Guest Post: QE Forever And Ever?

Tyler Durden's picture

Submitted by Pater Tanebrarum of Acting Man blog,

The Extraordinary Becomes Normal

The lunatics are running the asylum. This is the only conclusion one can come to when considering the nonchalance with which what was once considered an extraordinary policy with a firm 'exit' in mind is now propagated as a perfectly normal 'tool' to be employed at the drop of a hat.

We refer of course to so-called 'quantitative easing' (QE), which really is a euphemism for money printing – even if not necessarily all of the central bank credit created ends up as part of the money supply. In fact, the experience of the Bank of Japan and the Bank of England with 'QE' was and is that it simply increases excess reserves and depresses already low interest rates a little further. Such excess reserves may be regarded as the tinder for an inflationary expansion of the money supply, but as long as no new credit is pyramided atop them, they may as well not exist.


However, the Fed has been quite successful in boosting the money supply with the two iterations of 'QE' it has implemented thus far, in spite of both private sector lenders and private sector borrowers not prepared to add to the existing debt pile. We believe this is due to two factors: for one thing, the Fed also buys securities from non-banks. This not only increases bank reserves, it also increases deposit money directly. For another thing, commercial banks seem eager to increase their holdings of treasury bonds and are thus helping to finance a government that seems perfectly willing to engage in deficit spending on an astronomical scale. The banks have not only replaced the bonds they sold to the Fed during 'QE', they have expanded their holdings of treasury securities at an unprecedented pace.

For a rigorous explanation of the mechanics of 'QE', we refer readers to an earlier article on the topic which discusses them in detail: 'QE Explained' (we have written this as a reference article, as we thought at the time that many of the explanations that were forwarded elsewhere were not satisfactory).



Treasury and agency (GSE) securities held by commercial banks. Since agency bonds are these days issued by state-owned entities under 'conservatorship' they are effectively liabilities of the US treasury – perhaps not de iure, but de facto. Big expansions of bank holdings of treasuries usually tend to go hand in hand with recessionary periods and heavy deficit spending by the government – click chart for better resolution.



By contrast, the commercial banks have cut back on their holdings of 'other securities' since the 2008 'GFC'. The last time this happened was after the property bust of the late 1980's and the S&L crisis that followed in its wake – click chart for better resolution.



We have little doubt that if the Fed were to start 'QE3', it would once again succeed in boosting the rate of money supply growth. We also have little doubt that 'QE' will be tried again, even if the timing remains uncertain. One reason to expect more of the same is that in recent months, a slowdown in US true money supply growth has taken place. Not as rapid a slowdown as we thought we would see when 'QE2' ended, but that can probably be ascribed to dollars fleeing the euro area. A recent example is provided by Royal Dutch Shell's decision to remove its money from euro area banks and deposit it with US banks instead.

To put numbers on this, over the past quarter growth in 'narrow' money TMS-1 has slowed to 5.9% annualized and growth in the 'broad' money measure TMS-2 has slowed to 6.6% annualized. This may strike many people as plenty of inflation, but consider that the year-on-year growth of these two money supply measures stood at 11.9% and 13.4% respectively as of June 30 (even the year-on-year growth rates, although still hefty, represent a marked slowdown from the peak).

An economy that has become addicted to constant injections of new money is likely to falter very quickly once the money supply growth rate slows down. Although it is not knowable in advance what rate of money supply expansion is the new threshold for upsetting the economic apple-cart, it is probably higher than it used to be during the credit expansion of the pre-GFC boom period.

At the time, the year-on-year growth of TMS-2 slowed to low single digits (slightly above 2%) before an economic crisis struck – see the chart below.

What this chart also shows is that 'QE2' was preceded by a quick slowdown in money supply growth after the conclusion of 'QE1'. At the time, the ECRI WLI fell to territory that indicated an imminent relapse into recession was likely. The Fed quickly resumed its printing duties.



The year-on-year growth rates of TMS-1, TMS-2 and M2, via Michael Pollaro – a slowdown is underway ever since the Fed's 'QE2' program ended, but has been mitigated by money fleeing the euro area – click chart for better resolution.



Fed credit outstanding and the 12 month change in Fed credit – as can be seen, the Fed is no longer actively inflating – click chart for better resolution.



