"There Is No Clear Way Out" - Richard Koo Says "The Price For QE Has Yet To Be Paid"

Tyler Durden's picture

In his latest note tited "The Calm before The Storm", Nomura's traditionally downcast Richard Koo is not too excited about the market's future prospects, in fact quite the opposite and makes the point that since QE was no game changer, not only is there no clear way out, but "the price for QE has yet to be paid."

What does that mean for risk assets:

Recently, for example, the markets took a tumble when the Fed moved to normalize monetary policy. The US central bank responded by delaying the normalization process, which stabilized the markets, but eventually fears of falling behind the curve on inflation will force it to resume the process. That will lead to renewed market turmoil in a cycle that has the potential to repeat itself endlessly.

 

I expect this balancing act between the monetary authorities, who want to push ahead with policy normalization, and the markets, which violently reject each such attempt, will persist for an extended period of time, interspersed with periodic lulls like the current one.

Some further insight from Nomura's Richard Koo:

For more than half a century after macroeconomics began to develop as an independent academic discipline in the 1940s, the emergence of breakthrough products such as aircraft, automobiles, home appliances, and computers provided companies in the developed world with a host of investment opportunities. Perhaps it should not be surprising that economic theorists at that time were unable to envision a world of no borrowers.

Economists were focused instead on the problem of how to effectively allocate a limited pool of private-sector savings. Government borrowing and spending was seen as something to be avoided since it was a symbol of inefficient resource allocation.

And until Japan caught up with the west in the 1970s, economists’ attention was focused on monetary policy since there was a surplus of domestic private-sector borrowers and no one envisioned capital fleeing the developed world for the EMs. This was the world of Phases 1 and 3, in which there were enough borrowers. Given the historical backdrop, it is perhaps only natural that economists at that time moved in the direction they did.

Macroeconomics did not keep up with changes in global economy

Subsequently, the global economy underwent major changes, with manufacturing shifting to Asia and the developed economies—almost without exception—experiencing asset bubbles that eventually burst, triggering balance sheet recessions. These economies entered Phases 2 or 4 as a result.

The discipline of economics, however, did not keep pace with these changes. Economists continued to build their theories and models based on assumptions that had only been valid in the developed economies of the 1950s and 1960s.

That is the main reason why most economists, whether in academia or the private sector, were completely unable to predict what has happened since 2008. They could not imagine a world where the private sector is actually minimizing debt instead of maximizing profits. Even now, the discipline tends to suffer from the bias that monetary policy is inherently good and fiscal policy inherently bad.

Unconventional monetary policy creates problems when it is wound down

These preconceptions underlie the current policies of inflation targeting, quantitative easing, and negative interest rates. Because central banks have pushed ahead with these policies even though there is no reason why they should work at a time of no borrowers, excess reserves created by the central bank now amount to $2.3trn in the US, or 15 times the level of statutory reserves, and to ¥222trn in Japan, or fully 26 times statutory reserves.

I have used the term “QE trap” to describe the problems that must be confronted when such policies are unwound. They can trigger severe market turmoil that cannot be avoided no matter how extensive the authorities’ dialogue with market participants.

Recently, for example, the markets took a tumble when the Fed moved to normalize monetary policy. The US central bank responded by delaying the normalization process, which stabilized the markets, but eventually fears of falling behind the curve on inflation will force it to resume the process. That will lead to renewed market turmoil in a cycle that has the potential to repeat itself endlessly.

QE was no game changer, and price has yet to be paid

Professor Krugman, who came up with the idea of lowering real interest rates by combining an inflation target with quantitative easing, has finally acknowledged that these measures were no “game changer” capable of sparking an economic recovery. But he still insists they did no real harm. (https://www.imf.org/external/pubs/ft/survey/so/2015/RES111915A.htm)

While that may be the case during a balance sheet recession, when there is no private loan demand, these policies can cause huge problems when they are wound down (witness the market’s recent gyrations). The global economy has now entered a phase characterized by this kind of instability.

