to. This leads to lower demand causing a deflation. Deflation causes the stocks earnings to fall. And this is where we have a hole boom and bust cycle end with another bust of overpriced stocks and depressed economy.

yogibear's picture

Each Fed QE is larger.

By QE7 maybe $500 billion/month?

Debt goes infinite.

Look at the chart. 

Run away debt and a currency failure.


arrowrod's picture

Risky assets, such as property.


coinhead's picture
coinhead (not verified) arrowrod Sep 2, 2015 6:56 PM

Muh head is a coin.

Wheresthesolutions's picture

Are there any alternative economic models that ZH advocates? A lot of people believe we need to go back to the gold standard, but it doesn't appear there's enough physical gold to support the size of the global economy. There is Modern Monetary Theory (MMT), which capitalises on the fiat system in a way that removes 'private' central banking and the selling of government debt so that sovereign nations just create what stimulus they need and direct it to essential social and other services. Do you guys push any solutions to this banking tyranny?

Bendromeda Strain's picture

Do NOT up arrow your own comment on a new thread. It is too obvious. You are new here, so I won't be too hard on your moronic comment about gold. Know this - there is plenty of gold, it is merely the price that has to adjust. Simple. Think about it.

Money Counterfeiter's picture
Money Counterfeiter (not verified) Bendromeda Strain Sep 2, 2015 6:20 PM

Not enought gold"  Fuck me come up with something new for fucks sake.

new game's picture

if a human is involved. he or she would fuck it up(game it for wealth advantage)anyways.

it is hopeless. enjoy your fiat flame out, soon to be replaced by what? another cb scheme to fuck the masses. gold or fractions of gold could anchor a legitimate money system, but it will never happen. and if it did ,theyd fuck with the ratios when they overspend to placate the freeloaders.

fucking hopeless without a purge and reset of the mindset and billions less useless eaters, ha lol...


Wheresthesolutions's picture

I'm just asking questions with a genuine interest in hearing other points of view. I do hear you, but what evidence is there that this is the way to evolve our social systems? Seems to me a lot of people have financial investment in gold, hence obstructing their vision.

Not My Real Name's picture

Seems to me a lot of people have financial investment in paper, hence obstructing their vision. 

Ghordius's picture

Seems to me a lot of people... talk their book. And their dreams

conscious being's picture

Some people assemble their "book" in a way that it winds up as an expression of their ethics. Then they can talk their book, avoiding contradictions.


Womb Service's picture

 You must be new here. How about a free market for money? People can use Gold and/or Bitcoin, or any other freely chosen unit.

 "A lot of people believe we need to go back to the gold standard, but it doesn't appear there's enough physical gold to support the size of the global economy."

There is always enough Gold, at the right price. You've been brainwashed. We don't need a perpetually expanding currency system. It's a myth. Guess who benefits from pushing this old myth?

Stormtrooper's picture

Always enough PM's. Just need to value them properly, I.e. $2000/gram vs. $2000/ounce.

Moar-ey Greedman's picture
Moar-ey Greedman (not verified) Womb Service Sep 2, 2015 8:03 PM

What is "the fucking banksters", Alex?

Wheresthesolutions's picture

I like the sound of that. Return to sustainable models and practices, not just for huamnity's health, but the earth too. In terms of the free market though, it didn't work the first time, so what makes you think it'll work the next time round? People will always organise to consolidate power if we have a system that allows it. For the record too, we've all been brainwashed ;)

Womb Service's picture

"In terms of the free market though, it didn't work the first time, so what makes you think it'll work the next time round?"

Johnny Bravo? Is that you?

 The pretend free market didn't work. It wasn't supposed to.


Wheresthesolutions's picture

No it's just me, wheres the solutions. Thats my point WS, the whole concept of a free market is an illusion. It will always manifest in ways that it has now, so to me it makes sense to remove the opportunity for the system to be manipulated and corrupted in the first place.

indygo55's picture

WOW 3 days and 16 hours on ZH and you are making these kinds of statements. Hummmmmmm I wonder which side of the tracks you are from?

New_Meat's picture

I do so love it, how the newbiez are ... well ... jejeune but also have "hours" on their longevity.

Wheresthesolutions's picture

I just have a genuine interest in what the general position is at ZH. I've been reading for a while, but haven't come across any revolutionary ideas on how to move forward for humanity. The way we economise our society is so integral to our future, which is why I thought I'd open the floor to hear what you guys have to say. So far though, I'm a little disappointed in not just the lack of vision, but also the unnecessary attacks. We're adults, not children.

Lamarth's picture

Solved problems do not require revolutionary solutions. Fiat was the revolutionary solution to the problem of how to bribe a populace with their own money while imperceptibly stealing most of it - an important political problem, to be sure.

That said, the fundamental problem here is that every system of governance is corrupted by the entrusted humans. Blockchain technology solves that on a technical level, even better than Gold, which is governed by physics and engineering.

The even more fundamental problem is governmental, and results from branching factor. How many effective machines do you know that have more than a million joins at a single interface? Or even more than 10? Christmas lights are the only thing I can think of at present. But millions or hundreds of millions of voters can be simply pooled together to form effective governance? Nonsense!

For such a compound decision, every piece must have a relevant local action. Picking your preferred party of two is neither relevant in selecting which party (my vote doesn't really matter) nor relevant even if the party is swapped (they’re both the same). Solutions should now be obvious.

Wheresthesolutions's picture

Thanks for your (decent) comment Lamarth. So Bitcoin and local governance? Not sure if that will deal with rogue groups who form with advanced technology to insitute their own tyranny though.