'Open-Ended QE'

On Tuesday, Boston Fed president Eric Rosengren, a noted 'dove', made waves by arguing in favor of an open-ended asset purchase program by the Fed, a kind of QE of undetermined size and without an expiration date, only limited by the attainment of certain macro-economic goals. This method is to be preferred to a 'fixed limit' QE operation according to Rosengren, as it would end the 'market's fixation with when the program will end'.

Rosengren has no vote at the FOMC this year, but he is still regarded as an influential member (he is slated to rotate into a voting slot next year). In fact, all the 'doves' should be considered influential considering who helms the Fed's governing board in Washington, namely Ben Bernanke and Janet Yellen (we have briefly discussed Mrs. Yellen's views yesterday).

Rosengren also argued that the Fed should not shy away from more easing just because it is an election year – a sign that the political implications of Fed action this year have been a topic of discussion at the central bank. His remark on that particular point is not without irony as can be seen below:

As reported by Bloomberg:


Federal Reserve Bank of Boston President Eric Rosengren said the central bank should pursue an “open-ended” quantitative easing program of “substantial magnitude” to boost growth and hiring amid a global slowdown.

The Fed should set its guidance based on the economic outcomes it seeks and focus on buying more mortgage-backed securities, Rosengren said today in a CNBC interview. Without new stimulus, the jobless rate would rise to 8.4 percent at the end of this year and economic growth wouldn’t exceed its 1.75 percent average in the first half of the year, he said.

“What I would argue for actually is to have it open-ended, that we focus on economic outcomes,” Rosengren said. “It would be setting a quantity that you’re going to continue to buy until you get the economic outcomes that you want.”


“We’ve found that the economy has not grown as fast as we’d hoped and as a result I think it is an appropriate time to take stronger action,” Rosengren said. “A nonpartisan Federal Reserve should not be worried about the political cycle, it should be worried about the business cycle.”


(emphasis added)

This latter remark is ironic because the Fed's actions are the root cause of the business cycle – its suppression of interest rates after the bursting of the tech mania in 2000 was what set the stage for the housing boom and its aftermath.

What makes it all the more astonishing to hear Rosengren articulate this latest idea of 'monetary inflation without limit' is that it is so utterly bare of introspection regarding what has happened up to the current juncture.

It seems to us that it should be glaringly obvious that when the Fed boosted money growth last time around to help battle a recession, it set in motion the very boom that has cost us so dearly. And now the 'dovish' faction wants to continue doing it all over again, only on a much bigger scale?

Apart from his sole focus on short term outcomes, an important point that seems not be considered by Rosengren is the question of what should happen if the 'open-ended' QE policy were to fail to achieve its stated goals. He seems to assume that it will succeed in lowering unemployment and creating 'economic growth' as a matter of course. No other outcome is apparently conceivable. However, the effects of monetary easing on the economy are circumscribed by the state of the pool of real funding.

It goes without saying that money printing cannot create a single molecule of real wealth. If it could, then Zimbabwe wouldn't be a basket case, but a Utopia of riches. However, money printing does have both short and long term effects. In the short term, it can divert resources into bubble activities – all those economic activities that would not be considered profitable in the absence of monetary pumping. These activities of course create demand for factors of production, including labor, and tend to prettify the 'economic data' for a while – just as the housing bubble was widely regarded as an example of smooth 'non-inflationary' economic growth until it burst.

As it were,  monetary pumping can not always be expected to produce even such short term improvements in the vaunted 'data'. If the economy's pool of real funding is stagnating or shrinking, there will simply be no wealth available that can be diverted into bubble activities. All currently existing economic activity is already funded – and it is important to realize that what funds it is not 'money', but real goods. Money is merely the medium of exchange that enables both economic calculation and the smooth functioning of the market.

To describe with a simple example what we mean, consider a very primitive island economy. Say that there are three fishermen who want to build a new boat to improve their productivity and hence increase their wealth. Building the boat takes time, during which they can no longer catch fish. They must therefore have enough food stored to see them through the boat building period – otherwise they will simply begin to starve and never be able to finish the project. If they hire additional helpers and pay them with money, then these helpers will also require food, shelter and so forth during the time it takes to build the boat. Unless someone else produces food in sufficient quantity to sell it to them, or they have a big enough store available, the project will come to grief. In other words, an adequate pool of real funding is a sine qua non if such an investment project is to succeed. It would obviously not help at all if these men increased the size of the money supply. 

