Stop The Presses: Nobel-Prize Winning Economist Slams QE

Whether it is due to pervasive groupthink, a chronic lack of vision, the perpetuation of failed ideas, or just because the alternative casts grave doubts about the value of their very existence, conventional economists and their media lackeys have almost without exception been supportive of the Fed's "recovery" efforts, be it ZIRP or QE. After all, neoclassical economics demands it, and if the Fed is wrong about its response to the second great depression, then the value of every single economist likewise goes out the window.

Still, in the relentless rising tide of ever louder voices against central planning by the world's monetary authorities, and its destructive consequences, mostly originated by people who engage in actual work as opposed to tenured academics who live in ivory towers where they conduct (failed) thought experiments,it was only a matter of time before at least one prominent economist took the other side of the argument that according to the likes of Paul Krugman has only failed (so far) because not enough of it has been tried (leave it to an economist to completely fail to anticipate the collateral collapse resulting from relentless central bank debt monetization which Zero Hedge forecast as long ago as 2012).

That time has come, and over the weekend, none other than Nobel-prize winning economist Robert Merton (of expanded Black-Scholes fame) with Arun Muralidhar as co-author, released an Op-Ed in Pensions and Investments magazine titled "Monetary policy: It's all relative", in which they slammed not only the current monetary policy response to economic ills (as observed through the prism of pension math and the adverse impact of low rates), but question if instead of leading to an improvement, QE isn't in fact making the situation even worse.

Here are the key excerpts from the op-ed:

... while QE has increased absolute wealth, it has simultaneously lowered relative wealth for a large class of investors. This could lead to the opposite of the desired effect for this group of investors. Lower relative wealth means investors need to save more to improve their funded status, especially where regulations are strict, and it results in less consumption and investment, and may not remove the deflationary overhang.




An alternate, more sophisticated approach to explaining why QE may not work to stimulate aggregate consumption is, perhaps, because the demographic mix of the U.S. (and most parts of the developed world) has shifted toward older people. Unlike 30 or 40 years ago, the enormous baby boomer generation, and even retirees, are much wealthier (including human capital) than in the past, and they are wealthier than current generations earlier in their life cycle.  So the wealth effect does not lead to an increase in consumption and, potentially, has the opposite outcome.


When baby boomers were in the sweet spot for housing needs, expenditures on children and cars, etc. 30 to 40 years ago, the effect the central banks were expecting from QE might have worked better, as they expected it would, but that need not be a reliable prediction under the changed current demographic and wealth distribution.




We believe it is imperative for central banks and academia to examine this perspective immediately and develop a new monetary policy toolkit, because it would be tragic if the central banks' attempts to improve economic security with the current orthodoxy leads, instead, to less consumption, less investment and greater retirement insecurity.

And the punchline:

A recent study by the Center for American Progress shows that millions of Americans (as high as 50% of households) are in danger of retiring with insufficient money to maintain the standard of living to which they are accustomed, and the problem is getting progressively worse. Your previous editorial argues that QE by the central bank may impose unintended costs on pensions, at both the institutional and retail level. This suggests more research needs to be conducted to examine how monetary policy affects relative wealth, not just absolute wealth, and whether traditional approaches are outdated given the current retirement landscape. This may call for central banks to use a different set of policy tools than manipulating long-term rates, and may even argue for the Fed to actually raise long-term rates faster than what is recommended by traditional monetary policy.

Alas, with central banks now proudly owning $22 trillion in "assets", it is far too late. The best one can hope for is that the social collapse the results after QE's failure is finally accepted by all, and that includes all other economists, will be somewhat contained.

Needless to say, all it would take for the Fed to "lose credibility" (if only among its "very serious" peers; it has long since lost all credibility across the broader population) is for a few more economists to have a comparable epiphany and declare that the money-printing emperor is naked, and then all bets - at least for the current failed economic and monetary regime - are off.

As for the immediate response to this article from the Keynesian canon, here is a preview of what to expect.