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QE3 Or Not To Be, A Brief Q & A

Tyler Durden's picture




 

As good news appears to be bad news for now and the hopes of imminent dovish QE3-gasms gets pushed off a week or two, we thought it useful to dig into the mysterious central bank go-to play in a little more detail. Morgan Stanley's European Economics Team asks and answers five of the most frequently discussed questions with regard quantitative easing. From whether QE has worked to inflation fears and concerns over policy normalization and what happens if the public lose confidence in central bank liabilities, we suspect these questions, rather dovishly answered by the MS team, will reappear sooner rather than later, and as they interestingly note, the deployment of central bank balance sheets is, in essence, a confidence trick.

 

 

 

Q1: QE hasn’t worked. Why do central banks keep doing it? A: QE has worked, although the effects are likely to be diminishing. In the absence of more effective tools, central banks view the risk/reward of QE as favourable.

But to answer the question properly – to understand why central banks keep doing QE – it is important to put oneself in monetary authorities’ shoes and perform the same cost-benefit calculations that they are doing. It turns out that in the absence of other – more potent – policy tools, large real effects of QE are not necessary to induce central banks to engage in (further) QE. Given the potentially very serious adverse effects of deflation and the fact that central banks themselves view upside risks to inflation stemming from QE as small and manageable, then even very modest effects of QE are sufficient to justify it. Put differently, from central banks’ point of view, the risk/reward of further QE remains very favourable, indeed compelling, in the current economic environment. When there are few low-cost tools available, and as long as QE can reasonably be expected to make a positive contribution – however modest – to keeping the economy away from the danger zone, monetary authorities are likely to continue deploying this tool

 

Q2: QE has raised risks of high inflation, thus increasing inflation uncertainty. Has this not undermined investment and growth rather than supporting it? A: QE is just as likely to have reduced inflation uncertainty: While the risks of higher inflation have gone up, at the same time the risks of deflation have gone down.

Q3: Won’t the large amount of excess reserves inhibit rate hikes and policy normalisation? A: No. Central banks should be able to establish sufficient control over the overnight market to be able to push overnight rates higher. This, in turn, should increase borrowing costs and tighten financial conditions.

Q4: Why then do you still see inflation risks from QE? A: We worry that: (i) central banks will err on the side of caution and exit too late; and (ii) when the economy improves, banks will increasingly lend out their excess reserves, which could lead to inflation pressures.

Q5: What happens when the public loses confidence in central bank liabilities? A: A run on the fiat money system

In response to the seismic shift in private sector risk-aversion the financial crisis brought about, central banks have deployed their balance sheets to cushion the blow to the economy. They have done so by taking the unwanted risk off the private sector balance sheet and replacing it with safe as well as liquid assets: central banks’ own liabilities.

This is, in essence, a confidence trick. It works for as long as the private sector is willing to hold these liabilities – i.e., for as long as they are considered safe, which in turn depends on them being considered safe by everyone else. A central bank will, of course, never default on its liabilities – they can, after all, create unlimited amounts of it. But the ‘safety’ property also depends on whether this asset is seen as a store of value, i.e., likely to maintain its real value – its value in terms of goods and services. So, while there is no technical limit to the expansion of central bank balance sheets, there is a limit nonetheless: the public’s confidence in the real value of such liabilities – and government liabilities more generally. The more such liabilities are created, the more we approach this point.

How would such a loss of confidence unfold? If the supply of central bank liabilities – call it ‘liquidity’ – exceeds the public’s liquidity preference, then the latter will seek to substitute away from it. The public will then buy goods and real assets. The result is self-fulfilling inflation – inflation will rise essentially because the public has lost confidence in the ability of central bank liabilities to maintain their real value. We are probably very far from such an outcome – far enough that it can be considered a tail risk. Yet, the risk in question is nothing less than a wholesale run on the fiat money system.

 

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Wed, 02/29/2012 - 14:25 | 2208917 tony bonn
tony bonn's picture

i would love to know the value of the fed's balance sheet on a mark to market basis, realizing of course that there is no market for much of its crapulent "securities" in which case the value of such "assets" is 0.

Wed, 02/29/2012 - 14:52 | 2209021 TruthInSunshine
TruthInSunshine's picture

1st, this 'analysis,' with the exception of one astonishingly candid point (that ZH has already itemized; more below), is essentially 'An Idiot's Guide to Learn to Trust Fractional Reserve Banking' (alternative title: 'Fractional Reserve Banking's Rising Debt Tide & Why You Should Ignore It').