It is not different in a modern complex market economy – all economic activities require real funding in the end. The allocation of these inputs will only be rational when money is sound – any interference with the money supply and interest rates by a central planning agency will by necessity falsify prices and paint a false picture of the savings and consumption schedules of consumers and the size of the pool of real savings available for investment purposes.

It will therefore set bubble activities into motion – activities that fail to generate wealth, because they only appear to be profitable. If no wealth can be diverted into such activities because the pool of real funding is exhausted, then all that will happen is that additional money will raise prices, but it won't be possible to conjure even a short term mirage of an improving economy.

Of course the market economy is highly flexible and new wealth is created all the time, in spite of all the obstacles the economy faces. It is conceivable though that a point in time will come when the Fed pumps and there is no longer an effect that would fit its conception of economic recovery.

We must infer from Rosengren's idea of implementing open-ended QE until  certain benchmarks in terms of unemployment and 'growth' are achieved, that in case they remain elusive, extraordinary rates of money printing would simply continue until the underlying monetary system breaks down.

Perhaps he should be cheered on to shorten the waiting time.



Boston Fed president Eric Rosengren: in favor of money printing without a fixed limit.

(Photo credit: Wendy Maeda)

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SwingForce's picture

Disgusting how these banksterz help each other and no one else. 

CREATURE FROM JEKYLL ISLAND, 5th Edition, by G. Edward Griffin. Its the best book I have ever read. It changed my life- now I just look at these bozos and laugh at how stupid the people are who let them get away with it.


Stackers's picture

This is called Nominal GDP Targeting. You just spend until you get the GDP print you are looking for. Once again Jim Rickards hit the nail on the head months ago on predicting this language coming from the Fed next.

Muppet Pimp's picture

So long as all the cash hits the PD's first and they are able to front run it, I am all for this plan.  Anything to get bonuses back up is ok by me.

BTW, anybody know how the country got into the hands of a bunch of jerks who never had real jobs their entire stinking lives?  This could be the problem me thinks.

Muppet Pimp's picture

FWIW, it seems worth noting that the China has been granted PD status as well now.  It only makes sense that to get the economy going again over here stateside that any printed monies be dispersed to China first, so they can front run along with our TBTF's.  To quote GWB, 'Your doing a heck of a job Brownie"  Central Planning and corruption FTW. 

El Oregonian's picture

Eric "Buzz Lightyear" Rosengren "TO INFINITY AND BEYOND!!!

Vampyroteuthis infernalis's picture

It is just more debt collection. Debt upon debt upon more debt. Delaying the inevitable deflationary black hole which will suck everyone's pocket's dry.

GetZeeGold's picture




Excuse me are we going to pay for all this free crap again?


Money 4 Nothing's picture

That's not your concern Muppet, were printing money off your Social Security WHFIT accounts now. Go watch the Olympics and leave this in our capible hands.

-Eric Rosengren

AldousHuxley's picture

problem is with internet and mobile phones, even retarded arabian oil princes can come to conclude that US is bankrupted despite all of the window dressing on a pool somewhere.


no more American mass media propaganda. any blogger can state his case as well as any pre-selected buffon on CNBC.


 In Addition, unlike TV, where predictions and analysis are easily forgotten, internet keeps track of history. Easy to prove someone has failed despite status quo credentials.


So.....PEOPLE now know the truth....



but with QE, they are forced to risk their money, so they do. only to the extent of QE. and we end up with a dependency cycle: no QE, no investments.


Japan tried QE for 5 years....from 2001 to 2006

Nikkei index during that time shows "growth" until 2007, just a year after end of QE .




Truth is, US market is pretty efficient. outsized profits are not to be had unless some significant tech breakthrough (risky startups) or cheating (banksters). Austerity push is to rob labor of the productivity gains to force profit into investors by enslaving labor (make them more like chinese factory slaves).





SwingForce's picture

You spew too much, internet has no memory only instant pulses...  to remember is to think, and you do not. 

  1. Profits are an accountants' daydream
  2. MSM talking heads are brain-dead animatronics from Disney/ABC
  3. QE is spent 1 time, is disappears into the banks
  4. WELFARE & FOOD STAMPS get spent in their entirety every month, into The Economy.

Big A, you over-think too much. Wipe up your vomit & open your eyez.......

AND read the book. 3rd ed. here: Keep saying yes, download anyway...

