Guest Post: When Quantitative Easing Finally Fails

Tyler Durden's picture

Submitted by Gregor MacDonald of Peak Prosperity,

While markets await details on the next round of quantitative easing (QE) -- whether refreshed bond buying from the Fed or sovereign debt buying from the European Central Bank (ECB) -- it's important to ask, What can we expect from further heroic attempts to reflate the OECD economies?

The 2009 and 2010 QE programs from the Fed, and the 2011 operations from the ECB, were intended as shock treatment to hopefully set economies on a more typical, post-recession, recovery pathway. Here in 2012, QE was supposed to be well behind us. Instead, parts of Southern Europe are in outright depression, the United Kingdom is in double-dip recession, and the US is sweltering through its weakest “recovery” since the Great Depression.

It wasn’t supposed to be this way.

Recently-released data from all these regions now confirm that previous QE, at best, merely bought time against even more grueling outcomes. Spain's unemployment, for example, has just hit a new post-Franco high of 24.6%, and the forecast for this crucially important EU economy remains negative. Recently revised US figures on GDP show that the post-2009 recovery was even weaker than previously estimated, with the first year post-crisis crisis clocking in at 2.5% vs. the expected 3.3%.

Plodding, slow growth in the aftermath of a global financial crisis is a recipe for stagnation. The inability of the US economy to work off its surplus of labor appears to have finally stirred OECD policymakers into action. This is, of course, a great and humbling disappointment to the recoverists, who keep mistaking various economic oscillations around a bottom for the start of a typical post-war, V-shaped recovery. Housing, autos, jobs, Internet IPOs, state tax revenues, and train traffic have all been called upon by optimists to sound the clarion call for a broad economic recovery. Yet the US economy still is only able to produce sector-specific or selected regional strength that never adds up to quite enough to restore national growth.

When we look at national GDP, at 1.5% in the most recent quarter, it is not clear the US economy has enough forward speed to statistically distinguish between slow growth and no growth. Large states like California, for example, are already seeing the return of declining state revenues. Meanwhile, national poverty -- one of the best measures of aggregate economic health -- continues to soar.

There is no doubt that any new round of QE -- especially a double shot from both the Fed and the ECB -- will have psychological impact. For Europe, QE would once again allay systemic risk. And for the US, QE will surely find its way to the stock market; which is not an insignificant outcome as America increasingly relies on the stock market to produce retirement income. However, the question arises, What series of radical measures policy makers will turn to after the next round of QE wears off?

Before we answer that question, let’s review the poor economic conditions leading to the next (and final) round of QE.


House prices in the US have done an excellent job of adjusting downward over the past 5 years to reflect the stagnation in US wages, the overhang of private debt, structural unemployment, and the rising cost of energy.

But there has been a recent media celebration of sorts over this story, as it now appears that housing is bottoming. To be sure, certain housing markets like Miami and Las Vegas continue to recover from completely bombed-out levels. Additionally, construction of new homes, especially multi-family homes, is off the bottom. For now.

The problem is that housing is a result, not a cause, of economic expansion. And unless housing is to work in tandem with wage and job growth, housing alone cannot power the US economy. Did the US not already learn that lesson already over the past decade?

Let’s take a look at fifteen years of home prices, from the US Census Bureau:


The unsustainable peak in 2006, when single-family homes reached a median sales price of $222,000, marked a near-doubling of price over the ten-year period from 1995. But as we now understand, not only were wages (in real terms) not rising during this period, but a new bull market in commodities was getting underway, robbing Americans of discretionary income.

The result is that house prices were able to keep up with the loss of purchasing power until slightly past mid-decade. Then they collapsed. Worse, the phase transition in rising energy prices kept going (and continues through today), which had an outsized impact because the topography of US housing, largely dependent on roads and highways, is quite exposed to transportation costs.

