Why QE Is Not Working

Tyler Durden's picture

Up until now we were a lone voice in the wilderness, with our "dry-humored" Transatlantic colleagues, working for a newspaper funded with Goldman Sachs advertisements, periodically mocking our "misunderstanding" of credit and money creation. We are now delighted that none other than one of the foremost opinions on all topics "shadow" stood up this week, and admitted that indeed, it is Zero Hedge whose view on money creation is the correct one. Behold several absolutely critical observations by Citi's Matt King. The same Matt King who a week before the collapse of Lehman wrote "Are The Brokers Broken" and explained to all those who had heretofore been reading and basing their understanding of finance on the above-mentioned Transatlantic newspaper, why everything they know about the modern financial system is wrong. Lehman filed for bankruptcy 12 days later.

Since early 2010 Zero Hedge has said that for the Fed's QE efforts to be successful in stimulating the economy, and rekindling inflation, it has to focus on not only stimulating traditional bank liabilities but far more importantly offsetting the collapse in shadow bank liabilities. As we observed in July, when the latest Z.1. update was made available, there is still a nearly $4 trillion hole that has to be be plugged on a condolidated basis from the all time "credit money" high of $33 trillion in 2008. Until such time as the Fed's largesse pumps enough to fill this void, the US economy will be mired in deflation.

To wit:

"What is worse is that even when accounting for offsetting traditional bank liabilities, on a consolidated basis, the US total financial sector is still an epic $3.8 trillion below its all time highs, just above $33 trillion. Unless and until this $3.8 trillion hole is plugged, one thing is certain: risk is not going anywhere (also notable is that consolidated liabilities in Q1 declined by $86.2 billion at a time when the Fed was engaged in Twist but that is for Ben Bernanke to worry about, not us)."

In fact, the misconception is so bad, that even the Fed's own John Williams recently confirmed the Fed itself has no idea how money creation in the New Normal, where the bulk of "credit money" exists in shadow aggregates, actually works. We explained this in "Fed's John Williams Opens Mouth, Proves He Has No Clue About Modern Money Creation"

 

The Problem (How Large Will The Losses Be - and can the reaction be contained?):

 

The Impact (Fear of losses mean private sector is running for the exits...):

 

...and TARGET2 (official sector) is forced to pick up the slack...

 

The Band-Aid Fix (print money into traditional banking system):

 

Is NOT Working (global equities range-bound on policy action, economies remain in slump, and money multipliers are broken):

 

Because (they are simply impacting the wrong system):

 

and more and more - funding depends on collateral...

 

and there is only one 'funder' - the collateral-taker-of-last-resort (as unsafe assets can only be funded at Central Banks)...

 

Credit Growth will remain 'stalled' until 'risky' is made safe - by on-boarding 'risk' to infinitely expanded CB balance sheets (credit-easing) with its consequent total and utter break-down of every asset class reality (and bank encumbrance); or a cataclysmic price mark-down and 'creative destruction' allowing the savers to scoop up the assets at 'reasonable' levels.

 

Charts: Citi

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vast-dom's picture

It's not only NOT working, but it's DESTROYING ecomomies and individuals!

ACP's picture

It works, the problem is it works the same way CRACK works. You get high, crash, get high, crash. Eventually, you go into cardiac arrest & die.

Atomizer's picture

http://trimtabs.com/blog/

Bullish Marxist handout mentality vs real world math.

Precious's picture

Bernanke is a case study in "conditioned reflex".

 

 

macholatte's picture

 

..... and Jamie Dimon still gets his $23,000,000 "wages" plus corp jet, food, chaufeur, butler, secretary, office, credit card, cell phone, etc., etc., etc.

 

World's top bankers handed 12% pay rise to average $12.8MILLION... despite profits and share prices plummeting Read more: http://www.dailymail.co.uk/news/article-2164347/Worlds-bankers-handed-12-pay-rise--despite-profits-share-prices-plummeting.html#ixzz23hJdD1NE /

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The CEO took a salary of $1 million for 2009 and gave up bonuses that year and in 2008 after receiving $49.9 million in total compensation for 2007. Dimon and his wife control almost 5.2 million shares valued at more than $209 million as of March 2, when his total holdings were last disclosed.
JPMorgan Awards CEO Jamie Dimon $23 Million Pay Package

http://www.bloomberg.com/news/2012-04-04/jpmorgan-awards-ceo-jamie-dimon...