SwingForce's picture

MP- Your comments reference MY comment exactly HOW?

Or the main story?  


Hype Alert's picture

What I'm wondering is why we spent all that time over all those years worrying about credit ratings?  I mean, this really does point out how meaningless they are.


Somewhat like the old "Discount Window".  Now, there's a relic.

dmger14's picture

Yes, and his prediction of Currency Wars is coming true as well.  Next will be his true prediction of gold going to $3,500 to $5,000 within 2 to 3 years.



Precious's picture

Rosengren.  Some fucking career bureaucrat that should be running a deli in Jersey.  Never did one fucking notable thing.  Wrote 100 academic papers you could use to wipe your ass. 

Hedgetard55's picture

“What I would argue for actually is to have it open-ended, that we focus on economic outcomes,” Rosengren said. “It would be setting a quantity that you’re going to continue to buy until you get the economic outcomes that you want.”

This is the statement of either an insane man or a complete and utter douchebag with shit for brains.

Precious's picture

This is a statement from someone who has never produced a single unit of production other than his daily bowel movement.

Thorny Xi's picture

Actually, pooping is a net loss deal, considering the guy burns 100W per hour for 24 hours just to work it up.

Snidley Whipsnae's picture

"extraordinary rates of money printing would simply continue until the underlying monetary system breaks down."

How long has it been since you heard the Fed use the term 'exit plan'?

I long ago assumed that all the grown ups here understood that there is no 'exit plan'...

The printing will continue till it doesn't.

Slightly Insane's picture

"The printing will continue till it doesn't"

I would add "The printing will continue till it doesn't MATTER"!

When your only tool is a Hammer, every problem looks like a nail.

vast-dom's picture



YesWeKahn's picture

Fuck Rosengren. I prefer hyperinflation so that the worth is redistributed after revolts and wars.

Motley Fool's picture

Printing Rah Rah Rah!


bank guy in Brussels's picture

Great new piece from Ambrose Evans-Pritchard ...

Germans printed money and bought their own bonds in 1975 when they were desperate ...

Ambrose Evans-Pritchard is absolutely, totally nailing it in his journalism on the EU situation

ZH has been pretty weak recently by comparison, stuck in a narrow rut

Evans-Pritchard's articles should get a standard lead-in on ZeroHedge as much as anyone

AEP's latest 'German money printing' -

Hedgetard55's picture

please... Ambrose is a complete douche that hasn't been right about anything in ten years.

Totentänzerlied's picture

So, let them do it again. See what happens.

q99x2's picture

Bring it on. I haven't got Arithmophobia. They are only binary representations of a philosophical concept. Probably can't even withstand a solar flare. In the old days you could wipe your ass with them so they had some actual value. Not today.

buzzsaw99's picture

Rosengren knows damn well QE doesn't create jobs. QE creates banker bonuses and that is all it does.

Papasmurf's picture

Wouldn't that be his reason to promote QE?

rufusbird's picture

As I read this thread I keep getting images of characters from Stephen King novels...Lol!

(of course I have drank a couple of glasses of homemade Apple cider [fermented of course] by now.)

lotsoffun's picture

and it preserves more banker jobs, so they can trickle down as you skim their pool and mow the lawn.


wdmitch666's picture

the fed was created to manipulate currency. it is now tasked with doing so until inflation and employment stand at certain levels. the 'tools' for promoting one hurt the other - goals enacted by a federal government that (along with state and local) restricts economic activity. we are turing to open-ended currency manipulation in an effort to appease voters who want it both ways. this cannot end well.

i would love to see some 20-year projections of the money supply, and its effect on inflation, assuming QE continues as it has .

dark pools of soros's picture

That's easy. You won't see any of that money, but feel all of that inflation.

The Monkey's picture

If the Fed is going to pursue these policies, they need to let the markets correct before hitting the next trigger. If they don't let the bears come in and hit the markets from time to time, they will be putting prices so far out of kilter to cause a large crash - if they aren't already there.

Rosengren is apparently totally unaware of how dangerous it is to have an ever growing layer of speculation in prices. Producers overproduce. Inventories grow. Yeah, it looks good for jobs (for a while) until the slack is so large that it unwinds on it's own and mass layoffs come in spades.

Suppressing natural market volatility is dangerous stuff.