We can think of housing as facing several key constraints that will be sustained for at least another five years:

  • First, there is the tremendous overhang of personal debt in the US. Much of this is still carried within the mortgage market itself. (Additionally, student loan debt has also emerged as an enormous barrier to home buying.)
  • Second, there is the lack of wage growth and the problem of structural unemployment. The surplus of labor prevents the broad, marginal pressure needed to force national house prices upward.
  • Third, the constraint of oil prices will not ease. This means that urban real estate may do well on a relative basis, but the majority of US homes will continue to adjust downward to reflect the permanent repricing of oil (and hence gasoline).
  • Finally, the notion that real estate prices have bottomed with mortgage rates near all-time lows seems a very risky call. Is it more prudent to presume that a new advance in national real estate prices will be carried on the back of rates going even lower -- or higher? Which is it? The view that real estate has bottomed appears to assert that no matter where interest rates go from here, real estate is going higher. That is the mark of hope and belief; not analysis.

It seems very unlikely only five years into such enormous, structural shifts in the US economy that the repricing process is over in housing.

At minimum, I expect the median price of single-family existing homes to revert to the 2000 level of $147,000, with the strong possibility of an overshoot to the $125,000 level. This process will take several more years.


As early as 2009, many of us understood that this was not a normal economic decline and therefore would not be followed by a normal economic recovery. Here's the lead paragraph to a New York Times piece, covering the latest GDP data:

U.S. Growth Falls to 1.5%; a Recovery Seems Mired

The United States economy has lost the momentum it appeared to be building earlier this year, as the latest government statistics showed that it expanded by a mere 1.5 percent annual rate in the second quarter.

This is precisely the kind of news flow that the business press can expect to report for years to come.

Sure, the stock market may advance from points of low valuation. Certain regions of the country, especially those tied to exports, may thrive for a while. But nationally, a long secular contraction is now in place that will combine stagnant wages, contraction in government payrolls, flat tax revenues, and the shift to a cultural preference for much lower consumption. In addition to the fact that young people will not buy cars, will not buy houses, and in general will not secure high-paying jobs (if they can secure jobs at all), the nature of work in the US has entered a degrading period. Low wages, part-time work, poor benefits, and higher health-care costs all serve to further squeeze consumption.

Let’s take a look at the structural shift from full-time to part-time work in the US.

At an inflection point in a normal recovery, US workers would quickly be hired back to full-time jobs. But a full-time job with benefits is a cost that US corporations no longer wish to bear. This is partly why US corporate earnings and their accumulation of cash has been so robust. Sited in the US but acquiring labor abroad, US corporations are having their finest hour as they sell products to non-OECD markets that benefit from wave after wave of stimulus from the OECD, while the economy and labor force in their home countries languish.

Here in the US, we have effectively stripped out an entire tranche of the full-time US workforce, with no plausible scenario currently in place for adding it back. America used to have nearly five full-time jobs for every part-time job. Now we have four. Meanwhile, Washington, characterized by professional normalcy bias, has finally started figure this out. More importantly, this is why the economy will veer continually towards recession absent some form of stimulus in the years to come.

While the jobs market is surely the primary reason why QE 3 will be attempted, it’s also the reason why more radical measures are likely thereafter, as opposed to QE 4. Many of the prognostications for QE’s impact on the labor market, especially from the Fed and Fed-connected economists, simply never came true. That will become even clearer after QE 3 fails.


After leveling off in late 2011 and early 2012, the number of persons taking Food Stamps (Supplemental Nutrition Assistance Program, or SNAP) in the US is starting to push higher again. Given that food prices are set to make their next move higher as well, it’s reasonable to expect SNAP participation to reflect that pressure on household budgets. The annual cost of the program, which rose in the three years 2009-2011 from $50 billion to $64 billion and then to $71 billion, is quickly becoming a significant budget item. For comparison, should SNAP program costs reach $75 billion this current fiscal year, this amount is almost exactly equal to the most recent Department of Transportation Budget, at $74 billion.