Inasmuch as there is no clear way out, I expect this balancing act between the monetary authorities, who want to push ahead with policy normalization, and the markets, which violently reject each such attempt, will persist for an extended period of time, interspersed with periodic lulls like the current one.

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buzzsaw99's picture

he only cares about the "markets". asshole.

HedgeAccordingly's picture

Time to start over. Or massive world war to spark GDP
Nomura got their China GDP call right.
http://hedgeaccordingly.com/2015/03/nomura-chinas-gdp-growth-may-fall-to...

The Alarmist's picture

There is a clear way out, and you hit it right on the head ... WW-III. This is one war the even the lefties can get behind since it will help Gaia get back to the "ideal" half-billion population they keep prattling on about.

Ham-bone's picture

Obama says America ‘is pretty darn great’ after jobs report...Any "truth" to his claim?

http://econimica.blogspot.com/2016/03/obama-says-america-is-pretty-darn-great.html

 

DownWithYogaPants's picture

Liberals don't care about Gaia.  They care about Gaya.  They're all cocksucking assmunches.  No offense to any homosexuals.  I'm just searching for strong enough words to describe these idiots and the damage they do.

Saddam Miser's picture

Assholes, Faggots, Retards, Cunts.... Evil Mother Fuckers.  These work.  And fuck you all if you're offended by these words. I don't care. 

willwork4food's picture

It's funny you mention Gaia. Over the years I've been doing research on what the "real" reasons the .gov and other nations have done to format this economic cataclysim which by any high school senior would be classified as suicidal: i.e.  QE to infinity, neg. intrest rates, massive unemployment (fuck the .gov #s), high debt, corps borrowing millions to buy back their stock, wars that only enrich the means for war and the reaps of war all over the world. Climate change credits? We are to blame? Rumors of huge underground government fascilities all over America?

Now I'm going to go tin foil hat on you ZH guys. Grab a beer and sit down. Do you really believe they think this is sustainable? Then why would they do it?

I am suggesting the possibility that perhaps there is credence to what NASA discoverd in 1983 of a large object coming to earth.

Polonius's picture

I like the way you think.  But riddle me this: why is there no discernable measurable curvature to the earth?  And, if true, what would that imply?  Just sayin'.

10mm's picture

Yeah? Got news for ya. This is not your mama/Pappas war

khakuda's picture

It is sad that we had to go through this whole experience just to prove that Krugman is a quack. Something everyone here new years ago.

knukles's picture

Some might conjure Krugman up as a quack, but he's still an Asshole.

Government needs you to pay taxes's picture

Krugman is like Dr Walter J Freeman, the lobotomy commercial pioneer who travelled the US insane asylum circuit ~performing 3500s procedures, most with no gloves or sterilized gear.  Hell, he didnt have any surgical training at all.  Sure, he killed 15% of his patients, but no matter, he claimed 65% were improved after his icepick to the brain 'treatment'.  So what if many of those 65% shat themselves and had to be re-taught how to eat and walk . . .  That's what Krugman is doing to the economy.  

 

See you at the hanging tree!

leftcoastfool's picture

Not to mention that he can't keep his hands off his pussy...

Multivariate Man's picture

He's not a quack in the definitional sense.  According to public documents he makes about 1.5M per year dispensing his theories and opinions.  To misquote Twain, I believe, "It is impossible to get a man to believe something if his livelihood depends upon it."  He believes in what he says, he's just wrong, not a quack.

Tinky's picture

It's worse than a misquote, it's a misattribution.

Upton Sinclair, The Moneychangers

knukles's picture

Here's an OT for the evening:

Paul Craig Roberts on Sandy Hook.  Published just March 1.   
Talk about no ways out of deep rabbit holes......

http://www.paulcraigroberts.org/2016/03/01/sandy-hook-puzzles/

ISEEIT's picture

Wow.

