An Alphaville blog entry “Credit rollovers & rally monkeys” discusses falling yields on corporates of all persuasions.
But my point is that falling yields and rising prices are equivalent to lower prices and higher yields.
QE needs to translate into growth before we may actually have a portfolio effect on consumption.
THINK ABOUT IT!
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.
The world’s QE bet is all about closing the potential output gap, and for many this accumulated gap, built up over the last 5 years is pretty large. Not large enough however to soak up all that cash the Fed has injected, but the Fed wants to deal with this crisis later.
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.
I am genuinely interested in what he would have said, but not about quantitative easing per se, because he was obviously pro quantitative easing if there were issues about insufficient growth in the monetary base.
The End of China’s Easy Growth
By 2015 hard commodity prices will have collapsed
If US monetary stimulus is a case of trying to bang a square peg through a round hole, then China is the mallet: without China, where is the bang?
While Bernanke must be having a Uri Geller moment if he thinks that he can “will” nominal GDP into expanding, Milton Friedman, from above, must be thinking that Ben has gone all “Reality TV”.
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.
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.
Who knows what spin is actually being put on the ball these days, but the Federal Reserve’s decision to implement QE3 has much complexity, and if you thought it was all about pushing up asset prices, think again.
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
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.
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.