WOAR's picture

Well, welcome to fight club kid. Embrace the down arrows as you learn.

First of all, there are no solutions. We've opened the box, and Schrodingers cat is dead. The stock market is finished. There's so much innate corruption in the system, trying to fix it is like going on a vegan diet instead of getting a triple coronary bypass. 

In short, just read my name. Cut out the heart of the current system, one way or another (stop paying taxes, go Galt, kill the fuckers, etc). It's not a solution, but it does get rid of the problem.

Wheresthesolutions's picture

lol thanks WOAR. To be honest though, down arrows and childsplay doesn't bother me. I am just here for exactly that, to learn.

Well, revolution might work well if people could get theiur shot together already and organise it, but replace it with what? Personally, I feel that removing money altogether and implementing a resource-based economy, or something to that effect, appears as the best long-term solution. That's why I'm interested in what's going on here, as we need some interim solutions too. As mentioned in my original comment, MMT seems a good way to remove the banksters and ensure essential social services are met, but I'm certainly open to suggestions.

goodtimesKC's picture

A centrally planned, resource-based economy maintained by a strong (probably authoritarian) central government is basically the opposite of what most people here believe is the best long-term solution.  I mean.. we might end up there but it's definitely nothing we should be striving for.  What you don't take into account is at the heart of men of great power is not the same as what's in your young, naive heart, because that's not how you get powerful.  Therefore, the only acceptable solution is a complete decentralization of power, as decentralized as is absolutely possible, so that no man or group of men is able to conspire against the rest of us because of their relative positions among us.

Clowns on Acid's picture

Put down the hash pipe and turn off the Beatles 1st album.

" so that sovereign nations just create what stimulus they need and direct it to essential social and other services."

This is what the neo Bolsheviks have done for the past 25 years. Hopw does the $18 trillion of unsustainable debt sound to you? Like a fuckin' solution ?!

You stoopid fuck.  MMT is simply Alinsky translated into a Fed Gov't centric ponzi scheme. 

So STFU and read more. 

Wheresthesolutions's picture

Why so hostile? So many of you appear to be angry, bitter people. How's that working for you? I'm just asking questions. In terms of debt, why can't it be written off so that debt is no longer part of the equation? Why can't community based central banks generate what's needed depending on their lcoal circumstances?

WOAR's picture

One man's debt is another man's collateral. You can't just "write off debt" without causing a domino effect of asset destruction. The minute you do that, the system collapses. Either the government (the FED, in reality) starts printing money to cover the destruction of the assets (creating hyperinflation), or the assets are allowed to depreciate, causing a deflationary collapse (goods become super cheap, and it's suddenly not worth it to make a businesses that depend on the FLOW of an economy go out of business - steel production, motors, tools, anything with actual value).

The reason people are bitter here is because we see these two paths, and realize that they are the only logical ends to our economy. So we drink, smack talk, and get depressed together like an old biker gang, full of old farts that are to old to ever actually do anything, but smart enough to know what should be done.

Fucking let the system fail. The faster the fall, the sooner the recovery.

Wheresthesolutions's picture

Nailed it. The two things I'm not sure of though. First, what about QE for the People? Steve Keen has developed a good model. The other one is if the system fails, doesn't that just consolidate more power for the empire? Seems we'd be proper fucked then.

TheEndIsNear's picture

A single ounce of gold could support the world economy because it's divisible down to the molecular level. At present, Hugo Salinas Price points out that one US dollar isn't worth more than a flyspeck of gold.

ersatz007's picture

"healthy inflation"

As if there is such a thing. The idea that constant inflation is a good thing is what's wrong. And, the bankers don't want inflation - they want this deflation to occur so they can get MORE assets at pennies on the dollar.

TheZeitgeist's picture

Inflation is friend of the debtor, enemy of the saver. And note everyone pulling the levers is a debtor; deflation takes away sovereign 'policy tools' (read: scams) to slither from liabilities.

It is why the Keynesian clowns love their inflation circuses; their fatal conceit not understanding that supply and demand applies to everything - including their precious fiat trinkets.

New_Meat's picture

dat true, but, well, dat not d'Zeitgeist.

yogibear's picture

QE to infinity is the Federal Reserve's only plan now.

It's larger  QEs each time until the US dollar crashes.

There's a 100% certainty of QE 4.

QE4 will be much larger than QE3.

Clowns on Acid's picture

And....US and Europe will need more non white refugees...because "its for the children"  ... and also for the Banksters and their lackey politicians...

new game's picture

over run by rats, fucking rats. shit holes for eyes and fucked up stupid is what iv'e encountered (and i'm putting it mild). sub human fucks speading there beliefs, having moar childern than they can afford and back to the caveman era of thinking. fucking culdron boiling over the top,;its gonna get interesting real soon...

and i see so many people putting up with this shit, ya know the politically correct crap.

just observing, just saying...

plez, darwin, come to our resue, ha lol...

McCormick No. 9's picture

So, if QE4 happens, what does China do? QE drives up the price of Treasuries, and China desperately needs cash. Will China sell more at the artificially high price? All that selling puts upwards pressure on yields. Do the two balance each other out? Does that mean that QE4 just helps us run in place? The Fed buys but cannot sell...until selling must be done. Sounds like the perfect buy high/sell low strategy to me. Way to go bankers. Y'all smaat.


new game's picture

the real war is the feds balance stmnt...

conscious being's picture


At some point, QE will not "drive up" the price of treasuries.

q99x2's picture

I wish we could wait for a while.