QE者，负鼠也

Jan 26, 2015 Stephen S. Roach

纽黑文—欧洲央行可预见地加入了世界其他货币当局行列，开始了史上最大央行业务实验。到目前为止，一切都是那么熟悉。首先，央行将常规政策利率下降到可怕的“零下限”。但经济继续萎靡，而常规工具已经用尽，于是央行采取了非常规方法——量化宽松（QE）。

这一战略背后的理论很简单：央行无法让信用的价格进一步降低，转向了扩张信用的数量。隐含观点是这一从价格到数量调整的变化在作用上等同于增加货币政策宽松。因此，即使名义利率处于零下限，央行手里仍有武器。

但这些武器可适用于它的任务吗？对欧洲央行和日本银行来说，它们都面临可怕的经济和总物价水平的下行风险，这绝不是一个可以等闲视之的问题。对美国来说，它的量化宽松最终后果还有待观察，答案也仍然有待揭露。

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0 Comments on this paragraph, 22 in all 22 Comments on this article

Michael Kelley Feb 5, 2015

Mr. Roach does not offer any advice or solutions.

How about this?
http://michaelekelley.com/2014/03/28/federal-reserve-can-create-jobs/

Thanks
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Seth Hines Jan 31, 2015

With 1.2 trillion dollars in student loan debt, the United States gov can stimulate annualized real consumption growth, by merely passing legislation that brings down student loan interest rates to the same level as home equity loans. We are creating a new generation of young adults who will not spend due to their obligation to pay student loans that currently has an interest rate of about 6.8%. Now compare that to home equity loans. Obama's plan for 2 yr of free community college is a start, but the current young adult population still carries a huge student loan burden that is unprecedented in this country.
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Mike Fellman Jan 29, 2015

Dead wrong. Just plain wrong. QE is NOT about the quanity of reserves! A price of zero implies that the demand for reserves has been fully met and there is no marginal bidder for reserves. Thus, creating more reserves does not and will not result in further credit creation. The banks can't do anything after QE they couldn't do before QE. In a modern monetary system with a central bank, the quantity of reserves is never a constraint on the banking system. Rather, the central bank delivers reserves at will, on demand, and at the stipulated price.

QE acts via a portflio balance channel. It raises the price of safe assets and thus shifts investors into riskier assets. Mr. Roach, you are the real lemming. You blindly listen to all those throw away economists on NPR who participate in the hunungous diseducation campaign about QE and how it "expands the money supply."

See http://www.fx-fusion.blogspot.com/2015/01/essay-how-qe-actually-affects-economy.html
- Jose araujo Jan 29, 2015
  
  Nice post, amazing how many people and reputable economists don't know what the QE is for.
  
  I would add that QE is aimed at changing expectations and perception, creating a scenario of irresponsible monetary policy to gain monetary traction.
  
  Risk free interest tares are at the ZLB not because of QE but inspite of QE that has failed to raise inflation expectations.
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Paul Mathew Mathew Jan 29, 2015

Come on Steve - you know that QE is all about attempting to offset the price of oil:

HIGH PRICED OIL DESTROYS GROWTH
According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

THE PERFECT STORM (see p. 59 onwards)
The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

As predicted, the high price of oil would kill demand --- which it has --- causing a glut --- causing the price of oil to crash --- which means we need to get ready for a massive spike because capex is being slashed and we are going to run into a very skinny bottle neck down the road.

Think rock and hard place. That is where the central bankers are stuck. There is NO solution to the problem
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Stamatis Kavvadias Jan 29, 2015

What exactly are "the risks they face" for central banks? You (should) know, central banks can really print money and depreciate the currency (while sterilizing QE for proper legal contact). The doctrine of the central bank balance sheet corresponding to a debt recording instrument is just a taboo --not economics. Sufficient depreciation for economy reflation and restarting growth, will come much earlier than the total magnitude of QE is sterilized. Really printing money (without debt attached) and giving it to governments *is* market-neutral, because the money can be spent in the economy with political choices. If in doubt, this money can be evenly distributed to *all* citizens. This *will* change the problematic demand situation, advanced economies find themselves in today.

The real problem, then, is that the remaining part of QE that has to be sterilized, created an unequal wealth effect, to the benefit of corporations, and has to be reversed. When every advanced economy is trying to do the same and "emerging" economies have taken counter measures to spillover effects, the choice remains only on reforming the banking system.

