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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Caviar Emptor's picture

Agree. The paper economy masks the darkest fear: that capitalism has quietly been replaced by the corporate welfare state. We went to sleep and woke up to find out we are owned.

AnAnonymous's picture

That is quite a connection.

From unsustainability of US citizen economics to a change in the system.

Yet no change.

What is going on right now is the same thing that started 236 years ago, going by the name of 'Americanism'

akak's picture

That is quite a connection.

From unsustainability of Chinese citizen economics and world resource blobbing-up to a change in the system.

Yet no change.

What is going on right now is the same thing that started 2236 years ago, going by the name of 'The Mandate of Heaven'.

kito's picture

+1 to akak for understanding the convoluted messages of   anusnonomyous............................

akak's picture

Kneejerk prejudice and blind hatred are not actually all that hard to understand (or at least to recognize).

Kayman's picture


Why don't you start up your own China counterpoint ZH site, based on criticizing China's slave wage policy, unfettered pollution of the earth policy, and the biggest one of all- pretending to be Marxists while actually supporting the financial rape of your working  class- just like the Mandarins of old.

Let me know how it goes for you.  You seem to know sooo... fucking much about America and fuck all about the shit in your own hut.

Erudite non-conformists, like yourself, will be welcomed by your Chicom handlers, no... ? 

DaveyJones's picture

great posts cougar   it is like two mirrors facing each other    and modern economic concepts are just that    people think it's the paper world that destroyed the brick and mortar   it may be the reverse   once we started making both with oil   paper only became the criminal monster to cover and attempt to compensate for the larger collapse 

JohnKozac's picture

cougar, good article...thanks!

cougar_w's picture

Isn't it though? I was like "oh my god he's right" at just about every paragraph.

People: Read it.

AldousHuxley's picture

we haven't recovered since 1980s.

Neoliberalism is an ideology based on the advocacy of economic liberalizations, free trade, and open markets.[1] Neoliberalism supports privatization of state-owned enterprises, deregulation of markets, and promotion of the private sector's role in society.[1] In the 1980s, much of neoliberal theory was incorporated into mainstream economics.

Caviar Emptor's picture

1980s : A critical decision was reached to attack "wage inflation". It was demonized as the real cause of inflation since it caused increased demand. But this was in reality a political decision to favor capital accumulation over wages. The solution for attacking wage inflation was offshoring of jobs and industries and combatting collective bargaining. As a result we've had 40 years of wage stagnation and jobs charts that clearly show that we are not replacing the jobs lost during recessions anymore.

LawsofPhysics's picture

Correct.  This is the same "free market" that prevents real consequences for bad behavior.  Bailouts for the right people, paid for by the taxpayer - FAIL.

GCT's picture

Law of Physics the "free market" that prevents real consequences for bad behavior for the big corporations and donors to politicians.  None of the QE came to the small people that hire the most people in this country.  I know alot of you predict QE, but it will not help the taxpayers at all.  We need to pay down our personal debt and then I think why should we!  the Fed is thinking about bailing out those that do not pay.  I feel so stupid for being debt free right now!!!

LawsofPhysics's picture

Remember, corporations are people now. By the way, as a debt free corporation, I intend to have a limited liability for my actions henceforth.

crawldaddy's picture

so reagan and his gang were neoliberals  LOL,, man o man you are an idiot dude

TWSceptic's picture

Revisionist propaganda at its best. Please do some more studying, then think about your simple assessments again before you spew them out in public.

JohnKozac's picture

Unemployment may reach 10% by November elecetions depending on how many they drop from the rolls.

Caviar Emptor's picture

QE is the ultimate Biflationary WMD. Because it relates the paper economy and creates a situation of too much fiat chasing too few targets. It bypasses wealth creation through productive work And savings and goes straight to lottery winnings on a grand scale.

cougar_w's picture

I think most of the QE so far has gone into replacing money that has been evaporated, and little more. There is a $5-10T hole blown in the side of the US economy, that is the hole they need to fill somehow. QE to now has not even come close, and there has been too little growth to do it.

This ship is going down. Period. Until $10T is written off this ship sits on the bottom of the economic Mariana Trench.

"That’s the ultimate secret of the financial crisis, the thing that nobody anywhere wants to talk about: if a country gets into a credit crisis, defaulting on its debts is the one option that consistently leads to recovery."


Read it!

