How QE Crushes The Real Economy & Why The Secular Low In Treasury Yields Lies Ahead

Tyler Durden's picture

The economy was supposed to fire on all cylinders in 2015. Sufficient time had passed for the often-mentioned lags in monetary and fiscal policy to finally work their way through the system according to many pundits inside and outside the Fed. Surely the economy would be kick-started by: three rounds of quantitative easing and forward guidance; a record Federal Reserve balance sheet; and an unprecedented increase in federal debt from $9.99 trillion in 2008 to $18.63 trillion in 2015, a jump of 86%. Further, stock prices had gained sufficiently over the past several years, thus the so-called wealth effect would boost consumer spending. But the economic facts of 2015 displayed no impact from these massive government experiments.

Excerpted from Lacy Hunt and Van Hoisington's Q4 2015 Review & Outlook...

Since the introduction of unconventional and untested monetary policy operations like quantitative easing (QE) and forward guidance, an impressive amount of empirical evidence has emerged that casts considerable doubt on their efficacy.

Central banks in Japan, the U.S. and Europe tried multiple rounds of QE. That none of these programs were any more successful than their predecessors also points to empirical evidenced failure.

On QE's Utter Failure (or  Why QE Hurts More Than It Helps)

This empirical data notwithstanding, a causal explanation of why QE and forward guidance should have had negative consequences was lacking. This void has now been addressed: Quantitative easing and zero interest rates shifted capital from the real domestic economy to financial assets at home and abroad due to four considerations:

  • First, financial assets can be short-lived, in the sense that share buybacks and other financial transactions can be curtailed easily and at any time. CEOs cannot be certain about the consequences of unwinding QE on the real economy. The resulting risk aversion translates to a preference for shorter-term commitments, such as financial assets.
  • Second, financial assets are more liquid. In a financial crisis, capital equipment and other real assets are extremely illiquid. Financial assets can be sold if survivability is at stake, and as is often said, “illiquidity can be fatal.”
  • Third, QE “in effect if not by design” reduces volatility of financial markets but not the volatility of real asset prices. Like 2007, actual macro risk may be the highest when market measures of volatility are the lowest. “Thus financial assets tend to outperform real assets because market volatility is lower than real economic volatility.”
  • Fourth, QE works by a “signaling effect” rather than by any actual policy operations. Event studies show QE is viewed positively, while the removal of QE is viewed negatively. Thus, market participants believe QE puts a floor under financial asset prices. Central bankers might not intend to be providing downside insurance to the securities markets, but that is the widely held judgment of market participants. But, “No such protection is offered for real assets, never mind the real economy.” Thus, the central bank operations boost financial asset returns relative to real asset returns and induce the shift away from real investment.



It is quite possible that corporate decision makers do not understand the relationships that cause QE and forward guidance to redirect resources from real investment to financial investment. It is also equally likely these executives do not understand that this process reduces economic growth, impairs productivity and hurts the rise in wage and salary income. But, does a lack of understanding of economic theory by key market participants render the causal relationships invalid?


Spence and Warsh elegantly argue corporate executives do not need to know these fundamental relationships. Here is their key passage: “Market participants may not be expert on the transmission mechanism of monetary policy, but they can deduce that the central bank is trying to support financial asset prices. The signal provided by central banks might be the essential design element.” Real assets market participants simply need to know that the central bank does not offer such protection. In other words, the corporate managers merely need to realize that one asset group is protected and the other is not.

On Monetary Policy's Endgame...

Our assessment is that monetary policy has no viable policy options that are capable of boosting economic activity should support be needed. In fact, the options available to the central bank, at this stage, are likely to be a net negative.




The extremely high level of debt suggests that the debt is skewed to unproductive and counterproductive uses. Debt is only good if the project it finances generates a stream of income to repay principal and interest. There are two types of bad debt: (1) debt that does not generate income to repay interest and principal (Hyman Minsky, “The Financial Instability Hypothesis”); and (2) debt that pushes stock prices higher without a commensurate rise in corporate profits (Charles P. Kindleberger, Manias, Panics and Crashes).

On Treasuries...

With the trajectory in the nominal growth rate moving down, U.S. Treasury bond yields should work lower, thus reversing the pattern of 2015 and returning to the strong downtrend in place since 1990.




The firm dollar will remain a restraining force on economic activity and should cause the year-over-year increase in the CPI to reverse later in the year. Under such circumstances, lower, rather than higher, inflation remains the greater risk. Such conditions are ultimately consistent with an environment conducive to declining long-term U.S. Treasury bond yields. In short, we believe that the long awaited secular low in long-term Treasury bond yields remains ahead.

Full must-read letter...

Hoisington Q4

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ZippyBananaPants's picture

We crushed some folks.

MrNosey's picture

There will be no real recovery what so ever!

The elite will soon run and hide in the bunkers paid for with citizens taxes, after engineering a full economic collapse as well as starting WW3, plus they will make sure that there are enough Jihadi's in the West to start a race war.

That should be enough to cover up the failed fiat ponzi scheme and take care of the 'excessive' population......

Dr.Engineer's picture

Thank you whoever posted this.  Finally, a dose of sanity.

Kayman's picture

1. the Fed is a communist, socialist, totalitarian, Crony Club that can only bump asset prices for its friends. It cannot move the real economy.

2. By setting interest rates by edict, instead of a free market of many buyers and sellers, misallocation (deliberate) of scarce capital is inevitable.

3. All the risk that the Fed "absorbs" is, in fact, shouldered by the rest of society, because the Fed is backstopped by the country as a whole.