That's all I gotta say.

Wow.

Mr. Universe's picture

Wow is right, they can take Zippy and put him on TV mowing down a bunch of Muppets with an AK.  Bath Salts is the culprit and sorry to say but Zippy had to be taken down. Just like them punks up in Boston, geez the nerve of that guy living after we shot up the boat we were having a shoot out with. Yeah that's the ticket. Those 3 hours the SB kids lost? Praying to Allah for their next target, good thing we got them! I wonder why they really don't want the FBI to unlock that phone. Never mind nothing to see here. Are we having fun yet?

medium giraffe's picture

Price for QE? Fuck, we're still paying off the baby boomer bill.  Come back in 7 centuries.

The Dogs of Moar's picture

Oh, we can afford to pay for our vacation in QE land.  That's the good news.

The bad news is after we cash out the stock market, the bond market, the commodities market an all of their derivatives, there won't be a sou left over.

I don't doubt you'll look dashing wearing a Jack Daniels barrel with paisley suspenders

 

Thenardier's picture

Krugman-"no harm done."

No harm yet at the WTC on 9/11, just passing the 80th floor on the way down...the corpse of these unconventional policies and the quartering of Bernanke, Krugman, Dragi and Kuroda is in the not too distant future.

economessed's picture

Zen riddle:  do debt traps make a "snap" sound when you find yourself in one?

Tinky's picture

Only if you're in a forest.

FreedomGuy's picture

The test of any economic theory is it's ability to predict the future, not model the past. Underlying this article are largely Keynesian monetary ideas developed the first half of the last century. They have failed to have any real lasting positive effects since then. However, they have the aphrodesiac of government power and the necessity of central planning. This appeals to elitists of all sizes and gives rationale for ever more government power. Power begets favors.

These theories will not die on their own. They have to be killed by their own abject failures and the people who hold them must be deposed and ridiculed.

I need more asshats's picture

You Americans. Sitting in the comfort of your Particle Board Mcmansions. Posting your selfies on your farcebook, texting your besties, and watching your joo teevee shows.

Oh you complain about the joo confetti but you're too comfortable to do anything.

Right Alice!??

Try catching and killing your own dinner for once like we do up here in Churchill! Try it!

tarabel's picture

 

 

Try catching and killing your dinner without benefit of civilized products such as guns and ammunition. Try it!

And I wonder how many raccoon pelts it takes to pay your ISP bill.

 

I need more asshats's picture

I've been trapping since I was 8 years old. I can sneak up on a seal and club it, easy. The young ones have silk pelts$$.

FreedomGuy's picture

What the hell does that have to do with my post about failed economic theory? The reason we have advanced over time/history is precisely because we don't all have to go out and kill our own meal, make our own clothes, build our own hut and dig our own coal. We specialize just like the people who make your Remington with advanced optics in the sights, advanced metallurgy in the barrel to make them half the weight they used to be 200 years ago and so on. You will use your stainless steel knife with composite light handle to skin in.

The whole Joo thing and McMansion stuff is idiotic. Live in a log cabin and rail against zionists in Alaska if you like. Does not make you superior to anyone.

If you get an infection after skinning your game and cutting yourself make your own antibiotics. Try it!

The Alarmist's picture

Why would he think a society that legitimised liar-loans, jingle-mail, credit-card cashouts followed by chapter 7, campaign finance reform designed to funnel money through the media criminal elite to the political criminal elite, and bankster bonus bailouts ever actually intend to pay for QE? The goal was to plunder the assets of the middle class and return them to the serfdom from which they came 800 years ago.

Mission Accomplished!

- - - - - -'s picture
- - - - - - (not verified) Mar 4, 2016 8:05 PM

stop calling krugmann a professor

gregga777's picture

"Professor Krugman, who came up with the idea of lowering real interest rates by combining an inflation target with quantitative easing, has finally acknowledged that these measures were no “game changer” capable of sparking an economic recovery. But he still insists they did no real harm."