Now, the astonishingly candid point that MS apparently inadvertently admitted to is nothing less that an economy built upon the foundation of fractional reserve banking practices (aka Modern Monetary Mechanics) is the textbook definition of a confidence game, which inherently depends on tricking the population into believing that debt is a vehicle of wealth. Not only is the currency/fiat in such a system backed by nothing of inherent value, it's a liability with no debtor to ever pursue and collect from! The best result that can be hoped for by anyone holding these uncollectable liabilities is that they can pass this inherently worthless fiat/currency/debt onto a greater fool before the Ponzi implodes.

It's remarkable how The Money Masters have been able to hide such a basic, fundamental fact, and trick the masses into giving them all manner of things having inherent value and utility by exchanging never-to-be-paid liability notes with them.

Wed, 02/29/2012 - 15:12 | 2209106 koot
koot's picture

TruthInSunshine,  You are quick to point out the fallacy of the above MS answers.  In addition it is not "Money" that is in excess or shortage in so much as it is capital willing to invest productively.  When Central banks and governments impose financial repression, capital controls, or anything that causes higher risk for return of long term value based on World Capital, productivity of capital in those nations declines. 

Wed, 02/29/2012 - 15:13 | 2209118 Thamesford
Thamesford's picture

"To be or not to be?"

Is there more inspiration possible from Hamlet?

Alas, poor Forfeit! I blew it, Horatio: a belly
of infinite chest, of most exuberant fallacy: QE hath
printed me on his back a thousand times; and now, how
abhorred in my inflation it is! my gorge rims at
it. Here hung those TIPS (& MBS's) that I have dissed I know
not how oft. Where be your bribes now? your
gambols? your (big swinging) schlongs? your flashes of correction,
that were wont to set the market on a roar? Not one
now, to mock your own underpinning? quite Freddie-Mac-fallen?
Now get you to my shady chamber, and teller, let
her legislate an inch thick, to this endeavour she must
come undone; make her laugh at that.

 

Wed, 02/29/2012 - 15:16 | 2209128 Thamesford
Thamesford's picture

Doubling down on your bets is ultimately, in theory, a winning strategy.

 

Unless you run out of money or the house doesn't take the bet.

 

Wed, 02/29/2012 - 15:03 | 2209093 DosZap
DosZap's picture

We are probably very far from such an outcome – far enough that it can be considered a tail risk. Yet, the risk in question is nothing less than a wholesale run on the fiat money system.

Fairly open and honest,  UNTIL this.

Wed, 02/29/2012 - 14:25 | 2208918 JW n FL
JW n FL's picture

 

 

Bernake Lends Against the Stock Purchases!

The Money is Rolled over into new Purchases of yet more stock!

The .25% that is paid on money barrowed?? that was raised from JUNK!! Collateral! to begin with? means NOTHING!!

 

Bernake Does NOT Need QE-3 outright where everyone can see it!

He has been printing every day of every week for YEARS! to push the market this much higher!

 

But becuase YOU FUCKING PROPOGANDA LOVING TOOLS DONT HAVE A WHITE PAPER ON HOW TO DO IT??? YOU ARE FUCKING BLIND??

 

It is days like today that I believe you fucking stupid fucks deserve what is happening to you.

Now down arrow for your ego becuase of your ignroance!

Wed, 02/29/2012 - 14:28 | 2208933 Christoph830
Christoph830's picture

Gladly.  Take a valium, dude.

Wed, 02/29/2012 - 16:46 | 2209572 JW n FL
JW n FL's picture

 

 

Your contribution to Fight Club is? a down arrow?? and complaining like a lil girl who needs a Tampon?

 

Is anyone going by the Drug Store??

 

Christoph830 needs some Pamprin and a box of Tampons.. His Pussy Hurts!

Wed, 02/29/2012 - 14:30 | 2208950 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Only a green from me.  I agree; who needs a white paper doc when we could wipe our asses with Bernanke's words?

Wed, 02/29/2012 - 16:44 | 2209565 JW n FL
JW n FL's picture

 

 

You are a Good Sport.. as well as being well read and one better, being able to comprehend the playing field.

God Bless and God Love You.

Wed, 02/29/2012 - 14:31 | 2208952 barliman
barliman's picture

 

No

Down arrow because you have to emphasize EVERY word you type.

barliman

Wed, 02/29/2012 - 14:42 | 2209001 kito
kito's picture

He has been printing every day of every week for YEARS! to push the market this much higher!

bullshit jw. gold peaked in dollars after the last qe and it hasnt returned to its highs because ben HAS NOT BEEN PRINTING. no qe talk today and gold get hammered. gold will tell you when the dollar printing starts up again.....