 

 

LMAOLORI's picture

 

 

Oh but it is working just not for you or Granny

Muted inflation supports more Fed easing

HardAssets's picture

The very cynical among us think that's Exactly what its designed to do . . . so that the next step can be taken in the forced-on-humanity New World Order.

Problem - Reaction - 'Solution'

Meanwhile, how are things going in Iceland. After they threw out the banksters ?

Hayabusa's picture

HardAssets is correct... this isn't a "we don't know what we're doing scenario", it's carefully planned - we all know the banksters doing this aren't stupid and what are those top tier bankers getting? --- record bonuses to go along whilst things are tanking.  In this game of monopoly the NWO is playing incompetent when they are anything but... they are going "all in"... "Problem - Reaction - Solution"... when the SHTF people will react/be scared and we know what scared people do, they willingly go along with any solution offered - fear mongering works and when you're deep in debt they have you by the balls as anyone knows who has made payments plus interest.  Iceland... I sincerely hope we follow their example and "clean house."

Yamaha's picture

I am happy to just be finishing my safe room vault and food storage. Let the games begin.

centerline's picture

QE, ZIRP, NIRP, lip service till we are blue in the face has worked just perfect.  Just a matter of perspective.

roadsnbridges's picture

Sounds very bullish with our Ambassador now on Mars.

Aziz's picture

Hey maybe the Martians will buy some of our ABS?

Jim in MN's picture

Hey!  Paul Krugman!  Guess what?

The reason your Keynesian solution isn't working isn't because we don't spend enough.  It's because of CORRUPTION.

The same reason an Austrian solution can't work (won't, in Europe's case). 

Corruption has trumped all other issues. 

And what, pray, are all the Nobel laureates on God's green Earth doing about that?

Desert Irish's picture

Don't fret Mary Shapiro will save us all /sarc.....we are sooooo fucked....

nope-1004's picture

Someone once said:  "Money is at the root of all evil".  No economist can institute a policy to deny that statement.  And to base an economic model or formulas without human emotion (greed or theft) taken into consideration is why economists look stupid now and the financial system is falling apart.

 

HardAssets's picture

The role of intellectuals is to provide the justifications for the criminal rulers to live as parasites off the rest of the population.

In other times & places they were witch doctors & priests. In our current society they are lawyers (wearing black dresses as 'judges' or as politicians) and economists.

Its all voodoo 'magic'. Before you had money in your wallet . . . and Presto . . now you don't.

The intellectuals get a small cut for the b.s. they make up.

boogerbently's picture

....someone?

1 Timothy 6:10

MisterMousePotato's picture

Misquote. In fact, it is the LOVE OF money that is the root. In fact, Paul or Timothy (I can't recall) wrote that it is only one cause or root of evil. Big difference.

centerline's picture

Unlike any other real profession, economists seem to have figured out a way to live in a place of pure theory.  No other real application of science, social science, etc. that profoundly affects human lives gets away with this.  This shit is paramount to the function of society?  You have got to be kidding me.  

Jim in MN's picture

If by 'Aliens' one means 'the global financial elites' then...maybe.

DeadFred's picture

Reptilians, everyone of them. (Pretty sure I'm joking)

MisterMousePotato's picture

I once spent a Saturday night looking at the YouTube reptilian shape shifter videos. None were particularly interesting or persuasive, but it was fun.

Only reason I spent an evening doing this, though - to be quite honest - is Henry Waxman (and perhaps another dozen or two if I thought about it).

Swear to God: He and I have no common antecedents. (If you don't know what I'm talking about, google an image of Henry Waxman, come back here, and make a convincing argument that he is, in fact, human.

grid-b-gone's picture

People used to understand that when you live above your means using credit, you will have a period in the future when you live below your means to pay for those items. 

This made sense forty years ago when people typically only added credit to buy a house or car. Buying a home "on time" made sense because housing expense is always present for almost all U.S. adults, and the car was needed to get to work.

When people ran out of credit, new ways of extending credit kept being created.

Refinancing came into vogue and eventually the idea that one might never pay off a mortgage.