Besides stealing ~$500,000,000,000 annually (~$4,000,000,000,000) over the past 8 years) from American deposit American savings account holders alone to enrich the Oligarch, banking and Con Street criminals and for very generous bribes to Republican and Democratic parties and politicians, not including the incalculable and irreversible damage to public and private pension funds, etc., there was really no harm done from Ivory Tower Professor Krugman's vantage point. Professor Krugman should be fired from any and all employment and forced to live on welfare and SNAP EBT cards. I don't give Krugman much credit for common sense, but I t's possible that his point of view via-a-via the depredations of the Feral Reserve System could become more realistic after a few years living as an unemployed and unemployable American worker who has "left" the workforce.

InsanityIsWinning's picture

Can you say . . ."liquidity trap"

gregga777's picture

"Professor Krugman, who came up with the idea of lowering real interest rates by combining an inflation target with quantitative easing, has finally acknowledged that these measures were no “game changer” capable of sparking an economic recovery. But he still insists they did no real harm."

Economic witch doctor Krugman ensconced in his splendidly privileged and protected Ivory Tower is wonderfully insulated from the dire economic consequences caused by his economic malpractice. In fact, so far, the worse the consequences have been for the American People the greater he have been his actual benefits. In the real world of honest free markets, hard work, entrepreneurialism and risk Krugman would be a nobody. It's only in the artificial and protected world of academic witch doctors, totally divorced from the facts, data and honest accounting of the real world, that one such as Krugman could prosper. It's obvious that Krugman harbors not one iota of empathy, sympathy or understanding of the American People's hardships.

Yen Cross's picture

  WTF?  Koo Koo--Koo Koo. [ Bird popping out of cheap clock}

  Thanks Mr. Krugtard.

proctological milliner's picture

"unconventional monetary policy creates problems when it is wound down"

 

um..nope, it creates problems when it is 'wound up',..... the problems just become apparent when it is wound down, and until it is wound down, those problems will keep gowing.

 

Only kidding,... what would I know, I just make ass hats, no highly paid financial expert me!

 

 

orez65's picture

"unconventional monetary policy"

Stop trying to "grease" economic rape!

gattaca's picture

What is still supporting the eqitiy market mound of misallocation? On this site i have read that corporate buybacks are reaching their limit as debt service demand nears max defined by revenue surplus for such. Ive also read tbat the little tweak in rates foisted upon the system using reverse repo and interest on excess reserves has the same effect as fed selling enough bonds to undo all the qe injected since 2009. Throw in the commercial real estate peaking and oil tanking, why the hell are markets still supporting obscene valuations? I know there are some smart sumbitches on here, please say when or why not for this ponzi to pop?

fowlerja's picture

Hum...that was interesting...hey Richard...can you recommend a particular financial strategy for these uncertain times...or should I be reading your future articles to find the yellow brick road?

gattaca's picture

I think by asking the question, i came to the realization. They attempted to raise rates, but the tools were ineffective. 10yr t actually went lower and there was as a consequence no hoovering up of the confetti.

Die Weiße Rose's picture

Oh ye seekers after perpetual motion, how many vain chimeras have you pursued?

Go and take your place with the alchemists.     — Leonardo da Vinci, 1494

 ---------------------------------------------------------------------------

I expect this balancing act between the monetary authorities, who want to push ahead with policy normalization,

and the markets, which violently reject each such attempt, will persist for an extended period of time,

interspersed with periodic lulls like the current one.

in a cycle that has the potential to repeat itself endlessly....

(until the foolish experiment comes to another crashing halt..)

------------------------------------------------------------------------------

Deus ex machina and the law of conservation of energy:

A consequence of the law of conservation of energy is that a perpetual motion machine of the first kind cannot exist.

That is to say, no system without an external energy supply can deliver an unlimited amount of energy to its surroundings.