While SNAP tracks the growth of poverty well, it's not the only measure. And the breadth and scale of US poverty continues to grow. This autumn, the Census Bureau is expected to release its latest figures on the growth in US poverty:

Poverty rate nears worst mark since 1965

The ranks of America's poor are on track to climb to levels unseen in nearly half a century, erasing gains from the war on poverty in the 1960s amid a weak economy and a fraying government safety net. Census figures for 2011 will be released this fall in the critical weeks ahead of the November elections. The Associated Press surveyed more than a dozen economists, think tanks and academics, both nonpartisan and those with known liberal or conservative leanings, and found a broad consensus: The official poverty rate will rise from 15.1 percent in 2010, climbing as high as 15.7 percent. Several predicted a more modest gain, but even a 0.1 percentage point increase would put poverty at the highest level since 1965. Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor. More discouraged workers are giving up on the job market, leaving them vulnerable as unemployment aid begins to run out.

The Diminishing Marginal Utility of Quantitative Easing

QE is a poor transmission mechanism for creating jobs.

While there has certainly been a recovery of sorts in US jobs since the deep lows of 2009, in which total employment has risen from 139 million to 142 million jobs, this has been insufficient to keep up with population growth. Accordingly, if the US job market cannot aggregate the number of new workers into its system, then it cannot work off the structural labor surplus. Indeed, the rather narrow targets that QE aims for are exactly the reason why the US and the OECD are fated to try more unconventional solutions once the next round of QE fails.

In Part II: What Radical Measures to Expect in the Post-QE Era, we forecast that policies to revive stagnant Western economies (and the US, in particular) will swing sharply away from central banks towards elective bodies. Such programs will involve various forms of debt jubilee and massive infrastructure programs. More unconventional is that some of these programs may be initiated using new forms of government scrip, equity participation, or other methods that allow the government to “spend” without incurring new debt.

Contrary to the deflationist view, which holds that governments will eventually turn to austerity, the examples of such failed efforts in the United Kingdom (which has entered a double dip recession) suggest that austerity will be nothing more than a brief, economic dalliance of Western policy makers -- recall that the Works Progress Administration (WPA) of the 1930’s was considered radical in its time.

We should expect no less this time around, as governments decide to pursue WPA 2.0.

Click here to access Part II of this report (free executive summary; paid enrollment required for full access).

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LawsofPhysics's picture

When it fails?  So long as the criminals are in charge, the capital and resource misallocation and malinvestment will continue.

AldousHuxley's picture

neoliberalism failed but in denial we live on.


watch out, after denial comes ANGER then DEPRESSION


soon everyone will come to accept our failure to get rid of bad policies and politicians.

Michael's picture

I'm glad the privately owned Federal Reserve Corporation already has it's rafters and warehouses stuffed with its member bank toxic fecal matter.

When the Fed banking cartel blows sky high, all that worthless private debt blows up on their own private consortium, and the tax payer will not bail out the Fed.

cougar_w's picture

"and the tax payer will not bail out the Fed."

I think they named it the Federal Reserve for a reason. It was always, from the beginning of the world, going to be our bill to pay and the hook that tears out our heart.

I don't know how they will do it. Maybe the Federal Government will "step in" and "nationalize for domestic security" the Federal Reserve. Congress could vote tomorrow to unwind the Fed and place all its assets and liabilities on the public books.

What do people think will happen if we "end the Fed?" That the nation's banks will divide up all that toxic crap among themselves? Does anyone seriously think that will happen?

risk-reward's picture

"It was always, from the beginning of the world, going to be our bill to pay and the hook that tears out our heart."


Well said, cougar...I wish you were not right but, sadly, you are.

john39's picture

new world digital currency and world wide bank system...  don't worry, everything fixed. /sarc

PiratePawpaw's picture

This cannot and will not end well. "On a long enough timeline..." everything reverts to mean, in this case ZERO. Those who hold the bad debts will do everything in their power to forestall it. In the end they will try to drag us down with them. Our best and only chance is to decouple as much as possible.

Stop feeding the beast.