Wed, 02/29/2012 - 16:42 | 2209396 JW n FL
JW n FL's picture

 

 

kito

He has been printing every day of every week for YEARS! to push the market this much higher!

bullshit jw. gold peaked in dollars after the last qe and it hasnt returned to its highs because ben HAS NOT BEEN PRINTING. no qe talk today and gold get hammered. gold will tell you when the dollar printing starts up again.....

 

The FED buys down the Price of Gold and Silver with Monies Printed and Provided to the Primary Dealers.. Like JP Morgan who Maintains a Controling Interest (http://en.wikipedia.org/wiki/Gold_fixing ) now that MF Global UK's shares of the LME have been communicated to JP Morgan.. Thusly JP Morgan is the Majority Share Holder and ALL of those winners! are now Losers! with regard to the Futures Contracts held in PM's.

 

http://www.lbma.org.uk/pages/index.cfm?page_id=46&title=current_statistics

 

So, You are Wrong. You are an ignorant little day trader with at best a pedestrian understanding of what is what.

I should warn you that the Forbes 400 List of Richest People is filled with the Help. In the plainest terms possible, the people on the Forbes list are not anywhere Near! being the Richest 400 in the World.

 

On 31 December, 2011,

MF Global UK Ltd was

removed from the Membership

List due to the company going

into administration.

http://www.lbma.org.uk/assets/Alch6507Murray.pdf

 


(Reuters) - J.P. Morgan (JPM.N) has agreed to buy all of defunct U.S. brokerage MF Global's (MFGLQ.PK) shareholding in the London Metal Exchange after a competitive bidding process, KPMG, the administrators for MF Global's UK unit, said on Wednesday.

 KPMG did not give a price for the sale.

 J.P. Morgan already has a 6.2 percent stake in the LME, the world's largest metals market place, which has opened its doors to potential suitors. Increasing its stake alters the landscape, as LME shareholders seek to protect their interests, or make a profit, in any eventual takeover.

 

B-SHARES

KPMG said J.P. Morgan will also buy the B-shares held by MF Global. Those would be bought for 2 million pounds, one of the sources said on Tuesday.

B-shares give holders the right to trade on the LME and can be sold separately to other members of the exchange. J.P. Morgan already holds B-shares, and it was unclear what would happen to the new shares it would now acquire.

The LME stake sale, though, could leave more money for MF Global creditors.

KPMG's Heis said the process to sell other parts of MF Global's UK business "continues apace and we are in negotiations with several parties to this end."

A spokesman for KPMG said there were no further details.

http://www.reuters.com/article/2011/11/23/us-mfglobal-lme-jpmorgan-idUSTRE7AM1RP20111123

Wed, 02/29/2012 - 14:42 | 2209003 SheepDog-One
SheepDog-One's picture

Dont worry JW, no need to try to wake the sheeple from their slumber and pricing in DOW 25,000 by year end...when it collapses suddenly one morning just fist-pump. To hell with the morons.

Wed, 02/29/2012 - 21:19 | 2210542 Joseph Jones
Joseph Jones's picture

You pick and "interesting" group of people to hang with! 

Wed, 02/29/2012 - 14:29 | 2208932 Gringo Viejo
Gringo Viejo's picture

No choice. "BANK" on it!

Wed, 02/29/2012 - 14:30 | 2208935 devo
devo's picture

They keep doing it because nobody else would buy their worthless bonds & because they borrowed dollars from China and now only have to pay back in dimes.

To keep yield this low they have to be buying a shitload of bonds (under the table) because no cognizant investor would touch them.

Wed, 02/29/2012 - 14:29 | 2208938 Hedgetard55
Hedgetard55's picture

What a load of horseshit that was.

Wed, 02/29/2012 - 14:29 | 2208942 barliman
barliman's picture

 

"Yet, the risk in question is nothing less than a wholesale run on the fiat money system."

Everything else in their statement could have been uttered by Bernanke this morning.

This, however, is an insufficient statement. It should read:

"Yet, the risk in question is nothing less than a wholesale run on ALL the fiat money systems."

FIFT

barliman

Wed, 02/29/2012 - 14:29 | 2208943 bilbao
bilbao's picture

Who needs QE3 when you have LTRO combined with the Fed's Dollar Swap Lines to the ECB?

http://www.contraryinvestor.com/moprinter.htm

Wed, 02/29/2012 - 14:36 | 2208968 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

And OT2.  Don't forget OT2.

Wed, 02/29/2012 - 14:33 | 2208956 NotApplicable
NotApplicable's picture

As always, nothing but a confidence game. Better yet, they blame the public for the "self-fulfilling" price inflation that occurs once they get smart to the game and demand real assets.