QE 123, ZIRP, TWIST, NIRP, are negative energy takers, that will eventually deplete -

the Deus ex machina monetary system.

WR;)

Element's picture

But ... but ... Richard Koo said stagnation would be benign ... best of all possible worlds ... something ... must have missed the finer-points of his subtitles re balance sheet recession  ... seems to be turning to shit instead .. what a shocker!

honestann's picture

This article ignores one important factor... confidence.  Already many in the mainstream are starting to question whether the predators-DBA-centralbanks know what they're doing.

Once their skepticism becomes more certain, and substantially more in the mainstream also come to realize that the monetary emperors have always been nudists, large numbers of people will run for the hills.  And many of them will also realize "the tin-foil hat crowd was at least substantially correct all along", at which point behavior radically changes in favor of real, physical assets and disfavor of paper and computer screens displaying fiat, fake, fraud, fiction, fantasy, fractional-reserve statements of debt.

gattaca's picture

you share my penchant for both alliteration and movement into physical tangibe assets. would you consider it prudent to deploy debt to acquire such physical assets in anticipation of inflation outstripping fixed interest rates?

honestann's picture

I think that is probably a winner strategy (if you can get timing right), but also a strategy that I would never adopt.  I have never had debt, and I never want to have debt.

Also, the predators-that-be have a penchant for arbitrarily and unilaterally changing the rules to benefit themselves, and at the same time royally screw the responsible and productive.  Therefore, in any "reset", the predators-that-be may well decide you need to repay multiples of what you borrowed (to partially or fully offset the devaluation part of the reset).

Yeah, playing the odds (and taking advantage of predators) seems wise, but this kid prefers to stay totally out of every fraud they play.

Which is why I never had debt, haven't had fiat for the past 3~4 years, and prior to that (2000 to 2011) kept 95% to 99% of my liquid assets in physical precious metals.  In 2011 I converted most of my PMs into my self-sufficient digs in the extreme boonies of the southern-hemisphere, which was absolutely the luckiest timing that ever happened to me (exchanging most of my gold above $1800 and silver above $40).

And I do mean lucky, because I had no idea the predators-that-be would manipulate gold and silver prices down like crazy from 2011 to early 2016.  In fact, at the time I decided to liquidate and build my digs, I was terrified that I was trading away my precious metals near the start of an astronomical parabolic blow-off.  So yeah, talk about luck.  Then again, about 98% of the luck I've had in my life has been bad luck, so I was definitely due for a bit of good luck for a change!

Or, as some wise dude once said, "good luck is rarely accidental".

However, probably accidental in this case.

gattaca's picture

well, I started down the path to erudition with debt at a private uni that cost more than my rural farming family could afford, and far more than a student could work for. I was a work-study student in a research lab 20H/week and that was just really chump change compared to costs. so, once i got started with debt, it didn't seem like a big deal when it was time for medical school and the phd. so it was really just ignorance and oppportunism that started me on the path to debt. pretty standard doctor stuff. now that i realize savers are being punished, nay robbed, by monetary expansion and inflation, I am verily tempted to double down and use debt to get my own self sufficient digs in the boonies of north idaho.  Also a nice offset to my salary while building the energy and irrigation infrastructure on the acres.  However, I truly envy your position, you are correct the rules may be changed at any time and the threshold for confiscation is low. I would have never projected the PM price manipulation or the current collapse in energy prices. nonetheless, 'chance favors the prepared mind' indeed and you exemplify a very successful and prudent approach to modern living.  I am just beginning to consider getting out of fiat as well, but more for abstract poliltical reasons. I think the gamble on debt could be a winner in the short to medium term.

falak pema's picture

Koo sounds like poo about the coming reset...

ussa's picture

Debt can be liquidated through bankruptcy, forgiveness or issuance of zero interest currency. There are many paths out of this. TPTB won't take the ones that are best for the country.