Category Archives: Banking

QE dynamics one more time- it’s about price, not quantity

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Believe it or not I’m still getting a lot of questions about how QE works,
so I’ve reorganized the discussion some:

First, recognize that, in fact, reserves, functionally, are nothing more than 1 day t bills.

And, for all practical purposes, the difference between issuing 1 day t bills and 3 month t bills is inconsequential.

So since currently the shortest thing the Treasury issues are 3 mo bills,
I can say that:

QE- the Fed buying longer term treasury securities- is functionally identical for the economy to the Treasury having issued 3 month t bills instead of those longer term securities the Fed bought.

Now the more tricky part.

The yields on the approx. $13 trillion of various Treasury securities and reserve balances continuously gravitate towards what are called indifference levels.

That means that for any given composition of reserve balances at the Fed and Treasury securities (also Fed accounts), there is a term structure of interest rates that adjusts to investor preferences at any given time.

So, for example, with govt providing investors with the combination of $2 trillion in reserves and $11 trillion in various Treasury securities, the yield curve will reflect investor preferences given the current circumstances.

That means if investors expect Fed rate hikes, the front end of the curve would steepen accordingly. And if instead they expect 0 rates for a considerable period of time, the curve would flatten for the first few years to reflect that.

If the Fed then buys another $1 trillion of securities, reserves go to $3 trillion and there are $10 trillion longer term Treasury securities outstanding.

And to actually purchase those reserves, the Fed would have to drive the term structure of rates to levels where investors voluntarily are indifferent with that mix of offerings, given all the other current conditions.
The Fed doesn’t force anyone to sell anything.
It just offers to buy at prices (interest rates) that adjust to where people want to sell at those prices.

So even if the Fed owned a total of $10 trillion of securities, and there were only $3 trillion left outstanding for investors, if investors believed the Fed was going to hike rates by 3%, for example, the term structure of rates on Treasury securities would reflect that.

What I’m trying to say is that QE does not mean rates will actually go down. The yield curve is still a function of investor expectations.

But the yield curve is also a function of ‘technicals.’
This means the quantity of 30 year securities offered for sale, for example, can alter the yield of that sector more than it alters the yields of the other sectors.

This is because, in general, there tends to be fewer ‘natural’ buyers of 30 year securities than 3 month bills.
For most of us, we are a lot more cautious about investing for 30 years at a fixed rate than for 3 months at a fixed rate.
And it takes relative large moves in 30 year rates to cause those investors to shift our preferences to either buy them if govt wants to issue more, or sell them if the Fed wants to buy them back.

On the other hand, there are pension funds who ‘automatically’ buy 30 year securities regardless of yield because they are matching the purchases to 30 year liabilities.

So altogether, the yield curve is function of both investor expectations for interest rates and the ‘technicals’ of supply and demand (desires by issuers and investors).

And while there might be no amount of 3 month bills the Treasury could issue that would materially drive up 3 month t bill rates, relatively small amounts of 30 year bonds do alter the yields of 30 year securities. Insiders would say the 30 year market is a lot ‘thinner’ than the 3 month market.

So what is QE?

QE is nothing more than the govt altering the mix of investments offered to investors.

The Fed buying longer term securities reduces the amount of longer term securities and increases the amount of reserves (one day securities)

Interest rates, as always, continuously gravitate to reflect current investor expectations of future Fed rate changes and current ‘technicals’ of supply and demand.

QE changes the technicals, and possibly expectations, and results in a yield curve that reflects those current conditions.

So all QE does is alter the term structure rates, as investors express preferences for the term structure of interest rates, given the securities and reserves of the varying maturities offered by the Fed and Treasury and all the current conditions.

That brings us back to the question of what QE means for the economy, inflation, value of the currency, etc.

Which comes down to the question of what the term structure of rates means for the economy, inflation, the value of the currency, etc.

QE is nothing more than a tool for changing interest rates by adjusting the available supply of securities of various maturities (technicals). And it’s not a particularly strong tool at that.