Marketing based on monthly payment rather than the details of a loan followed.

Leasing, especially vehicles, overtook buying to own as another way to lower monthly payments.

College kids, with zero or near-zero income, were issued credit cards based on probable future income.

With each step that delayed the "living below your means" time to pay down debt, credit grew, but so did risk.

When legitimate creative means of extending credit could no longer be found, the illegitimate means filled the gap. Fraud kept the party going until 2008 and now corruption and outright theft of segregated accounts is being tolerated.

The final phase, the one reaching an end in Europe, is to keep adding public jobs and paying people with over-printed fiat money until the private sector can no longer support the system. This eventually leads to a fiat currency collapse. 

It is easy to vote for growth over austerity, but a period of future austerity is exactly what each of us, and we as a nation, sign up for when we decide to live on credit rather than waiting until we can afford things.

We have reneged on the austerity we originally promised and the market has no choice but to issue its available ultimatums of default, reset,  or collapse.

Many, public and private, will continue, Rumpelstiltskin-like, to use algos, derivatives, QE, or some other deflection move, to attempt to keep the music playing even longer.

All they know is they ran out of credit and if we just had more credit the system would get back to normal.

The part we all miss is that paying back the debt was always the agreed upon price for having things before we could afford them. 

 

HardAssets's picture

They didn't loan anything. The 'credit' is made up out of thin air.

They use those made up 'credits' to steal your real property & the product of your real labor. Their paid whore politicians put in tax laws that encouraged you to buy into various of their bubbles (including housing). Their media convinced you this was 'financially smart.' The public schools you were in taught you nothing about money or economics or any of this.

Through the excess printing of fiat money, they have stolen 96% of the value of your money over the last 100 years through inflation (82% of that since 1971).

People have mass Stockholm Syndrome. They are victims of their irrational public schooling and conditioning. They blame themselves for acting exactly in the manner that the incentives were set up for them . . . just like the tunnels in a rat maze which the rats have no control over.

In Iceland, they seem to have seen through the fraud. They threw the banksters out, repudiated the 'debt', and are doing quite fine now.

Of course, we never hear of that.

In the meantime, people will give up their property & labor to pay the interest charged by the banksters. Stupidity creates their own slavery.

Disenchanted's picture

 

 

 

Has anyone ever wondered why and when(and who did it) the debt pig was all gussied up by applying the credit word(credit card, credit score, apply for credit, credit limit, etc.) to it as lipstick?

 

But guess what, when the credit word lipstick is all smeared off debt pig is still a debt pig.

acetinker's picture

It occured to me the other day that when we "borrow" (i.e; pledge our future labor to conjure digital "credits"), then pay back with actual labor inputs, we are, in fact, money laundering.

Ironically, on the bank's books at least, when we satisfy our obligation, their asset goes to zero.

Given those two statements, it's easy to see how this system was "designed to fail".  Once you reach the saturation phase, the only option is reset.  The question then becomes; Are we there yet?

MachoMan's picture

They didn't loan anything. The 'credit' is made up out of thin air.

Actually, the lending institution directly lending to you did loan money (unless you are able to dip at the discount window)...  it had to borrow from a lender higher up the food chain...  eventually ending at the mothership, where money is created out of thin air. 

They use those made up 'credits' to steal your real property & the product of your real labor. Their paid whore politicians put in tax laws that encouraged you to buy into various of their bubbles (including housing). Their media convinced you this was 'financially smart.' The public schools you were in taught you nothing about money or economics or any of this.

Actually, this is incredibly complicated...  but for the credit, would you even have a job?  Would you even have the ability to generate income?  How would your labor be valued?  I'm not advocating for our credit system, I'm simply stating that it's going to be difficult to find a control in your experiment...  you can't simply eliminate the concept of credit and then cherry pick our prospective existence...  credit does actually serve other functions than control (especially considering PRIVATE LENDING from real capital).

I also take issue with the top down approach...  it stinks to high hell of an external locus of control, but at some point "brainwashing" is a bit...  overstated.  I think the more reasoned approach (given the continuous and cyclical nature of debt cycles) is to say that these creditors merely exploit natural tendencies in the general population, e.g. the desire to live today at the expense of tomorrow.  This phenomenon occurs with or without political, media, or educational instruction.

