QE in the US has again done what it’s always done- frighten investors and portfolio managers ‘out of the dollar’ and into the likes of gold and other commodities.

And because sufficient market participants believe it works to increase aggregate demand, it’s also boosted stocks and caused bonds to sell off, as markets discount a higher probability of higher growth, lower unemployment, and therefore fed rate hikes down the road.

But, of course, QE in fact does nothing for the economy apart from removing more interest income from the economy, particularly as the Fed adds relatively high yielding agency mortgages to its portfolio.

As ever, QE is a ‘crop failure’ for the dollar. It works to strengthen the dollar and weaken demand, reversing the initial knee jerk reactions described above.

But the QE myth runs deep, and in the past had taken a while for the initial responses to reverse, taking many months the first time, as fears ran as deep as headline news in China causing individuals to take action, and China itself reportedly letting its entire US T bill run off.

But with each successive QE initiative, the initial ‘sugar high’ is likely to wear off sooner. How soon this time, I can’t say.

Global austerity continues to restrict global aggregate demand, particularly in Europe where funding continues to be conditional on tight fiscal. Yes, their deficits are probably high enough for stability- if they’d leave them alone- but that’s about all.

And as the US continues towards the fiscal cliff the automatic spending cuts are already cutting corporate order books.

And oil prices are rising, and are now at the point cutting into aggregate demand in a meaningful way.

Yes, the US housing market is looking a tad better, and, if left alone, probably on a cyclical upturn. And modest top line growth, high unemployment keeping wages in check, and low discounts rates remains good for stocks, and bad for people working for a living.

Too many cross currents today for me to make any bets- maybe next week…

This entry was posted in CBs, China, Fed, Government Spending, Oil. Bookmark the permalink.

118 Responses to QE

  1. Ivan says:

    The government is already taking the default risk on agency MBS, so adding to their purchases doesn’t change the fact that the Treasury has guaranteed Fannie and Freddie. To the extent that more agency MBS becomes available, then the govt is increasing their default exposure.

    If the Fed really wants to make a difference, they should buy up the remaining $1 trillion in non-agency MBS and offer more attractive loan modification terms. They can also ask the banks to package their $4 trillion in raw loans and purchase those as well at par and allow for more aggressive modifications. The Fed would take a hit of about $1 trillion, something that can’t be done through fiscal policy in this environment. Whether or not you like the policy, it would put an end to the housing crisis, unlike purchasing agency RMBS.



    i prefer a fica suspension to stop taking funds from people working for a living than singling out a narrow group of homeowners.


    Ivan Reply:

    @WARREN MOSLER, FICA suspension, middle class tax cut, no tax increases…all good. Housing and the ancillary businesses associated with housing remains the overwhelming drag on employment and economic growth.



    so if we all had nice houses that lasted forever we couldn’t be fully employed doing something else?

    Ivan Reply:

    @Ivan, It would take 20+ years to wean labor (carpenters, plumbers, etc) off the new construction trade. New family formation and population growth, along with upward mobility, creates demand. Japan’s shrinking population has created a near permanent drag on growth.


    doesn’t explain the output gap

    ESM Reply:


    “so if we all had nice houses that lasted forever we couldn’t be fully employed doing something else?”

    But this is not the situation we’re in. A contractor knows that there will be a market for new houses and renovations again, so he’ll just sit around waiting out the downturn until there’s work for him. He won’t go out and learn a new skill.

    Also, a big problem with housing is that homeowners have become immobile, particularly those who are underwater on a mortgage. If they are workers, then it is harder for them to move to where the jobs are.

    Of course, my solution is different from Ivan’s. I would just streamline the foreclosure process to get delinquent borrowers out of their houses as quickly as possible. If you want to provide government assistance to them afterwards so they can get on with their lives, that’s a completely separate issue and something I would support, in theory. But we shouldn’t create a moral hazard by rewarding people for becoming deadbeats.

    There was an article on Bloomberg today about how the housing market in the West is hotter than Georgia asphalt, and in the East, it’s moribund. The difference is the foreclosure process, which is mostly gummed up in the East (e.g. NY, NJ, FL – all “judicial” foreclosures states), in contrast to the “non-judicial” foreclosure states in the West (e.g. CA, AR, NV).

  2. walter says:

    “Too many cross currents today for me to make any bets- maybe next week…”

    eur/usd has now ended up 5 weeks in a row.
    Momentum was strong though. And as Cliff said some things, or maybe better “notions”, fundamentally changed in the ez.
    I get the impression that foreign reserve holders like China also make some portfolio shifts.
    Last week I saw also some Korean official on tv, very worried about qe3 and the usd.
    Today serious interest from China to buy a european financial.


  3. bob says:

    “It works to strengthen the dollar and weaken demand, reversing the initial knee jerk reactions described above.”

    Cash cannot be repo’d, t’s can. Due to the size of the repo market, is this another way that credit ($) gets removed from the market?


    Walid M Reply:


    Here is a slice of a comment from a market strategist on QE :

    “We comment more below on the QE move, but first, we need to explain what our short term views are on the financial markets now that the FED seems to be unleashing unlimited QE and the ECB has set itself up to do the same as soon as a sovereign requests a bailout. The unlimited nature of the current policy response from the two biggest central banks is a real escalation and something that we were not expecting. If we have truly moved into a new era of unlimited money printing, financial markets are unlikely to suffer a major decline from current levels.”

    If they all begin to think that way will the market oblige or surprise?



    not in the context of this analysis, just by narrow definition maybe


    bob Reply:



    She’s done other writing on this issue and is a fan of warren’s work.


  4. Fin says:

    I assume this means your anticipation of rates normalizing in the next few months is off the table.



    definitely some new info introduced here.
    i wouldn’t be short bonds here, or long either.


    Cesar Reply:


    Any view on your old friends the BTP Warren?

    If the ECB buy the front of the curve they should, eventually, drag 10’s in?




  5. Senexx says:


    Hence the qualification of given a “sufficient distance apart”.


    roger erickson Reply:


    To paraphrase Keynes, “given sufficient distance apart, we’re all dead.” :)


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