Tag Archives: Quantitative easing

How Quantitative Tightening Ends, by MN Gordon

When the pain level gets too high, QT4 will end the same way QT’s 1, 2, and 3 ended—with a quick reversal by the Fed and the initiation of another massive QE. From MN Gordon at economicprism.com:

The pursuit of decadence is always met with the painful reality that stopping the excess is much more difficult than starting.  This realization, like a killer in the night, lies in wait until just after the point of no return.  When the certain destruction cannot be undone.

John Maynard Keynes, Fabian socialist and the godfather of modern day economic planning, in his 1935 work, The General Theory of Employment, Interest and Money, wrote:

“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

In late November 2008, then Federal Reserve Chairman Ben Bernanke committed a fait accompli.  Though he may not have realized it at the time; he was blinded by his scholarly prejudices.

Bernanke, a smug Great Depression history buff of the highest academic pedigree, gazed back 80-years, observed several credit market parallels, and then made a preconceived diagnosis.

After that, he picked up his desktop copy of A Monetary History of the United States, by Milton Friedman and Anna Schwartrz, turned to the chapter on the Great Depression, and got to work inflating the money supply.

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Mayhem Beneath the Surface of the Stock Market, by Wolf Richter

If we’re in a bear stock market, it’s not even a month old (the Dow’s last high was November 8), and already there’s been substantial damage to some old crowd favorites. From Wolf Richter at wolfstreet.com:

It’s amazing how individual stocks, at the tippy-top of the biggest stock market bubble in modern times, are getting taken out the back one by one to be crushed, but without denting the overall indices all that much.

The stock market bubble was driven by $4.5 trillion in QE in the US alone, along with many more trillions by other central banks, and it was driven by interest rate repression, even has inflation has been surging to multi-decade highs, not just in the US but globally, and not just in goods, but now also in services, particularly housing, such as rents.

After a decade of QE being relatively benign on the inflation front, giving central bankers a false sense of confidence, it has finally broken the dam, and inflation is now surging everywhere, and it’s spreading across the economy.

Central banks are now no longer denying it, and some have raised rates, and others have ended QE.

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Quantitative easing: how the world got hooked on magicked-up money, by Ann Pettifor

Central banking is a gateway drug to quantitative easing and then, perpetual debt monetization. From Ann Pettifor at prospectmagazine.co.uk:

Going cold turkey would finish off a dysfunctional global financial system that’s now hopelessly addicted to emergency infusions. The only solution is surgery on the system itself

The world economy is a mess. The system, notionally governed by the invisible hand of the market, is no longer governed in any meaningful way: private excess puffs up bubbles that government indulgence ensures can never burst. We seem condemned to volatile commodity prices, wild capital flows, worsening imbalances in trade, taxation and income, and—before long—the next sovereign debt crisis. And then there’s inequality. During lockdown, the total wealth of billionaires rose by $5 trillion to $13 trillion in 12 months, the most dramatic surge ever registered on the annual Forbes billionaire list.

Where do such riches come from? Compared to before the pandemic, there’s less real economic activity: we are collectively poorer. And yet within a year of the great panic of March 2020, many asset prices were surging. Wall Street and the City of London are again awash with liquidity—and in a speculative mood. One vogue is for something called SPACs, or “special purpose acquisition companies.” That sounds so vague as to bring to mind the South Sea Bubble companies of 1720, whose pitch is remembered as “carrying on an undertaking of great advantage but nobody to know what it is.”

How is this mismatch between financial markets and underlying reality possible? Because just like in the aftermath of the Great Recession, the civil servants in our central banks spotted the dreadful potential of unchecked panic, and rode to the rescue of private speculators by flushing the system with made-up money through a process we’ve come to know as quantitative easing.

Commentators on both the right and the left are increasingly fixated on the role of QE. In a way, that’s understandable. The policy—deployed on and off ever since the financial crash—has been pursued to an extraordinary degree in the face of Covid-19. By this June, the US Federal Reserve’s balance sheet had doubled in size since the pandemic began, and has now swelled by 800 per cent since 2007.

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The destructive force and failure of QE, by Alasdair Macleod

An analysis of the mechanics of monetary inflation, and how it may blow up the global financial system, by Alasdair Macleod at goldmoney.com:

This article concludes that quantitative easing as a means of stimulating economies and financing government deficits will fail. The underlying assumption is that the transmission of additional money to non-banks in order to inflate financial assets, and to banks to cover government finances, will become too great in 2021 for it to succeed without undermining fiat currencies and financial markets. Admittedly, this opinion stands in stark contrast to the common Keynesian view, that once covid is over economies will start to grow again.