Through the excess printing of fiat money, they have stolen 96% of the value of your money over the last 100 years through inflation (82% of that since 1971).

Hmmm...  so I get to borrow today and purchase to my heart's desire and then tomorrow pay them back with diluted dollars?  Sounds OK to me!

People have mass Stockholm Syndrome. They are victims of their irrational public schooling and conditioning. They blame themselves for acting exactly in the manner that the incentives were set up for them . . . just like the tunnels in a rat maze which the rats have no control over.

I think it's much more fundamental than that...  the constructs that you're talking about aren't merely a modern phenomenon...  I think people are the victims of their own greed and lack of discipline.  Creditors simply exploit these aspects in people...  much like a drug pusher.  Again, let's party today and worry about the hangover tomorrow.  (this also goes for creditors btw)

In Iceland, they seem to have seen through the fraud. They threw the banksters out, repudiated the 'debt', and are doing quite fine now.

Of course, we never hear of that.

Of course, repudiation is eventually the ONLY choice...  so I don't hold them in some shining nobility (especially after they spent like drunken sailors)...  but they did at least walk the walk...  and I hope they're successful in the long run.

In the meantime, people will give up their property & labor to pay the interest charged by the banksters. Stupidity creates their own slavery.

By your definitions here, the contracting debtors on any debt are merely automatons, incapable of rational thought or having the requisite mental capacity to understand the consequences of their actions...  I'm sorry, but this contemptuous view of humanity is completely wrong...  People are undeniably smarter than this...  Now, overcoming denial is a really difficult thing...  and a collective equity theory sure plays a big role...  however, in the end, this is EXACTLY the type of thinking that breeds the nanny state...  and, consequently, solidifies the regulatory capture you seem to be not so fond of...

 

acetinker's picture

Actually, the lending institution directly lending to you did loan money (unless you are able to dip at the discount window)... it had to borrow from a lender higher up the food chain... eventually ending at the mothership, where money is created out of thin air.

The day I see a man walk into a bank, sign some papers and roll out with a pallet of FRN's, I'll agree with your statement.

Regardless, it matters not at which level the fraud is manifested to the average Joe- it's still fraud.

 

MachoMan's picture

false dilemma...  if I roll out with a house...  or I purchase goods with a line of credit...  I've received something of value...  and something tangible to boot.  The fact that it might be something other than cold hard cash is irrelevant.

and yes, it COMPLETELY matters at what level the fraud is...  the average joe has CULPABILITY for his actions...  if he decides to go on a spending spree, that's his baby... 

if the bank that lent to joe did not have any responsibility to repay the loan, then I would be inclined to agree...  just like joe has culpability, so too does the local/regional bank...  or even higher up the food chain...  Unless the party that lends you money created it out of thin air, then I'm having a hard understanding how there is no responsibility to repay...  and, even then, it's a stretch.  The bottom line is that even the first borrower in the chain (e.g. TBTF) is vested with knowledge of how the system works...  and is still beholden to the agreement it makes.

So, free houses, cars, education, etc. for everyone????  Take your free lunch fantasy and shove it.  Average joe AND his creditors should have to go out in the woods and find a switch...  and get bent over the collective knee for their idiotic maneuvers. 

acetinker's picture

Take your free lunch fantasy and shove it. Say What?  Your name fits well, I see.  It ain't free, dumbass.

Joe has to work to repay it, see?  I'm not defending Joe.  Quite to the contrary.  Joe is culpable, but primarily due to ignorance.  The same cannot be said of the banking cartel as they know exactly what they're doing.  Big difference there, Mr. MachoMan.

While I'm at it, let me explain how I view fractional reserve banking.  It could actually function quite well, because it is driven by demand.  The reason it currently sucks is b/c all currency is issued at interest.  Never mind that this interest money is never created- that's another topic.  If you'd pull your head outta your ass for at least a minute, you'd realize that it is the borrower who creates the value.  Therefore, charging him/her interest on value that he/she created is not defensible by anyone with the ability for reasoned thought.

Since I'm feeling generous, I'll share with you a thought that will likely not be received well by most ZHers.  The Gold Standard for currency is a terrible idea.  Why would anyone (again with capacity for rational thought) want to base their "wealth" on a currency, which if it is to be expanded, requires digging ever deeper holes into the very planet which sustains them?