It’s the resulting interest rates that may or may not alter the economy, inflation, and the value of the dollar, etc. and not the quantities of reserves and Treasury securities per se.

And it is clear to me that the FOMC does not fully understand this.

If they did, they’d be in discussion with the Treasury about cutting issuance.

And, additionally, If they wanted the term structure of interest rates to be lower, they would simply target their desired term structure of rates by offering to buy unlimited amounts of Treasury securities at their desired rate targets, and not worry about the mix between reserves and Treasury securities that resulted. Which is what they did in the WWII era. And how they target the fed funds rate.

With today’s central banking and monetary policy with its own currency, it’s always about price (interest rates) and not quantities.

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Beyond risk off

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So it was buy the rumor, buy the news, then watch it all fall apart a few days later.

QE was a major international event, with the word being that the ‘money printing’ would not only take down the dollar, but also spread ‘liquidity’ to the rest of the world through the US banking system, via some kind of ‘carry trades’ and who knows what else, or needed to know. It was just obvious…

So the entire world was front running QE in every currency, commodity, and equity market.

And the Fed announcement only brought in more international players, with money printing headlines screaming globally.

Then the ‘risk off’ unwinding phase started, reversing what had been driven by maybe three themes:

1. There were those who knew all along QE probably did not do anything of consequence, but went along for the ‘risk on’ ride believing others believed QE worked and would drive prices accordingly.

2. A group that thought originally QE might do something and piled in, but began having second thoughts about how effective QE might actually be after learning more about it, and decided to get out.

3. A third group who continue to believe QE does work, who got cold feed when they started doubting whether the Fed would actually follow through with enough QE, also for two reasons.
   a. the FOMC itself made it clear opinion was highly polarized, often for contradictory reasons
   b. the economy showed signs of modest growth that cast doubts on whether the Fed might
   think something as ‘powerful and risky’ as QE was still needed.

Reminds me some of the old quip- the food was terrible and the portions were small-
(QE is questionable policy and they aren’t going to do enough of it.)

So risk off continues in what have become fundamentally illiquid markets until some time after the speculative longs have been sold and the shorts covered.

Next question, what about after the smoke clears?

A. The dollar could remain strong even after the initial short covering ends- the modest GDP growth is slowly tightening fiscal, and crude oil prices are falling, both of which make dollars ‘harder to get’

It’s starting a kind of virtuous cycle where the stronger dollar moves crude lower which strengthens the dollar.
Also, the J curve works in reverse with other imports as well. As imports get cheaper, initially
the rest of world gets fewer dollars from exports to the US, until/unless volumes pick up.

The euro zone is again struggling with the idea of the ECB supporting the weaker members with secondary market bond purchases, as ECB imposed austerity measures are showing signs of decreasing revenues of the more troubled members. Seems taxpayers of the core members are resisting allowing the ECB to support the weaker members, and the core leaders are groping for something that works politically and financially. All this adds risk to holding euro financial assets, as even a small threat of a breakup jeopardizes the very existence of the euro.

Japan is on the way to fiscal easing while the US, UK, and euro zone are attempting to tighten fiscal.

Falling commodity prices hurt the commodity currencies.

B. Interest rates are moving higher as spec longs who bought the QE rumor and news are getting out.
But it looks to me like term rates could again move back down after this sell off has run its course.
The Fed still failing on both mandates- real growth is still modest at best, and the 0 rate policy is deflationary/contractionary enough for even a 9% budget deficit not to do much more than support gdp at muddling through levels, with a far too high output gap/unemployment rate.
And falling commodities, weak stocks, and a strong dollar give the Fed that much more reason not to hike.

C. A mixed bag for stocks.
Equity values have fallen after running up on the QE rumor/news, further supported by the dollar weakness that came with the QE rumor news, with the equity sell off now exacerbated by the dollar rally which hurts earnings translations and export prospects.

But a 9% federal deficit is still chugging away, adding to incomes and savings of financial assets, and providing for modest top line growth and ok earnings via cost cutting as well.