To help readers to understand why QE will fail, this article describes how its objectives have changed from stimulating the economy by raising asset prices, to financing rapidly increasing government budget deficits. It walks the reader through the inflationary differences between QE subscribed to by banks and by non-bank financial institutions, such as pension funds and insurance companies.

Having exhausted the reduction of interest rates as the principle means of economic stimulation, central banks, and especially the Fed, have embarked on pure monetary inflation. Before the end of 2019, that became the driving force behind the Fed’s monetary policy. Since March 2020 the objective behind QE altered again to financing the US government’s budget deficit.

In this current fiscal year, just to fund budget deficits and in the absence of net foreign demand for US Treasuries, QE is likely to escalate to a monthly average of $450bn. Almost impossible with a stable exchange rate, but with the dollar being sold down on foreign exchanges and for commodities, the everything dollar bubble will almost certainly collapse.


Now that the US has elected a new president who will appoint a new administration, we must forget recent political events and focus on future economic and monetary policies. It is a statement of the obvious that President-elect Biden and his new Treasury Secretary will be naturally more Keynesian than Trump and Mnuchin, and it is likely that the economic focus will be more on stimulating consumption than on supply side economics. Policies are likely to be closer to modern monetary theory, which is highly inflationary — certainly much more so than under Trump’s presidency.

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China (and the world economy) at the end of the road, by Thomas Malinen

China has too much debt to bail out either its own or the global economy. From Thomas Malinen at gnseconomics.com:

We have been monitoring China closely since March 2017. We were one of the first to show that China had driven the global business cycle since 2009 and that the remarkable recovery of the world economy from the 2015 slump was mostly China’s doing.

Now that the world economy is, again, heading down, many are wondering, what will China do? The unfortunate answer is that it can most likely do very little. Her ability to stimulate the economy by increasing debt is almost completely gone. This means that the world economy is heading into a recession.

The limits of stimulus

China has been very aggressive in its efforts to curtail any deeper contraction in its economy. This has produced some remarkable trends, like the relationship between China’s GDP and total debt shown in Figure 1.

Figure 1. Nominal gross domestic product and the total private sector and government debt in China. Source: GnS Economics, Mbaye, Moreno-Badina and Chae (2018), World Bank

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Is the Fed Secretly Bailing Out a Major Bank? by MN Gordon

So far there hasn’t been a good explanation for the Federal Reserve’s massive injections of liquidity. Bailing out a major bank is certainly a plausible hypothesis. From MN Gordon at acting-man.com:

Prettifying Toxic Waste

The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance?  So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?

The yield-chasing hamster wheel… [PT]

Thus, smart fellows go after it; pursuing financial innovation with unyielding devotion.  The underlying philosophy, as we understand it, is that if risk is spread thin enough it magically disappears. In other words, the solution to pollution is dilution.

With this objective, new financial products are fabricated into existence. The risk free rewards of several extra basis points are then packaged up into debt instruments and sold off to pension funds and institutional investors. The search for yield demands it.

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Unwinding QE will be “More Disruptive than People Think”: JP Morgan CEO Dimon, by Wolf Richter

This article was worth posting simply because it contains what sounds like some sort of intellectual humility from JP Morgan’s CEO, Jamie Dimon. From Wolf Richter at wolfstreet.com:

“We act like we know exactly how it’s going to happen, and we don’t.”

“We’ve never had QE like this before, and we’ve never had unwinding like this before,” said JPMorgan CEO Jamie Dimon at the Europlace finance conference in Paris. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”

He was referring to the Fed’s plan to unwind QE, shedding Treasury securities and mortgage-backed securities on its balance sheet. The Fed will likely announce the kick-off this year, possibly at its September meeting.

According to its plan, there will be a phase-in period. It will unload $10 billion the first month and raise that to $50 billion over the next 12 months. Then it will continue at that pace to achieve its “balance sheet normalization.” Just like the Fed “created” this money during QE to buy these assets, it will “destroy” this money at a rate of $50 billion a month, or $600 billion a year. It’s the reverse of QE, with reverse effects.

Other central banks are in a similar boat. The Fed, the Bank of Japan, and the ECB together have loaded up their balance sheets with $14 trillion in assets. Unwinding this is going to have some impact – likely reversing some of the asset price inflation in stocks, bonds, real estate, and other markets that these gigantic bouts of asset buying have caused.

The Bank of Japan has been quietly tapering its asset purchases for a while to where it buys only enough to keep the 10-year yield barely above zero. And the ECB has tapered its monthly purchases by €20 billion earlier this year and is preparing the markets for more tapering. Once central banks stop buying assets, the phase starts when central banks try to unload some of those assets. The Fed is a the threshold of this phase.