Caviar Emptor's picture

The trouble is that QE can't reflate end-demand for goods and services via jobs and wage growth. It can only reflate the paper economy which was the original intent. Of course collateral damage is incipient, gradual inflation for raw materials and essentials since QE trickles up to holders of paper assets, foreign and domestic

cougar_w's picture

QE as it has been applied can only reflate the banks and shadow money, since it was given to them to play with. A different kind of focus might have promoted smaller businesses with real services and employees, rather than simply injected more blood into the financial industrial vampire squid.

Not that QE applied differently is then better, just that the outcome would have been different.

All we've done for 4 years is keep our parasite alive, so we can try to kill it later by other means. Yay us.

Caviar Emptor's picture

@cougar : agree. QE was meant to keep The Corporate Welfare State alive aka Crony Capitalism. The banks weren't the only beneficiaries: all major corporates got a windfall ("sitting on piles of cash") through new debt and equity issuance, reflation of their market cap and a chance to cut costs further to make up for plunging demand

Hype Alert's picture

QE went to the banks and to fund entitlements.  It completely bypassed our employment structure, thus no jobs. 

williambanzai7's picture

Cesium seaweed crackers anyone?

RSloane's picture

I'll take mine with a dollop of Cheez Whiz made in superb, quality-controlled Chinese factories and an old dried out Greek olive on top.

Getting Old Sucks's picture

Tuna anyone?  Better start shorting cruise lines.  They make sea water, ships water.  Know whats being poured over the exposed fuel at Fukashima?  Sea water, in and out millions of tons (forget gallons).  The Pacific Ocean will become a nuclear waste pool in just a few years. 

Gloomy's picture


Missile Defense Staff Warned to Stop Surfing Porn Sites
StychoKiller's picture

Lt. General:  "Whodya think you are, SEC employees?" :>D

larz's picture

How in the world can you tell its failing without an accredited PhD's model?! charlatans!

HardAssets's picture

Ben's job is to do whatever is necessary to protect the bankers he works for. What happens in the overall economy is of secondary importance.

skipjack's picture

Uh huh - right up and until the real economy finally, completely dies and the banksters are left with nothing but the debts.  Remember, the bankster's assets are someone else's debt.


Kill a bankster - defaut on your debt.

SwingForce's picture

Without QE3, what will the banks do for 4Q earnings?

kito's picture

raise credit card interest rates to 69.99% apr........................

crawldaddy's picture

at some point they will. Look at rates in mexico the last few decades.

skipjack's picture


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."


OK, this guy is a dope, or he's smoking some.  We as a country are drowning in debt and those who have jobs have little to show after necessities.  The unemployed will be running out of savings soon, or already have, and are on gov't assistance or are living in their cars.  If the Fed prints to fund WPA 2.0, who THE FUCK thinks any of us will be able to afford food, let alone a house, expensive cars, iAnyDevice etc ?  What you will see is another and bigger crash, as all those who have held on by their fingertips finally just can't make it anymore ?  If you think spending is depressed now, wait 'til they start printing...the discretionary economy, which includes mortgage and car payments, will die.


They can't print...for very long, anyhow.  Until and unless we default the debt and get back to real production instead of this financialized shell of an economy, there will continue to be a series of lower lows until there is no more.

eclecticskeptic's picture

There's a school of thought (to which I adhere) that says if it CAN'T happen, it WONT happen.

Can Greece pay its debts? France? Italy? US? Any nation?

I submit that if anyone had any idea of what to do, they'd have done it a long time ago.


"More than at any other time in history mankind faces a crossroads. One path leads to despair and utter hopelessness. The other to total extinction. Let us pray that we have the wisdom to choose correctly".....Woody Allen

q99x2's picture

It wasn't susposed to be this way unless you are a bankster family with a long time-line horizon that would allow you the opportunity to set up the DHS, drones and rescind the constitution of the US and replace it with UN agendas as well as take over control of the EU and put into place technocrats that would further the process of moving all worldly power and wealth from the citizens of soveriegn nations into your families stash--bankster mother fuckers.

eclectic syncretist's picture

OT - Anyone notice that two hurricanes are about to buzzsaw Shanghai simultaneously!

Given that the city is so low-lying it could easily flood, and flood big-time.

Luckily we can depend on the media and local authorities to plan ahead so that no one gets hurt (sarc).