Fiscal risks include letting the tax cuts expire and proactive spending cuts by the new Congress which seems committed to austerity type measures.

Low interest rates help valuations but reduce the economy’s interest income.

China acting more like the inflation problem is serious. Hearing talk of price controls, as they struggle to sustain employment and keep a lid on prices, in a nation where inflation or unemployment have meant regime change. Looks to me like a slowdown can’t be avoided with the western educated kids now mostly in charge.

>   
>   (email exchange)
>   
>   On Wed, Nov 17, 2010 at 1:05 AM, Paul wrote:
>   
>   Very interesting — but I have a question:
>   
>   What if the deficit causes “saving” increase in financial assets held by
>   foreigners (via the trade imbalance) rather than US domestic households?
>   

Hi Paul!

That would mean we would get the additional benefit of enjoying a larger trade deficit, which means for a given size govt taxes can be that much lower.

Or, if we get sufficient domestic private sector deficit spending, govt deficit spending can remain the same and we benefit by the enhanced real terms of trade supported by the increased foreign savings desires.

Except of course policy makers don’t get it and squander the benefit of a larger trade deficit/better real terms of trade with a too low federal deficit (taxes too high for the given level of govt) that sadly results in domestic unemployment- currently a real cost beyond imagination.

Fundamentally, exports are real costs and imports real benefits, and net imports are a function of foreign savings desires.

So the higher the foreign savings desires the better the real terms of trade.

Also, with floating exchange rates, the way I see it, it’s always ‘in balance’ as the trade deficit = foreign savings desires.

Best!
Warren

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New York Fed President Bill Dudley

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Dudley, a former Goldman Sachs economist, also rejected the widely held view that the Fed is really printing money. “What we’re doing is, when we buy Treasury securities, we are increasing the amount of reserves in the banking system.

Promising!

For those reserves to actually create money, the banks actually have to lend those reserves out.

:(

The problem with the U.S. economy now is that there is insufficient lending and he doesn’t expect the Fed’s purchase program to solve that problem because there are ample reserves in the system. He expects the current program to help the economy by lowering interest rates for businesses and consumers.

Ok, he mostly gets it. Like when one of the slow kids in class gets something close enough to right and gets a passing grade.

(If anyone reading this knows him personally, try sending him a copy of my book, thanks)

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China Newspaper Warns of Disaster Over Fed Move

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Actually, China’s exporters are quite happy when the dollar goes down.

All they do is keep the peg in place to gain market share in the rest of the world.

Or even let their currency appreciate some.
So the recent dollar weakness has probably helped their gdp probably more than it helped the US.
But it did aggravate their domestic inflation some which is problematic.

It’s when the dollar goes up that they get worried.
The dollar has been driven down by the ‘qe is inflationary money printing’ hysteria.
A ‘qe does nothing?!’ dollar reversal, if it happens,
should soften their equity markets along with the US equity markets if they hold the peg in place.

China newspaper warns of disaster over Fed move

November 7 (Reuters) — Washington’s latest move to print more money is a form of indirect currency manipulation that could lead to a new round of currency wars and even global economic collapse, a leading Chinese newspaper warned on Monday.

The United States last week announced it would inject an extra $600 billion into its banking system in its latest effort to boost a fragile economic recovery, prompting criticism from a number of countries, notably China and Germany.

The overseas edition of Communist Party mouthpiece the People’s Daily said in a front page commentary that this quantitative easing was bad for China and bad for the world.

“In essence this is an uncontrolled increase in money supply, equal to indirect exchange rate manipulation,” Shi Jianxun of Shanghai’s Tongji University wrote in the guest commentary.

The U.S. Federal Reserve’s actions will “touch off a global competition to devalue currencies … (leading to) a ‘currency war’ and trade protectionism, threatening the global economic recovery”, Shi wrote.

“Exchange rate wars are in fact trade wars, and if they set off a trade war it won’t only threaten the global economy, it will perhaps cause a collapse…and everyone’s interests will be harmed,” the academic added.