TWSceptic's picture

A proper understanding and implementation of (classical) neoliberalism would constitute a completely different system from the one we've had during most of the 20th and 21st century. To blame (classical) neoliberalism for the current economic problems is either intellectually dishonest or evidence of one's ignorance and/or stupidity. Since I'm inclined to think that you are a honest person, it will have to be the latter.

Precious's picture

Criminals at the front of the line are the teacher's unions.  Mis-education in USA is the cause of poverty.

jimod's picture

Actually they're no good in North Carolina, or any of the other right to work states either.

Worse, really.

Precious's picture


RTW laws have nothing to do with it.  RTW itself is a misnomer.  

Dues payment or not, has zero impact on the monopoly of the union administrators upon the design and delivery of US education.

hedgeless_horseman's picture



"Fail?  Fail?  QE is a giant-fucking success!" said Tim Geithner, the person responsible for somehow funding the debt-addicted vote-buying US Congress.


BigDuke6's picture


QE3 to infinity and beyond WONT FAIL to inflate my gold and silver.

Selfish? A bit but the writing has been on the wall.

And i've bored enough people telling them about gold and ZH.

Dr Benway's picture

Ah, they can always fail harder than they are currently failing.

Snakeeyes's picture

Today was a good indicator. Markets realized that the Fed is out of ammo and yields rose. As more and more realize it, the higher rates go.

LawsofPhysics's picture

Okay, I'll bite.  How long until the debt of the western world can no longer be serviced and default occurs?  Please do tell. 

CCanuck's picture

Check Japan for possible answers?

LawsofPhysics's picture

Riiiiiiiiggggghhhhht.  Goodbye reserve currency then.  Don't think the Fed would like that.  Besides, despite corporate debt (read debt of the 1%) decreasing, total debt is now growing exponentially.  there can only be one japan I am afraid.

Ned Zeppelin's picture

We can pay the US debt by simply printing it. The recipients of such payments will be none too pleased.  But rest easy knowing timely payment in full is but an Epson catridge away should things get dicey.

LawsofPhysics's picture

You forgot you < sarc > tag.  I certainly hope you are right though.  My commodities will love it.

BurningFuld's picture

And it gets even better. After paying you can refuse to sell any companys to the creditor...nah nah.

agent default's picture

How about this for unconventional: Cut taxes, stop pretending that government spending contributes anything to the economy, do away with overregulation and stop bailing out the idiots.

LawsofPhysics's picture

So shut down all government operations then?  Sounds good to me, now about those two unfunded wars...

Overregulation?!  Is this the same "overregulation" that allows financial houses to co-mingle client accounts or "rehypothicate" (i.e. steal) their money and other hard assets?

You got the "bailing out idiots" part right anyway.  Same "idiots" own you and your representation (i.e. CONgress).  Now just what are you going to do about it?

AldousHuxley's picture

you can't shut down government.

governance and power distribution will always exist like taxes in one way or another.


it just depends who is running it.

you don't want civil war where foreign powers fill the power vacuum with their own puppets.

you want gradual change amongst the population but that requires turning off the TV and people educating themselves.


I'd like to see American private enterprise compete against Russia state owned energy companies, Chinese state owned companies who can use military to hack into your computers who don't mind using their governement powers to crush your little private enterprise. It is no longer corporation versus corporation. it is fascism vs fascism and it has always been.









LawsofPhysics's picture

You are a coward and an idiot for missing simple sarcasm.

Ned Zeppelin's picture

Same as below - "overregulation" seems a code word for "let the banksters roam free."

What else, exactly, is "over regulated?"

skipjack's picture

Peasants ie debt serfs, are over-regulated.

DaveyJones's picture

well said ned.  criminal law is "regulation" 

cougar_w's picture

Reagan was wrong. His friends got rich. The middle-class disappeared. You are fighting the last war.

terryfuckwit's picture

listen agent nob cheese no tax means hanging out of a tree in jungle and dying of dysentry... get real mr ...we have taught the 1% to believe they need not contribute like GE constantly paying no tax...Yes government needs a good shrinking and their role needs to be hugely reduced...30 trillion sat offshore is theft...and all you rocky balboa types get up the rockies plenty room up their for the real men to make it on their own....