This could be a big story.  I'm just wondering why it hasn't been picked up on yet, especially given the fairly unique nature of the situation. 

sabra1's picture

it wasn't picked up 'cause in that part of the world they're called typhoons, maybe?

Apostate2's picture

Typhoon season. Vincente hit Hong Kong, and Saola will hit near Fuzhou well south of Shanghai. Damrey tracking still up for interpretation.

Westcoastliberal's picture

Blindly giving away money to those who need it least (Banksters) does nothing for the economy and only makes the Banksters richer.  Why do we need to go through another round of this horse-hockey to see this?  I'm all for a debt jubilee and massive infrastructure building/replacement.  That way the money flows to real people (who will spend thus boosting the economy) and the remaining infrastructure gives us lasting value (as we still enjoy much of the infrastructure left over from WPA).

This is neither a conservative/liberal, GOP/DEM argument. Why can't we use occams razor in solving any problems in the U.S.?  Our entire system needs a good flushing.

Spaceman Spiff's picture

Hilsenrath really has egg on his face this time.  Got'em again Bernanke.   Market rally no full release.

Peter Pan's picture

QE and all its cousins in Europe as well as all its half brothers who go by the name of bailout, ZIRP, subsidies etc will not fail. They will in fact succeed in blowing the system up and this in turn will require debt write offs, massive restructuring, prioritization, sustainable funding solutions for pensions as well as some level of fiscal and trade balancing. So the bigger the bust that QE and the other tricks cause, the bigger the adjustment.

The great danger lies in the period between the system blowing up and the period when sustinable traction starts to assert itself. In this grey period one is left wondering what kind of anarchy will assert itself and whether it will be so bad or prolonged that a reset becomes either impossible or just a distant dream.

ZeroAvatar's picture

I'm sure the FEMA camps and Martial Law will make the transition smoother. 


With the internet shut down no one will be able to organize so much as a flea market.


The incoming nukes should reduce the population to a more 'manageable' size.


RESET?  Distant dream at that point.    'The One' will be the new 'Freejack'.


Puppies Rainbows Love Unicorns Flowers Blue Skies Happiness Contentment Meditation Peace Subservience Bow All Hail The King Booyah Rah Rah Shishkoombah Grand Poobah Winnie the Pooh Gilligans Island Happy Days Praise the Powers that Be Bless the Beasts and The Children Who's you're Daddy Oh No We Won't Go.....

slewie the pi-rat's picture
The Diminishing Marginal Utility of Quantitative Easing

this was being discussed on zH over ayear ago, especially when a dollar of new public US QE'd debt made the GDP go up by less than a dollar and perhaps even not at all;  or DOWN!

a year ago! 


q99x2's picture

I'm shocked.

Racer's picture

A COMPLETE wasting of money by giving it to the non productive gambler banksters....

davey's picture


penexpers's picture

Citizens with some economic sense are really going to have to strategically position themsevles to gain power when this system finally collapses or some sickly fascist regime (openly fascist, not stealthy fascist as it is now) comprised of radicalized statists are going to exploit the misery of average Americans (who have been dehumanized and zombified) to instutute a viciously totalitarian system that'll make the Nazis look like the Falun Gong.

A global depression and delvereging leaves the U.S. in a prime position to rebuild itself as a manufacturing powerhouse.

Fuck the U.N, WTO, IMF, and WB.


toomanyfakeconservatives's picture

Dude, you are ignoring the 8 trillion pound gorilla in the room... tens of millions of American gun owners, patriots, active-duty military, veterans, reservists, police, federal marshalls, and so on, who swore an oath to protect the Constitution. If you think they are going to just stand idle forever, you have another thing coming. Don't believe the fear-bot keyboard jockeys would have you believe they are inconsequential, and in the case of the military and the police, on the side of the illegitimate federal government. They are not. Yeah, they may draw a government paycheck, but the vast majority of them hate the government and the vast majority of them are overall good guys.

The major players at the FED, Obama, most of Congress, and hundreds of other key traitors are about to be handcuffed, dressed in orange jumpsuits, and paraded in front of the cameras for the world to see...

Whenever a politician and bankster commits a bad act, there are hundreds, thousands, or even millions of good men observing, taking note, and preparing to pull the carpet out from under them when the time is right. The fact of the matter is, the FED, our illegitimate government, and the NWO has lost control over just about everything but the media. They are circling the drain, desperate beyond belief (NDAA, SOPA, QE2, QE3, etc), and they about to be flushed down the toilet for good.