Link I refer to the combination of QE and ZIRP as QIRP. Both happened concurrently for the most part. It is hard to dis-aggregate the effect of one from the other. ZIRP has its impact from a mechanical perspective. QE has its impact from a psychological perspective – investors believe it drives asset prices up (primarily stocks), so investors then drive up asset prices. Regardless, at this point the data is in. Asset prices have inflated (and systematic risk as well), but the economy has not. The economy has also missed every forecast the Fed had for it along the way when these policies were implemented. Further, QIRP is not working in Japan, even with the government buying equities. IF QIRP was going to increase inflation, Japan should be the place where it should at least create some inflation as they are huge net importers of commodities. Consider the following statement from a prominent economist: “Japanese companies held Y236t or $2.0t of cash in 4Q — the same as the US corporate cash. Given continued increases in inflation expectations, it’s somewhat surprising that cash holdings by companies are still increasing.” This is a very outdated notion that increased inflation expectations drive investment, especially if inflation is going from 0% to 2%. Frankly from any level a few % point change in inflation expectations is NOT enough to scare a business into an investment they wouldn’t otherwise make. Further as it pertains to the U.S., companies are holding cash as a matter of strategy — tax avoidance (loopholes re foreign tax dodges and other still not fixed), buybacks, and acquisitions, especially defensive acquisitions. A little inflation is not the panacea for our economic problems and the Fed and others are over-focused on this notion and use it as an excuse for extreme policy flexibility. With regard to buybacks, I think corporates are now cash-flow negative after dividends and buy-backs are taken into account despite record profits and relatively modest capex. Business strategy and society has changed. Economic policy that may have worked 50 years ago doesn’t necessarily work today, for a variety of reasons across a variety of behaviors (buybacks superceding CAPEX for example). Further when markets expect the Fed to behave a certain way because they have become conditioned to believe it will, the Fed’s actions are already baked in and therefore less meaningful (ergo when used to drugs, drugs no longer help as much). Also as long as end-market consumer demand remains weak (i.e., 28 qtr annualized growth of 1.4% is unprecedentedly weak), companies are not going to expand capacity. This is a classic accelerator effect in a non-accelerating demand climate. Keynes himself would not advocate what a lot of “Keynesians” view as proper policy today. His views (whether right or wrong) have been greatly distorted and they have morphed into something else in practice in today’s economy. The focus on increasing inflation is overdone, outdated, myopic, and an excuse to take experimental policy action and stretch the Fed mandate (locally and globally). Further now that it appears QIRP has been much less effective than anticipated for the economy, while increasing systematic risk, which makes it a net failure, Bernanke has taken to the blogosphere with transparent attempts to defend his decisions and legacy. Alan Greenspan seemed to often try and defend his legacy as well after his term as Fed chair ended. People only need to try and defend their legacy when they are insecure about it. I never noticed Paul Volcker trying to defend his legacy – the results of his decisions were pretty clear. Let me address a few things Bernanke has said in his recent blog posts: “Although the recovery has not been as fast as hoped—in part because of “headwinds” arising from fiscal policy, the after-effects of the financial crisis, and other factors…” Bernanke is saying he was right about everything, but everyone and everything else screwed it up. Hmmm. People that never admit they were wrong, blame others and other factors they didn’t consider but should have, never learn from their mistakes, and don’t evolve into being better at what they do. Janet Yellen fits this mold as well. “The bottom line is that large increases in the short-term rate based on financial stability considerations alone would involve costs that well exceed the benefits……Initially, detractors focused on the supposed inflation risks of such policies. As time has passed with no sign of inflation, that critique now looks rather threadbare” Makes sense, provided you assume, as the model he references does, that rate reductions have big effects on credit growth and economic growth. What if the effects on credit and economic growth were smaller than in the model? QE at least did not cause the credit growth that it was intended to. The increased money supply just ended up as excess reserves and the velocity of money slowed. That is why it wasn’t inflationary. Bernanke is now taking a victory lap because QE didn’t cause inflation. But that is only because QE didn’t do what he intended it to do. Then what if the costs (systemic risk) are greater than the model assumes? The costs of the last 2 bubbles blowing up was incalculably large. These models are all garbage in, garbage out. In my experience the Fed’s models recently appear to be good at one thing – being wrong!!!! “If you asked the person in the street, “Why are interest rates so low?”, he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense. The Fed does, of course, set the benchmark nominal short-term interest rate. The Fed’s policies are also the primary determinant of inflation and inflation expectations over the longer term, and inflation trends affect interest rates, as the figure above shows. But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed…The Fed’s actions determine the money supply and thus short-term interest rates.” BUT this is what he said on August 31, 2012 at that year’s Jackson Hole conference: “Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields… The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points. Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield. These effects are economically meaningful. Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS… “ Then Bernanke also stated: “This sounds very textbook-y, but failure to understand this point has led to some confused critiques of Fed policy. When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings.I was concerned about those seniors as well. But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative.” (cont'd below)
Cont'd from above... What a load of garbage. It is well documented seniors face a higher rate of inflation than the average person (medical costs, etc.). The inflation seniors are facing is now running north of the interest rates they can earn on the typical conservative investment seniors like to make. Therefore the real rates of return seniors are earning are now negative. Probably the worst they have ever been for seniors. But he has the nerve to claim his policy was good for seniors. All policies have upsides and downsides, but in Bernanke’s view apparently his policies have no downside for anyone. I have no idea how lower interest rates, with the intent of generating higher rates of inflation can be good for the real rates of return seniors and other savers generate. Further, for people holding a fair bit of cash, as a lot of seniors do, there is probably no better case than high rates and deflation. Money can be put to work earning great returns, while the cost of everything drops. For the not working (seniors) savings class, this is a great situation. Granted it probably isn’t so good for everyone else. But Bernanke seems to think that what he did (which didn’t work anyway) was somehow good for everyone, including seniors. My advice to Ben Bernanke is simple. If you consider yourself a public servant, spend less time trying to concoct ways to defend your legacy, and spend more time on what you did that didn’t work, what can be learned from it, and what current policy makers can change and do better. Here is a theoretical title to a Bernanke blog post that I would like to read, but don’t think will ever get wrriten “Things I was wrong about, what I learned, and what the Fed should do differently going forward.”
It would help to start with a correct understanding of what the aim of QE is and why Central Banks implement it. The purpose is to provide money to the government, or governments in the case of the EU, used for economic stimulus programs, while simultaneously puting downward pressure on interest rates. The net is of course your QIRP. This is a central bank tool that is unlikely to be used except in the case of deep, protracted recessions that the past, and present, has shown to be unresponsive to conventional measures. To understand why "QRIP" may be needed, it helps to understand what Richard Koo refers to as "debt trauma". In other words, there is a psychological aspect to deep recessions that if unaddressed will actually worsen the recession. QE, the stimulus projects and the low interest rates that result, have proven effective in combating debt trauma. The desirable end result is obtained over time, depending largely on the amount of stimulus applied. This may be compared to the result if nothing is done, or worse yet, a climate of belt tightening is allowed to not only persist, but expand. The result then is what we in the U.S. experienced through the first part of the great depression in the 1930s. It wasn't until very late in the depression that the government changed course and began to apply massive stimulus, with the result that the economy responded and debt trauma began to subside. The single most dramatic example in the industrialized era of massive government stimulus being used to lift a depressed economy out of debt trauma is provided by the Third Reich in Germany. A mechanism was used that produced a result very similar to what QE accomplishes, though it was not QE per se. The German central bank took advantage of the financial flexibility afforded by the gold standard ending to keep interest rates low and government budget deficits very high (Akin to what QE does!) Massive infrastructure projects were funded by equally massive deficits. The government funded the deficits by issuing what were in effect I.O.U.s that could be traded internally. The consequence was the most rapid decline in unemployment in any country during, or since, the Great Depression. Real wages measured against inflation increased by more than 10%! According to Wikipedia, revenues between 1933 and 1939 were 62 billion while expenditures were 101 billion. Unfortunately much of the manufacturing capability built up at that time went into arms manufacture, which just as in the case of the United States today, did not benefit the living standard of a majority of German citizens who, unlike U.S. citizens today, had to contend with rationing and other inconveniences because the German economy of that time was largely a closed economy. Although massive public works projects did impact the lives of citizens in a positive way, the equally massive rearmament projects, in general, did not. Nevertheless the German worker was vastly better off then they had been during the depth of the depression.