Un-fucking-believable!

Wed, 02/29/2012 - 14:35 | 2208962 YesWeKahn
YesWeKahn's picture

tail risk? What about oil at 200$, which will happen pretty soon?

Wed, 02/29/2012 - 14:36 | 2208971 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Transitory.

Wed, 02/29/2012 - 14:36 | 2208969 spastic_colon
spastic_colon's picture

We will know more in less than 30 minutes as the new twist schedule is released, plenty of time to adjust their spreadsheet today.

Wed, 02/29/2012 - 14:38 | 2208973 Chumly
Chumly's picture

"QE has worked, although the effects are likely to be diminishing. In the absence of more effective tools, central banks view the risk/reward of QE as favourable."

Q: So, in essense you are saying we are in the latter stages of a Ponzi Scheme that will fail and there is no other way out but to continue the perpetual machinations of a failing Ponzi Scheme?

A: Yes

Wed, 02/29/2012 - 14:43 | 2208980 SheepDog-One
SheepDog-One's picture

MORE effective tools than the mega-bazooka ultimate tool QE massive printfest? What would be more effective, a 1,000 kiloton SuperTsar Russian nuke? Theyve got nothin and are just bullshittin now.

Wed, 02/29/2012 - 14:38 | 2208974 SheepDog-One
SheepDog-One's picture

Such bad news wow the DOW is down a whole -15, this is a real market shocker.

Wed, 02/29/2012 - 14:41 | 2208991 devo
devo's picture

Yet Silver is down 6% and gold 4%.

 

Wed, 02/29/2012 - 14:44 | 2209008 SheepDog-One
SheepDog-One's picture

Well I always told people dont be surprised if gold and silver will be a real rough ride, after all theyre buying what the Maniacal Monetizers hate the most.

Wed, 02/29/2012 - 14:49 | 2209022 mayhem_korner
mayhem_korner's picture

 

 

Yes!  Yes!  Silver is down to where it was 2 weeks ago, up now only a paltry 22% YTD! 

Anyone that can't sniff out a 4-sigma intraday move as manipulated (or algo-rated) better stay away from these "markets."

Funny how every time these take-outs happen my stack is higher...

Wed, 02/29/2012 - 14:50 | 2209034 devo
devo's picture

I'm not selling any PMs. I'm just saying, Stock Market down .10% and real money down 6/4%. It just doesn't make sense. I guess a thinner market, but jeez that looks fishy.

Wed, 02/29/2012 - 14:56 | 2209056 mayhem_korner
mayhem_korner's picture

 

 

You just said the magic words.  "I'm not selling any PMs."  That, I suspect, is the same with 99% of real acquirers (including me).  So the question is who is selling them, 'cuz it's not real acquirers.

This is nothing but an algo-orchestrated, thinly traded, paper smackdown.  It's no more real than the levitation in the equities markets.  The manipulation becomes clear when one realises both paper PMs and equities are trading on near-zero volume, yet the former is smacked down and the latter levitates up.  That fits no random walk of market participant driven behavior.

Stack on, Mr. Pot-Head, Sir.

Wed, 02/29/2012 - 15:16 | 2209127 bbq on whitehou...
bbq on whitehouse lawn's picture

India is selling gold to Iran for oil since it was India what came up with the suggestion.

Also if you look at it as getting free oil from Iran, since gold is just a rock that cant be used to buy anything from or by government you will see what governments people see.

Scared; your not nearly scared enough but you will be.

Wed, 02/29/2012 - 15:49 | 2209295 mayhem_korner
mayhem_korner's picture

 

 

D'ya think Iran would take some of the yellow tungsten in Ft Knox for oil?

Wed, 02/29/2012 - 15:19 | 2209141 devo
devo's picture

I will stack if they drop a little more. I'd buy more silver in the 31 range. This is like getting a good conversion rate--Thanks JPM Chase!

Wed, 02/29/2012 - 15:21 | 2209143 optimator
optimator's picture

Try listening to the nicest sound in the world.  Balance a silver dollar on the trigger finger of each hand and gently bump them together!  That's what Dr. Paul should have done this morning in front on the microphone!  A silent question that Ben Shalom would not be able to come up with a comment on!

Wed, 02/29/2012 - 14:41 | 2208993 Catullus
Catullus's picture

Q2: QE has raised risks of high inflation, thus increasing inflation uncertainty. Has this not undermined investment and growth rather than supporting it? A: QE is just as likely to have reduced inflation uncertainty: While the risks of higher inflation have gone up, at the same time the risks of deflation have gone down.