4. the $8-10 trillion of new debt is somebody's asset somewhere and those assets weren't earned, they were conjured out of thin air. 

Kill the Fed. Print enough money to match the anticipated growth of the real economy.

Bilderberg Member's picture

Remember Obama's stimulus plan from 2009 (The American Recovery and Reinvestment Act) that cost $830 billion dollars. It promised funding all of this new infrastructure, but the majority of it went to the government and education sectors (where unemployment was already low!) ?...Only about 10% actually went to new infrastructure.


Son of Loki's picture

Bankers have never been so wealthy so I would not call QE a "failure." It accomplished exactly what Hank and Timmy wanted; namely, unimaginable  enrichement of the 0.01%.

knukles's picture

Hoisington and Hunt have been 2 of the just about only bright light spot on sane predictors of interest rates over the last 8 years.
A few of us concur... just a few.  Which makes it all the better when it's a non-consensus opinion.
Getchur real coupons before the yields all turn negative.
Dudley the other day even said that the Madness (Bat Shit Cray Ass Madness) of the Fed was Considering Negative Rates if the "Bad Numbers Continued"
What "bad numbers"?  Like they're a "surprise"? 
We're captained by idiots at the helm.

Moreover... we're caught in a Liquidity Trap.  A Liquidity Trap is a Monetary Phenomenon Caused by Non-Monetary Factors. 
Anybody see any Fiscal or Regulatory Changes on the Horizon, other than More of the Same Shit that's Not Working?

Me neither.

Arnold's picture

On paper.

Tangible assets other than distressed Real estate, not so much.

neilhorn's picture

5. Some debt is an "honest" mistake and can be considered forgiven if the lender (and/or borrower) belongs to a certain club. If so, the loan is marked-to-fantasy when the loan is subject to call; others, not in the club, beware.

vesna's picture

I can improve their website for 100 bucks

Wile's picture

Wile recommends Lloyd's Llamas LLC as a credible forecaster of Lower Lows.  lloll

Wile's picture

Web Bots analysis projects implosion of Bonds around April 2016.  Before that PM trading suspended as there will be no offer in USD.

Vlad the Inhaler's picture

Corporate decision makers do not understand the process? BULLSHIT. The corporations exist to return max short term profit to the shareholders, and in turn the board increases executive pay. And at the end of the day, these free shitters know that the Fed has their back with another bailout.

Wile's picture

Jeff Berwick's term for the US is a Facio-Communist Police State.  He reduces thoughts to words nicely.

hooligan2009's picture

finance 101 - it doesnt matter how you finance a balance sheet (economy) - if your product dont sell - you are fucked

the fed has been fucked (along with every central bank ever invented) since its launch

banks own the fed, so i guess it works for the minority (1%) employed in banks

control the output, unemplyment or inflaiton of a country? only if you are either stalin or an economist in charge of sadistics - woops, statistics

we can't grow up until bullshit is exposed - central banks shoud recylce shit into water, methane and wahtever's left

I Write Code's picture

>QE works by a “signaling effect” rather than by any actual policy operations.

AKA "voodoo economics".

debtor of last resort's picture

QE is like the Chinese pension plan; you get nothing. Except for the promised land frontrunners that die within 5 years from now.

Implicit simplicit's picture

I'm with the forecasts, but for how long. If the shit really hits the fan, everything will be sold, including short term bonds

InnVestuhrr's picture

to buy what instead ?????????????????????????//

Implicit simplicit's picture

Nothing. If hyperinflation follows a deflationary period, the fiat experiment will be over. I am a believer in gold near term and long term, but not midterm, when everything sells just to survive. My ideas are influenced by the opinions of "The Automatic Earth"' blog writers, who I believe purport a likely scenario. "We are all Greece". It is harder to predict the definition of near, mid and long term.

Publicus_Reanimated's picture

You didn't need to write an article that long to answer the headline question:

"Because it borrows growth from the future."

rejected's picture

I think many do not quite understand. The Fed and 90% of government(s) are criminals. Criminals do not produce, they steal from producers. Everything they do or say is intended to transfer more producer assets to them. Why people think otherwise is a mystery to me. 

Fed_is_Love's picture

Bretton Woods Agreement is a great of example of how the US conned the entire world.

Both the IMF and World Bank were established during these meetings. IMF makes US the world reserve currency based on gold with a fixed exchange rate and the Fed prints more than it could back in gold. The US then con's Saudi Arabia to sell foreign oil in dollars. The birth of the petrodollar and the default of the gold standard. Since then printing more paper didn't become much of an issue but the US continued to get cheap imports.

gregga777's picture

It is really very, very simple: What a system does is what it was designed to do. An airplane flies through the air because that is what it was designed to do. The Feral Reserve makes the rich richer because that is what it was designed to do. The Feral Reserves' ZIRP, QE and wealth effect policies were designed to make the rich even richer—at the expense of impoverishing everyone else. It's all very simple and very obvious.

Atticus Finch's picture

Keynsianism is short hand for what we have today, but Keynes never supported activities currently being implemented by today's criminal governments. According to Keynes, QE had a specific and limited purpose and that was to lend to businesses for job creation and producing products. There never was the notion that money should be given to the banks to enrich themselves. What we have today is not QE by the Keynes definition.

Last of the Middle Class's picture

Very simple dumbass, there are 2 economies, one where the QE money circulates to protect bad investment, and one for the rest of us. They never fucking overlap and printed money never flows to the masses.  Got it?  Damn.