Meesohaawnee's picture

and "stimulus" is a euphemism for "ripping the public off"

TeMpTeK's picture

Eric Rosengren...Great for my portfolio

Pants McPants's picture

While I grok articles like this completely, I can't help but feel empathy for those poor (no pun) souls who, though no 'crime' other than economic illeteracy, are crushed when policies like this are implemented.

Rosengren and his ilk represent sociopathy in its most primitive form.

govttrader's picture

I said it before, and I'll say it again.   Most of you posters seem to miss the major point...a politicians "job" is to keep his job.

A central bankers "job" is to stay a central banker long enough that his actions create such wealth for his "friends" that when he leaves his post, he has a vault of gold bars and other rare earth elements waiting for him in his basement.

Under these auspices...we are no-where close to the end.  Central bankers will LTRO and QE (and make statements to that effect) until it doesn't work.  It hasn't stopped working yet.  In trading, to be early, is to be WRONG.  I am a trader.

There won't be hyper-inflastion until the printed money makes its way into the hands of the regular joe.  That hasn't happened yet.  The minor inflation in food we are seeing is nothing close to hyper-inflation.

Hedgetard55's picture

You don't need "hyper inflation" to destroy an economy. $8 a gallon gas will do it.

Motley Fool's picture

Printing is the effect of Hyperinflation, not the cause.

Dr. Engali's picture

$5.00 gas will do the trick.

Totentänzerlied's picture

The deafening roar of "Who could ever have predicted this!!! Save us, government!!!" will that day use more energy than all the cars in America.

LMAOLORI's picture



Perhaps he should be cheered on to shorten the waiting time.


Ben is doing just fine in that regard heck yesterday he channeled Marx

ian807's picture

But the money is just bits and its flow is hidden. I think this changes things. You can keep the scam going for longer. How long? I guess we'll find out.

benbushiii's picture

A nonpartisan Federal Reserve what a joke.  They represent the interests of the bankers.  Period!!!!  What if the American people were told that the Federal Reserve was raising taxes on the 99% in order to allow the bankers to collect bonuses and perpetuate the extraction of the interest rate spread on their loans.  Perhaps we should understand that most of the revolutions of the past 1000 years have occurred when the common man realized he was being suppressed by the ruling class.  Did the Revolutionary War not start because of the citizens desiring to leave the shackles of the Crown / Bank of England?  The Federal Reserve through their QEs is effectively taxing the people without representation!

The Count's picture

It's mass lunacy my friends. I have noticed this starting about 15 years ago and now it has reached mind bogling levels (at least for those that somehow elude the effect). Most folks do not even realize that plain old common sense has evaporated, now replaced by 'values' reflected by brain dead reality shows. Case in point....Family Guy...a totally vulgar cartoon inappropriate for anybody under at least 14, aired during the day as if it was bugs bunny.

Snake's picture

IMO Family Guy, like South Park, use hyper irony and satire to become some of the most profound post 9-11 forums for socio-political discourse and commentary, not always easy to stomach ....  

lotsoffun's picture

it all still panders to the lowest common denominator possible. (south park, etc.)  and honestly - it's not something i would care for my kids to watch, or myself as a child.  infact - as a child, i usually found something better to do every day then watch t.v.  and, in fact, as an adult, i usually find something better to do than watch t.v. - and infact - i'm reducing my zh time, because in the end, it's the same thing over and over again, and i don't do anything for myself productive.  because, if we are all honest withourselves here - we lost, big banks won, and over the next year or so - you won't see anything except more dimons and diamonds and corzines with their pants down and hands in the till and nothing done about it.  including holder and obama and fast and furious fcking of the american people.  and we all know it.  so get one withit and do something with your time.  because - it's limited, and unless you are lucky - so will soon be any of your disposable worth.  and if you claim that anybody is going to 'do something about it'.  yeah right.  'i'm gonna hit you so hard, yo mama gonna feel it in philadelphia'.  a lot of talk.

SheepDog-One's picture

There was never any QE at all, its just an excuse to monetize the debt, thats all.

SemperFord's picture

I always thought of QE/TARP as a "legal" way to give banks free cash while making it look legit to the masses.

Meesohaawnee's picture

totally sheep dog. Ive never bought into the the cry that QE was about interest rates. maybe indirect. My view, via the mechanism you state is just an excuse to grease da boyz wheels. Nothing else.