The risk of inflation uncertainty has gone down as the Fed has printed money. Agreed. As they've printed money, there is surely more inflation.

Wed, 02/29/2012 - 14:46 | 2209013 SheepDog-One
SheepDog-One's picture

Inflation: An increase in the money supply.

Inflation has nothing to do with the prices of things, totaly baffling even top economists with that statement.

Wed, 02/29/2012 - 14:56 | 2209053 Dr. No
Dr. No's picture

What is the risk of Deflation?  Since CB economists state that deflation is evil (inflation a lesser evil), I have to assume Inflation is not actually a "risk" per se as far as the FED is concerned.  Inflation continues to line their pockets where as deflation rewards the savers and displaces power from the CB.  This is why the CB has inflation targets and not deflation targets.

Wed, 02/29/2012 - 14:46 | 2209014 mayhem_korner
mayhem_korner's picture

 

 

Question #6:

How many Morgan Stanley paid shills does it take to tote a narrative?

Wed, 02/29/2012 - 14:51 | 2209035 mayhem_korner
mayhem_korner's picture

The result is self-fulfilling inflation – inflation will rise essentially because the public has lost confidence in the ability of central bank liabilities to maintain their real value. We are probably very far from such an outcome – far enough that it can be considered a tail risk.

Help me out.  What alternative outcome is there to the vector this thing has been on since 2008/2000/1971/1913?

Wed, 02/29/2012 - 14:56 | 2209060 Manthong
Manthong's picture

"We are probably very far from such an outcome – far enough that it can be considered a tail risk"

Until some unforeeen disturbance of the equilibrium (planned flow) occurs.

                       Swan droppings occur at the tail and can really foul things up. 

Wed, 02/29/2012 - 14:57 | 2209065 Paul Thomason
Paul Thomason's picture

It's all because of the Jupiter - check this article out 'The Jupiter Cycle Effect On Wall Street'

Wed, 02/29/2012 - 15:01 | 2209086 ebworthen
ebworthen's picture

Glad I bought more silver and gold at $30 and $1,600.  Sad that I lost it in a tragic ice fishing accident showing it off to my friends "over the hole", but it still feels good.

A CONfidence game works until it doesn't.  With headlines that Snooki is pregnant versus $65 Trillion in debts and unfunded liabilities it could go on a very long time.

One lie requires the telling of another 1,000 lies to hide the origianl lie.

Bernanke and TPTB are very verbose, but the worm will turn eventually.

Wed, 02/29/2012 - 15:03 | 2209091 Dr. No
Dr. No's picture

MAke sure you claim that capital loss on your taxes.

Wed, 02/29/2012 - 15:03 | 2209098 steve from virginia
steve from virginia's picture

 

Don't hold your breath for any more Fed easing, the Fed isn't well-capitalized.

Wed, 02/29/2012 - 15:45 | 2209277 AldoHux_IV
AldoHux_IV's picture

Herein lies the overall problem: 'we' tend to frame the true problem incorrectly.  It really isn't about deflation vs inflation and therein also lies the limitations of what monetary policy can achieve.  It's about imbalances that have been caused as a result of monetary policy being unfounded in cultivating economic growth.  The illusion of the financial system is what keeps us spellbound by this meaningless debate about what central banks should and shouldn't do and what solution they can then come up with if only to sustain a illogical system.  A system that without the continuous run up in debt would otherwise collapse onto itself.

Let's not get caught up in the meaningless debates that central planners want us to waste time thinking about and let's focus on ending central banks, removing politics from policy, and to allow economic independence from the system.

Wed, 02/29/2012 - 16:00 | 2209357 SwingForce
Wed, 02/29/2012 - 17:09 | 2209717 MrBoompi
MrBoompi's picture

They consider the inflation risks to be "small and manageable".  This is a laugh.  There is NO risk to the bankers or elite classes.  These are the people who's income gains far outpace whatever the real rate of inflation is.  The rest of America gets lied to, and negative interest rates to boot.

QE helps a very small class of people.  The people Ben Bernanke works for.  And this is why it is always available when needed.

Wed, 02/29/2012 - 18:00 | 2209989 Robslob
Robslob's picture

Just the plain and simple fact that people are openly discussing what and how "inflation" or "deflation" occurs must have the The Fed and their crony clowns shaking in their boots!

People can't be having these conversations before they consume godammit..." buy buy buy" is the vision I get as Bernanke pulls his hair out...oh wait...

Thu, 03/01/2012 - 08:45 | 2211853 cnhedge
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