Your "argument" that central banks "face risks," simply, implies that where advanced economies failed to export the ill balance sheets of their banks, the "only choice" is to keep the increased inequality this has caused (and wait for a trickle-down effect that will not come with continued failure to heal weak demand). Insisting on this story, will be eventually deciphered by the markets and will result in capital flight from "advanced" economies, as companies will be left back by rivals in "emerging" economies. Unless you expect China to fall in the same trap, which is extremely difficult for a centrally managed economy.

Either the bankers will pay for their profligate behavior, or there will be a very weak political base for capitalism in the coming 20 years. They will take "their" money to previously emerging economies.
- Stamatis Kavvadias Jan 29, 2015
  
  There can be on more expectation: that markets will make an irrational exception for the US and forget animal spirits...
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- Stamatis Kavvadias Jan 29, 2015
  
  "Tax on capital" as Piketty suggests and "raising minimum wages" as Adair Turner suggests. With demand at the ...ZLB (zero lower bound), because of debt, I do not see capital staying in "advanced" economies and raising minimum wages may result in unemployment when demand is low. "Helicopter money" will have to fund public deficits first, to get to growth and reduced debt to GDP. This will restore inflation to normal. All eurozone, UK, and US, will need to tolerate somewhat higher inflation for a while, or higher debt-to-GDP than others for longer.
  
  Reversing QE would just bring the problem back for all. Waiting for any success from QE is a fallacy. It only gives stock markets something to make money on. Try to reverse it and you' ll see it's not there; at least with low growth. And China is rushing ahead, so QE cannot be effective for long. Unless, as said, it falls in the same trap...
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Paul Hanly Jan 28, 2015

It is not a liquidity trap. It is an excess indebtedness and comparative shortfall in income trap exacerbated by government austerity which flows through the identity of GDP to reduced private sector income unless a country is able to significantly increase its external sector surplus.

The US ran huge fiscal deficits to "break" the recession, while Europe went to austerity and deepened and prolonged it.
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Paul Hanly Jan 28, 2015

So is this article an acknowledgement that QE asset purchases are offset by the growth in liabilities and very little of the money finds its way to the real economy because it is stuck in bank reserves at the Fed?

Is it also an acknowlegement that there is no shrotfall in the cpapcity to create credit if there are creditworthy borrowers with demand because as the Bank of England paper on money creation explains commercial banks create money out of nothing when they make loans?
Is it also an acknowldgement that QE is not necessary to lower interest rates when there is a balance sheet recession among a significant portion of the economy because the lack of demand for credit and the increased savings rate fundamentally change the balance of supply and demand and consequently change price of money?
- Michael Kelley Feb 5, 2015
  
  QE has created a leveraged loan bubble, a dollar bubble and exchange volatility. Read this
  
  http://michaelekelley.com/2014/12/20/leveraged-loans-predict-crash/
  
  and
  
  http://michaelekelley.com/2014/03/28/federal-reserve-can-create-jobs/
  
  Thanks
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Michael Public Jan 27, 2015

QE has not caused inflation yet - one has to wonder if there will be a delayed effect - giving rise to 70's levels of inflation later on.
- Jose araujo Jan 29, 2015
  
  Most of the money is tied in US Bonds,German Bunds, Swedish..
  
  Low risk investments even in emerging countries.
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- Stamatis Kavvadias Jan 29, 2015
  
  Money finds its way abroad, to "emerging" economies. That's why there is not inflation effect domestically.
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- Jose araujo Jan 27, 2015
  
  We are living in liquidity trap conditions for the last few years.
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jagjeet sinha Jan 27, 2015

