It is both a hypothesis based on the uncovered interest rate parity [20] condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed.
The Impossible Trinity or "The Trilemma", in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.
So, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. All three are likely not going to succeed.
So, what has the nordic state centrsl bankers and the ECB drawn from these Veritaseum blog lessons? Apparently nothing, as denoted in yesterday's Bloomberg article Signs Swedish QE Backfiring as Liquidity Evaporates [22]:
It’s probably not what the Riksbank expected. Quantitative easing is supposed to drive down longer-dated yields. But as investors obsess over market depth [23], the Riksbank’s bond purchases are undermining liquidity and driving Swedish yields higher.
“The financial conditions -- the currency and the bond yields -- are moving in the wrong direction,” Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, said by phone. The assumption is that “the Riksbank wants yields to go down and the krona to weaken, but it’s been the opposite direction recently. That should pose a problem.”
Sweden’s 10-year government-bond yield, which traded as low as 0.2 percent in April, was at 1.1 percent on Tuesday. Its five-year yield was 0.4 percent, after trading below zero just two months ago. And though Swedish yield spreads have narrowed relative to German bonds, investors can still earn about 15 basis points more by holding AAA-rated 10-year notes issued by Sweden than they can holding similar notes from Germany.
“Swedish rates continue to trade strong relative to Germany because of a lack of material in the repo market as a result of the Riksbank’s QE program,” Danske said in a note on Tuesday.
Krona’s Allure
Meanwhile, the extra yield is adding to the appeal of the krona. Since the Riksbank started its bond-purchase program in mid-February, Sweden’s currency has appreciated more than 4 percent against the euro. It’s up 5 percent against Norway’s krone and is 3 percent higher versus the dollar.
Nordea Bank AB estimates the krona is trading about 3 percent above the Riksbank’s forecast, based on the trade-weighted exchange rate. That will make it harder for the bank to prevent disinflation as import prices decline.
The Riksbank targets about $10 billion in government bond purchases as it tries to revive consumer-price growth after months of deflation. That’s about 14 percent of the market or 3 percent of Sweden’s gross domestic product. Any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply, SEB AB and Danske Bank have said.
And there you have it. This is simply more proof that those who are running the central banking system of these countries truly have absolutely no idea what they are doing. An "I told you so" just wouldn't be appropriate here, would it?