GMan_'s picture

I don't see any problems here. Let's keep printing money so that Goldmanites can buy more mansions in the hamptons. HAHA

kito's picture

gregor is absolutely correct............the next lsap sometime after elections, likely after the u.s. is downgraded....will be the last...........its the last rabbit in bens hat..very precious....not to be wasted...after that, ben will make sure the world understands that its the job of congress to fix the mess............bens job is to save his currency.....his currency.....ben is fully aware that he cannot fix the structural problems that this country has...........he is done with employment mandates, done with housing mandates, he will hold on trying to plug the hole as long as possible, but wont go down with the ship......................

chubbar's picture

He very well may do what you say Kito but that won't save the currency. The economy will come to a complete stop if gov't expenditures are cut in half (which would only stop the bleeding, not pay down the deficit). Can you imagine what will happen to tax revenues at that point? They'll be forced to default and that will not keep the FRN as reserve currency, to say nothing of what happens to the bond market. They are completely boxed in and my guess is they are working up a scenario to blame the collapse on something other than their complete incompetence.

kito's picture

you may be right...however a default doesnt mean the end of the currency....a default would wipe away quite a bit of the excess electronic dollars floating around....thats why i have been advocating for the preservation of physical cash on hand...not in their hands....

Muppet Pimp's picture

Must have hit post twice....In this case I offer the following:

Completely OT:

Does todays Chick Fil A activity prove that having an opinion that is counter to what the MSM is selling is actually ok after all?  Will we see a new movement towards the libertarian ideals of have all the opinions (or actions) your little hearts desire, just leave every one else the hell alone to do as they see fit?  Sure seems we might be moving in the direction of sanity after all.  I like their chicken sandwiches, could care less if we hold the same beliefs. Give me a good value and a tasty sandwich and I really don't care what CT thinks about gays or any other matter.  The whole PC thing has gone too far, and it is nice to see someone say enough with all that.  We will hopefully never all agree on everything that is prescribed my our media and others.  They have a name for places like that and it ain't America btw.


Squid Vicious's picture

More bullish news after the bell from Abercrombie (-15%) and Weight Watchers (-12%)... two of Robo's faves no doubt.

Gringo Viejo's picture

Drudge Headline: 60 Bills before The House to name Post Offices. 0 Bills to fix the Post Office. Your tax dollars at work.

cougar_w's picture

Or maybe it means the Postal System cannot be fixed, and everyone knows it.

It's not always about government waste. It is just as often about the end of the fucking world.

TheFourthStooge-ing's picture

The postal system wouldn't need to be fixed if congress didn't require it to fully fund the postal pension system 70 years into the future.

I'm sure congress is taking good care of that funding, too. It's probably all safe in a lock box, like social security.

End of the world, at least as it currently is? Probably so. The parasite of congress (which itself has countless parasites clinging to it) has become bigger than the host it is draining dry.

LouisDega's picture

What..No Larry Flynt? I have to drag my lazy ass to the Te-amo cigar shop?

cougar_w's picture

Somewhat related to the original post:

"...the unspoken subtext behind the financial crises of recent years is precisely that the real economy of goods and services is no longer growing enough to support the immense financial economy that parasitizes it. The current crisis in Europe is a case in point. Since the crisis dawned in 2008, EU policy has demanded that every other sector of the economy be thrown under the bus in order to prop up the tottering mass of unpayable debt that Europe’s financial economy has become."

The rest and really good here:

Caviar Emptor's picture

The paper economy triumphed over the real economy. That's the outcome of 40 years of unfettered money printing and capital concentration

cougar_w's picture

My dark suspicion is that even the "real economy" was being juiced ... on fossil energy.

I don't think anything has been "real" ... meaning sustainable via conventional means ... for 200 years. If that's the case then the paper economy wasn't just a parasite, it was a parasite on a host that was in turn a parasite.

We are in some serious deep shit now.