Demand Mountains were needed to overcome the meltdown in 2008 - Asset Prices were collapsing, and the remedy applied was the liquidity injections to bolster by ballooning the Fed Balance Sheet. While the limits to monetary tools are evident, there are obviously many other elements that make up the chemistry of Demand Mountains. Fiscal tools, structural tools, minimum wage increases et all. The Fed Balance Sheet contained the haemorrhage in 2008. Surgical procedures have yet to be discovered, let alone applied. Inequality meanwhile perhaps a larger impediment in reconstruction of the Demand Mountains - tax on capital as Piketty suggests. Public Infrastructure Assets - like New Deal and Apollo Project - is another use of Fed Balance Sheet. Migration perhaps yet another - like the China story built on Urban Migration and the MegaCities that have been driving Demand Mountains in China. Migration created America itself in the first place. And Migration outward from the Eurozone - driven by inability so far of Europe to trigger expansion instead of austerity - mainly to the One remaining island of The Anglosphere still in European embrace. Neatly 5 million from Europe at the last count are now working in Britain driving Demand for housing/Infrastructure to the limit. So, there are many elements that constitute the chemistry of Demand. Central Banks perhaps alone cannot do the heavy lifting - the remedy requires coordinated surgery. Thought through - the three T's that the author suggests perhaps a starting point - so the cause and the objective of the surgical solution perfectly understood. There are many Nobel minds happily contributing to the analytical rigour required to get the diagnostics right before the remedy is perfected.
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JERRY COLBURN Jan 26, 2015

Questions — Why did the Fed not spend its QE funds on infrastructure projects, perhaps buying state bonds on the secondary market? Why make the rich richer, instead of creating much-needed public hard assets and employing large numbers at good wages? Surely the choice requires only mundane thinking.
- Andrew Purdy Jan 27, 2015
  
  What you suggest is not legally allowed. Not that anyone could actually stop the Fed if they chose to buy Munis, though.
  The right way to pump monetary stimulus into infrastructure is for the Congress to spend the money and for the Fed to finance the Treasury. The Fed cannot do this on its own. The same thing is true for the ECB in Europe.
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- Andrew Purdy Jan 27, 2015
  
  What you suggest is not legally allowed. Not that anyone could actually stop the Fed if they chose to buy Munis, though.
  
  The right way to pump monetary stimulus into infrastructure is for the Congress to spend the money and for the Fed to finance the Treasury. The Fed cannot do this on its own. The same thing is true for the ECB in Europe.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Greg Posehn Jan 26, 2015

Well said, Stephen. I would add that the transmission mechanism in the US - the wealth effect - is not likely to be as effective in the Eurozone. While the Fed pushed US investors out of Treasuries and into riskier bonds and equities, as asset prices rose Individuals felt wealthier, and were able to increase consumption. In Europe, where equities are a less utilized savings vehicle, the transmission mechanism most touted is the currency effect. The ECB seems to feel that if investor's Euro balances increase because the ECB takes them out of their bond holdings, they will sell their Euros to find higher yielding foreign assets. This will result in currency devaluation, improving competitiveness and "stealing" demand from their trading partners. Needless to say, the exit mechanism from Euro QE is even more perilous than in the US.
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Jose araujo Jan 26, 2015

In my view, the QE isn't aimed at lowering further the price of credit. QE recognizes thaw economies are at the Zero lower bound, with a a very high risk aversion and preference for liquidity.

All central banks would be dancing with happiness if the risk free interest rates started moving, but they aren't, hence the need for QE in order to change expectations and drive the interest rates up.

QE doen't make any sense viewd in other light. Problem is that QE isn't working changing expectations. Yes the price o money is zero, but the price of risk is still very high.
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Paul Daley Jan 26, 2015

Roach is right, but his reasoning is a little awry. Inadequate savings? Where did that come from?

The problem is, as Roach says, in part one of transmission. Those selling bonds to the Central Bank have no incentive to do anything but buy other assets to capture the capital gain lower real interest rates will produce. They have no reason to spend any money at all on new goods and services.

More seriously, when the price of money hits zero, markets lose they're capacity to separate good investments from bad. Any asset can produce a capital gain in response to a real interest rate movement so long as it has some value to someone. It makes absolutely no difference whether it is more productive or less.

And that's the problem. In their frenzy to start a recovery, Central Banks have touched off an orgy of speculation in capital markets, while providing only the slightest increment in demand for goods and services. To do better, they would need to tie some of their tools together with fiscal tools. My favorite is to tie capital gains tax rates inversely to real interest rates, so as to suppress capital gains that are based only on real interest rate movements. That would ensure that any monetary stimulus would pass through capital markets to the real economy without changing any values or touching off any speculation. But that's only one way to get at the dual problems of transmission and speculation; there may be others.
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