I liked your commentary (even if the "desired" point of QIRP was different than real world results), but when you get to this statement, I have to ask: Where has it been proven? Where is the proof? I'm not talking about proof that fiscal stimulus works (for a time) but that monetary stimulus without fiscal stimulus works. No. Not even close. You're drawing a parallel of two different things - one (fiscal) that can indeed drive recovery in times of weak demand, and the other (QE) designed to increase borrowing (or make it easier/cheaper). The problem is that if your overall economic health was damaged because of debt overhang and periods of way-too-easy credit in the first place, QE (which is more of the same) doesn't really help unless your intent is to inflate the debt away. Even then, you have to make sure the "money" makes its way through the economy. You can't force people to borrow. You can encourage them, you can make it painful for them if they don't do it, but still they can refuse.
Bernanke Supercycles By Jeffrey Snider of Alhambra Investment Partners The frightening possibility that the US economy, and the world with it, remains still bound by a single “cycle” dating back to at least 2007 (and you could even argue 2000 or 1995) brings with it nothing good about future prospects. If 2009 wasn’t really the ultimate end then that would mean the true trough is still to be found. The surface of that problem is that the Great Recession itself counted as a huge subtraction, but ultimately not conforming to symmetry in the recovery stage. Thus, the economy is less and has remained less despite the appearance of positive numbers. To put more specificity to it requires more than just anomalous figures – though 14 million failed labor potential will suggest nothing less than a serious break with past tendencies. In some ways, the early 1980’s offers a distant template as the initial 1980 recession was created by “inflation” and then re-recession through the very same. In other words, the same problem that existed at the outset of the first event existed entirely through it even if some of the economic figures suggested a comprehensive resolution. To complete the cycle actually meant a second and greater contraction. The distinctive problem of our own period is not one of “inflation” but of a shortage of demand (oversupply). In orthodox terms, that has meant “aggregate demand” which leads policy towards “stimulating” spending for the sake of spending through the courses of financial redistribution (with some fiscal redistribution thrown in here and there). None of this has worked to the point that even its prior proponents are either admitting serious deficiencies (secular stagnation) or changing the nature of their association with it. Primary among those most willing, it seems, toward revision is Ben Bernanke. When he was “tasked” (by whom?) with rewriting all monetary standards and benchmarks for “market” propriety starting in 2008, there were no doubts as to the power of the office and desks which he managed and controlled. The Federal Reserves was, as he told it contemporarily, a mighty force for the good of mankind. This control extended, specifically, through the whole of interest rate structures and across fixed income asset classes – a multi-dimensional effect of singular monetary focus. Such impressive ability was laid plain by Bernanke himself at Jackson Hole in August 2012, within weeks of announcing the third attempt at QE. Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield. These effects are economically meaningful. Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS. Such financial acumen was intended to be broadcast to prepare the system for the next implementation. The planned business end of that was in forging “market” expectations ahead of time; proving first that which you aim to conjure is a most curious element of assumed monetary propriety if only because markets are likewise assumed to be captured under “rational expectations.” But that was never the problem, as interest rates and yield curves readily and easily bent to the transmitted will of the FOMC’s collective objectives. The weakness, apparent now, is that those intentions never led where they were supposed to. Low interest rates did not, as assumed, invoke anything more than artificial bursts of activity that were never greater than “transitory.” Aggregate demand, as a matter of real existence, isn’t so generic. Writing recently, Bernanke seems to have come to terms with this shortcoming, but with a rather contradictory line of reasoning. But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed. The 2012 Bernanke was full of fury about the reach of monetary policy, that he could easily bend the will of credit markets far and wide. The 2015 version is meek and holistic, a restrained temperament that is peculiarly at odds with his prior professional self. Studies in 2012 were sure there were “economically meaningful” manipulations, but in 2015 the Fed seemingly was an afterthought the whole time. It isn’t, again, just downplaying prior boasts it is wholly rewriting them. This part isn’t rocket science, as the reasons for the change are obvious in not abiding retribution – which should be expected. If you take the 2012 version of financial power and subtract the 2015 Bernanke which seems so timid you actually get asset bubbles. In other words, the Fed is indeed highly intrusive in the financial ends of affairs but that doesn’t amount to much in the real economy. The Fed holds enormous power, just not in the manner in which it thinks. So the ability of policy to interject intent upon the UST curve, short rates, long rates, MBS and even corporates (junk, junk and leveraged loan junk) was the intended mechanism which was certainly and distinctly achieved; it is easily established of such major