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Roach on QE

Fed’s Asset Purchases Are `Charade,’ Roach Says

Why are regular blue jeans so bad?

THE INTERPLAY OF ECONOMIC REFORMS AND MONETARY POLICY THE CASE OF THE EURO AREA

The Disheartening State of American Incomes

America’s Discouraging Income Story – The effective transmission of QE to the US economy depends to some extent on income and wealth distribution – unbalanced distribution limits the efficacy of QE, almost to the point that increased asset values may well primarily benefit those with limited constraints on expenditure.

Is this the last kick of the can for monetarism as we know it?

I am not so sure that such a narrow focus on the monetary base as the de facto cause of current economic problems is a safe way to be conducting monetary policy.   Agreed, in a general equilibrium, and in most normal economic scenarios, increasing the monetary base is going to stimulate economic activity – give banks more deposits to lend at an acceptable margin and they are likely to do so – but I am concerned that today’s monetarists have lost the plot.

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ECRI recession update and QE

I think it is highly possible that the Fed know they have people guessing: they see the stock market moving on up and, wow, QE works.  Well, it is plausible that QE has had some marginal benefit to the economy because of this, but the regularity with which new phases of QE need to be implemented suggests quite strongly that the impact of QE has been weak, given the fundamental head winds.

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Aggressive, desperate or, by necessity, both? Is this the last throw of the dice?

I hate the phrase quantitative easing, it is a bit like calling an apple, Malus Domestica-Borkh.  But QE is no apple, it is a rigged game as far as investors are concerned, and the Fed is playing on the market’s irrationality, and its passion for the short term, to pump a little more blood into the valves. 

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QE is entering a dark “shadowy” mire…and perhaps that is all it is good for…

At a very basic level, all QE does is exchange “new money” for fixed interest assets (up till now high quality government bonds of varying maturities and some corporates (UK)).

QE is meant to lower bond yields through the initial demand and the reduction of supply, but this is not a necessary condition (i.e the interest rate change on high quality securities), since the real prize is the rise in the price of risky assets through portfolio adjustment of cash percentage allocations.

Reducing the supply of high quality assets and increasing the supply of money aims to increase the liquidity in the market for less liquid risky assets.

Ostensibly, since the rise in the price of risky assets is also a proxy for those loans and leases on the books of the banks, QE is also intended to increase confidence in the banking system and the banking system’s confidence in its ability to make loans.  Continue reading

Federal Reserve Twists, but can it Turn the economy?

The Fed’s announcement to sell 400bn short term US debt from its portfolio and buy a similar amount of long term debt is unlikely to solve the current financial and economic problems. 

Consumer demand is not the problem (consumer debt is still historically high) in the sense that consumers lack the earnings power and spare debt capacity to launch a debt fuelled stimulus of the economy.  They are still deleveraging and will most likely continue to do so.

Admittedly, by focussing on the long end of the curve it will likely reduce longer term borrowing costs, but the main problem areas deal with commercial and industrial lending.

Commercial and industrial lending require stimulus from final demand to stimulate loan demand, capital investment and jobs growth.

QE 3 needs to stimulate commercial and industrial lending if it is to be successful

QE1 And QE2 have proven ineffective in engendering an enduring recovery in lending and hence has failed to stimulate economic activity at the monetary level – please note data sourced from Federal Reserve table H8 Assets and Liabilities of Commercial Banks in the US.

Vast amounts of monetary base are already left idling within the banking system from QE1 and QE2.

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