Yes, I do know Bill Still.  He can be an ass.  But he's right when he says, "It doesn't matter what your currency is.  What matters is who controls it."

 

Squid Vicious's picture

We need MUCH more aggressive QE and fiscal stimulus... load up the Krugman howitzer and fire away! $5 gas will just be a transitory issue until we're back at full employment!!! /sarc off 

Aziz's picture

Well the QE has been aimed (among other things) at pumping traditional credit to offset the shadow credit collapse. They just haven't done anywhere near the amount necessary to reinflate, for one thing because they are worried that creditors will be frustrated by debasement, and for another because trying to inflate traditional credit carries significantly more inflationary risk than trying to inflate shadow credit. 

But what are they supposed to do? Try and reinflate shadow credit? However much ABS they buy it's not gonna turn worthless shit into gold. 

They are going to end up having to try a partial debt writedown/jubilee, because nothing else will even begin to offset the deleveraging costs that are keeping the economy (and shadow credit) depressed. It's only a question of how many more years of QE-followed-by-contraction-followed-by-QE bullshit we will have to live through to get there.

Tyler Durden's picture

Debt repudiation will never be attempted before a terminal attempt at reflating debt because it guarantees a full global equity tranche wipe out which is where the status quo, i.e., those who control the Fed, store their wealth. With inflation, even runaway hyperinflation, at least the hope of preserving some terminal equity value remains, which is why it will always be the preferred 'deleveraging' solution. (not to mention the whole $1 quadrillion in derivatives thing, which will collapse like a house of cards one even $1 dollar in financial debt is wiped out).

Hype Alert's picture

So basically wipe out everybody so they can ride assets up with inflation no matter how bad it gets instead of writing off the bad debt.

Dr. Engali's picture

Delete double post. Trying to watch spongebob with my four year old and read the Hedge.

fonzannoon's picture

Sponge bob freaks me out.

Seasmoke's picture

me too......SpongeBob is acting bad tonight !

IndicaTive's picture

Wait for Victorious (8-year-old), or however the hell it's spelled . Spongebob over my shoulder was much more entertaining. Cherish what you can.

 

Quinvarius's picture

How did this thread degenerate into a Spongebob discussion when just a few posts higher is the key to understanding what comes next?

Dr. Engali's picture

"not to mention the whole $1 quadrillion in derivatives thing, which will collapse like a house of cards one even $1 dollar in financial debt is wiped out"

I don't know why the deflationists can't grasp that part.

Hype Alert's picture

deflation will not be allowed.

bbucks's picture

Until the big boys have finalized their golden parachutes and ride off on their gulf streams as their companies implode behind them.

Aziz's picture

We'll see — A terminal attempt at reinflating the debt (i.e. hyperinflation) is debt repudiation. Very, very messy debt repudiation.

I think the goal of a significant number of the power elite may actually be global Japan, because that way creditors get paid off without too much of a haircut — but of course having a 20+-year depression sucks for the rest of society.

 

fonzannoon's picture

You are missing the point with all due respect Aziz. It may end up in runaway inflation. But the goal is controlled inflation that gets tptb along and if it crushes millions of people along the way, so be it. They don't give a shit. George Carlin was so right. If they lose contol then they lose it to runaway inflation and thats a better outcome for them than debt repudiation.

Hype Alert's picture

That's the message that needs to get out far and wide.  Anyone and everyone that has savings for retirement and/or fixed income receipts will be slaughtered and even more dependent on the government.  To think I once dismissed those theories as out there.

 

It also explains why they will not let the market fall even if it means obvious manipulation.   Be long anything but cash.

Snidley Whipsnae's picture

Hype Alert... "Be long anything but cash."

I believe you meant 'Be long anything but paper'...

If you didn't, you should have.

...and, even if one is long all but paper, one need be careful of being scalped by a zillion new fees, taxes, fines, hidden taxes and outright confiscation.

Meridth Whitney was correct on her Muni call. She was off on timing which has happened to all of us. At first slow and then progressively faster infrastructure collapse is going to be a real SOB. The last state/local jobs to go will be state/local cops and their incomes are taking/will take severe cuts.

Excellent post TD/ZH