Dimon was less concerned about the Fed’s rate hikes. People are too focused on rate hikes, he said, according to a Bloomberg recording of the conference. If the economy is strong, economic growth itself overcomes the issues posed by higher rates, he said. The economy has been through rate hikes many times before. They’re a known quantity.

But “when selling securities in the market place starts,” that’s when it gets serious.

To continue reading: Unwinding QE will be “More Disruptive than People Think”: JP Morgan CEO Dimon

“What If Market Consensus Is Wrong” – A Hedge Fund Ponders The Alternative, by Francesco Filia

Interest rates may be rising not because economies are improving, but because central banks are pulling back from quantitative easing. If that’s the case, it could spell bad news for stocks. From Francesco Filia at Fasanara Capital, via zerohedge.com:

A week ago we posed a simple qustion:”is the market wrong” in bidding up risk assets in a time of rapidly tightening financial conditions. With the S&P likely set to rise above 2,200 today, a new all time high, the market at least for now, remains “right.” However, more doubt has emerged.

In a note from our friends at Fasanara Capital, CIO Francesco Filia repeats the question we posed last week, contemplating what may be a “delusion” emerging on the boundary between reflation/growth and a QE bubble unwind. As Filia puts it, “what if consensus is wrong: what if rates are rising due to the end of Quantitative Easing and not because of reflation/escape velocity on growth?” He continues:

Rates then rise without growth, perhaps even without much inflation. Indeed, rates started rising back in August, on momentous shifts in policy by BoJ (forced by capacity constraints and collateral damage). Such scenario is not good for equities, contrary to what currently believed by markets.”

Indeed, such a scenario would be the worst possible one: with potential stagflation on the horizon, the last thing markets can afford is a withdrawal in central bank support just as US deficit funding needs are set to spike, something we have been cautioning for the past two weeks.

In any event, if the market is wrong about this most fundamental signal, what else is it wrong about? Here are the key highlights of Fasanara’s thought:

Delusions: Rates Rising on Reflation/Growth or QE Bubble Unwind?

What if consensus is wrong: what if rates are rising due to the end of Quantitative Easing and not because of reflation/escape velocity on growth? Rates then rise without growth, perhaps even without much inflation. Indeed, rates started rising back in August, on momentous shifts in policy by BoJ (forced by capacity constraints and collateral damage). Such scenario is not good for equities, contrary to what currently believed by markets.

With Trump rising to power against all the odds of bookies, pollsters, a militant press, a reflexive army of pundits and an all-guns-out establishment, it is all too clear who are the big losers of these elections. After the supposed shocks of Brexit and Amerexit, you may imagine less and less market participants to pay attention next to pollsters, bookies and analysts in informing investment decisions at the next check point.

But there is a bigger loser, and that is the Efficient Market Hypothesis itself, a cornerstone of modern financial theory, which states that all relevant information are embedded in prices, making them fair prices. Going into the event a win by Trump was widely perceived to be an outright disaster. Coming off the event, after an initial shock, equity markets staged one of the most impressive rebounds in history. Clearly, this is not an example of rationale investment behaviour. From Armageddon to Paradise on Earth in just few hours. The market had known full well what the aftermath of a Trump win looked like, had been given plenty time to strategize on that, and yet it all seemed really new news. Ex-post, narratives of cash on the sidelines, retail coming in, fiscal expansion /reflation reality sinking in, are all handy but unconvincing scapegoats.

To continue reading: “What If Market Consensus Is Wrong” – A Hedge Fund Ponders The Alternative


He Said That? 11/3/14

From Charles Wyplosz, of the Graduate Institute in Geneva:

It’s a sign of the desperate situation of the euro area that people are so focused on something [referring to quantitative easing] that will not turn the tide around. It may help and doesn’t hurt, so why not do it?

Wall Street Journal, “New Bond-Buying Conundrum,” 11/3/14

Mr. Wyplosz seems aware that the positive effects of quantitative easing (QE) have been minimal, but maintaining that QE doesn’t “hurt” betrays abysmal ignorance of QE’s real world damage. QE has lowered the prevailing interest rate below where it would be in the absence of central bank intervention. By doing so, it has encouraged debt, overproduction, and speculation, while discouraging saving by obliterating returns on low-risk income-bearing investments. Perhaps in the rarefied world of Swiss academia that doesn’t count as hurtful, harmful, or dangerous, but QE is the flimsy superstructure of a global skyscraper of cards (see A Skyscraper of Cards) whose collapse may well usher in the most catastrophic crash of all time.