imbalances in all these places. And it is that fact which 2015 Bernanke wishes to so distance himself to the point of being rather obvious about it. This is probably as close to an admission, backwards, as he might ever get that asset bubbles exist, the Fed plays a central role and that bubbles are highly inefficient means to an economic end. The reason for that is just as clear. In general terms, the policy of monetary bubbles is essentially one of stasis or the false sense of stability gained through fighting against dynamic reconstruction. The entire point of monetary policy is to upend creative destruction so that what wasn’t working before (at the cycle peak) is rebuilt in almost exact re-creation. That point is carried out endlessly in small ways in actual channels throughout the economy, but it was easily observed in “too big to fail.” It was finance itself, and the wholesale, volume credit capacity that was in dire need of pruning if not restarting scratch – yet it was exactly that same system which Bernanke and his cohorts sought to re-establish and return to functioning just as it had in 2005. That is, I contend, the mechanism for unifying the business “cycle” as what was marked for destruction by the initial recession was instead propped in place by the financial power of monetary policy. That is true especially of corporate junk that easily finances businesses that might otherwise not survive on their own (or the ability of survivable businesses to “invest” financially rather than productively through stock repurchases, M&A, etc.); they are instead pegged in place and thus increasing not “aggregate demand” but contributing mightily to the overall inefficiency by which the economy actually operates. (cont'd below)
Cont'd from above... If there is a specific point of failure which creates a massive and singular economic deficiency, or cycle, then it is certainly the point of monetary policy that favors inefficiency over dynamic, and messy, shifting. But it is the true capitalist tradition where creative destruction is “allowed” to work, through free markets, that builds sustainable progress. Monetarism, through financial means, is nothing but an impediment based upon the now-disproven (for Bernanke) delinking of financial power from visible economic gain. They were always focused almost exclusively upon GDP, which is why the housing bubble was so confounding to them. GDP may have been gaining but it wasn’t the same as a healthy and sustainable advance. To be blunt, we have in 2015 all the problems left over from 2005 without any actual solution apart from “more of the same.” Recession is supposed to bring “less of the same” so that new opportunities can replace the old and inefficient, and the economy grows through that dynamic reprogramming – a process that cannot possibly be centralized and controlled, nor even managed solely at the edges. In 1998, Milton Friedman wrote in his memoir that, “It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom.” It seems to be dawning across Friedman’s acolytes and disciples on the monetary side of “aggregate demand” that the same might be true of the activist central banks which were created in that same image. They all intended that monetary policy would be used for economic gain under capitalism, but such huge power instead only created the means by which policy could be nothing but too large, too intrusive and too destructive of freedom. There was at least some honor in Friedman admitting what was apparent, but this next generation would rather, it appears, admit sheepishly and indirectly only the effects without taking responsibility for them. Maybe that is progress in that monetary policy should lose a lot of appeal, but it is going to take a lot of reprogramming for that to bear out in large-scale effects. That, too, relates to the 2012 Bernanke which remains to this day in the conventions of mainstream media and assumptions. Despite what Bernanke says now, monetary policy is still talked about as if it were “pro-growth” and “stimulus”, powers that even its main proponent and practitioner no longer admits. The enduring legacy is bubbles and cycles, or, again to be fully specific, bubble-based supercycles. The problem is that the 14 million “lost” labor potential may only be the beginning.
In my opinion you are missing entirely the reason for QE and looking at it in isolation as though it were simply a monetary policy tool designed to increase borrowing.. The reason for QE is to finance government spending on stimulus while at the same time putting downward pressure on interest rates. If the government was to go to the regular, auction bond market to raise massive amounts of money in a short time the result would be upward pressure on rates -- not desirable during recession.. QE is not an ordinary monetary policy tool. It is always coupled with stimulus on the fiscal side. It can't accomplish its ends without that! Of course the amount of stimulus, and what kind, that should be applied is always endlessly argued among politicians and economists.
Ah, I see. What 3.5 Trillion $$ (or so) stimulus package accompanied the Fed's QE's again? Perhaps I was asleep for the last 6 years. Heck, what stimulus at any amount accompanied it?
I just wanted to add, that I don't find that Jeffrey Snider article credible. Asset bubbles are an almost purely psychological phenomena. They are the bailiwick of the behavioral economists. Soros offers the clearest account of them, and why they form, in "The Soros Lectures at the Central European University", available at Amazon. (Please buy the book, I have stock in Amazon!)
I buy enough from Amazon to support your shareholder interest. I don't need to buy a book about Soros lectures. I'd rather listen to elevator music for 5 days straight. I would, however, appreciate an answer to my previous question.