The comments were the latest in a string of strongly worded criticisms of U.S. economic policies by Chinese economists and government officials ahead of the G20 summit in Seoul this week.

On Friday, Vice Foreign Minister Cui Tiankai suggested the move by the Federal Reserve would add to financial instability in China and other countries.

For his part, Federal Reserve Chairman Ben Bernanke in recent days has been defending the bond-buying, saying the measures to help restore a strong U.S. economy were critical for global financial stability.

“We are committed to our price stability objective,” he said. “I have rejected any notion that we are going to raise inflation to a supra-normal level.”

However, the People’s Daily commentary asserted that the Fed’s actions will increase inflationary pressure on China and other holders of foreign debt and cause “huge losses” for China’s foreign exchange reserves, the world’s largest at $2.65 trillion as of the end of September.

Cash will flood into financial institutions and go overseas, creating new asset bubbles and “lie in ambush” for future inflation, Shi added.

“Given the present international financial situation, countries should join together to restrain America’s irresponsible behavior of issuing excessive amounts of money,” Shi wrote.

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FDIC Proposes Long-Term DIF-Management Plan

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The FDIC taxing banks to cover losses hasn’t been well thought out.

A universal bank tax is functionally equivalent to an interest rate hike for borrowers that doesn’t get passed through to savers.

FDIC Proposes Long-Term DIF-Management Plan

The FDIC board of directors proposed a long-range Deposit Insurance Fund management approach that includes a plan to restore the DIF. The board adopted a notice of proposed rulemaking on its long-term management plan that calls for a lower assessment rate to take effect when the reserve ratio equals 1.15 percent. Progressively lower assessment rate schedules would take effect in lieu of dividends when the reserve ratio reaches 2 percent and 2.5 percent. The DIF reserve ratio also must be at least 2 percent before a period of large fund losses, and average assessment rates over time must be approximately 8.5 basis points. The board said the goal is maintaining a positive fund balance even during periods of large fund losses and steady, predictable assessment rates throughout economic and credit cycles.

The board also adopted a DIF restoration plan to ensure that the fund reserve ratio reaches 1.35 percent by Sept. 30, 2020, as required by the Wall Street Reform Act. The DIF restoration plan would forgo the 3-basis-point increase in assessment rates scheduled for Jan. 1, 2011, and maintain the current rate schedule largely because projected DIF losses for 2010-2014 have dropped from $60 billion to $52 billion. The plan also calls for a new rulemaking next year on how to offset the effect of the Wall Street Reform Act requirement on community banks with less than $10 billion in assets.

Next month, the FDIC is expected to issue proposed regulations implementing the assessment-base change mandated by the Wall Street Reform Act. These new regulations will include proposed changes to the assessment rates necessitated by the change in the assessment base and, according to the FDIC, will ensure that the revenue collected under the new assessment system will approximately equal that under the existing system. Read more.

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China Raises Lending, Deposit Rates as Inflation Accelerates

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A lot more evidence of an inflation problem here.

Market forces may be at work forcing ‘currency adjustment’ from that angle as China undergoes the transformation from employment growth via export led growth to employment growth via domestic demand as world demand for their exports remains soft.

As previously discussed, their currency has probably been fundamentally weakening for a while, supported by capital flows rather than trade flows.

This is a bubble like process that can ‘burst’ when the capital flows decelerate with a bout of currency weakness, double digit inflation, and political unrest.

And their next gen western educated economists seem to be doing the traditional interest rate hiking response to inflation they learned in school, which only makes it worse through the ‘fiscal channel’ of higher interest payments by the govt. on the demand side, and rising costs of real investment on the supply side.
A lot more evidence of an inflation problem here.

Market forces may be at work forcing ‘currency adjustment’ from that angle as China
undergoes the transformation from employment growth from export led growth to employment growth through domestic demand as world demand for their exports remains soft.

As previously discussed, their currency has probably been fundamentally weakening for a while, supported by capital flows rather than trade flows.

This is a bubble like process that can ‘burst’ when the capital flows decelerate with a bout of currency weakness, double digit inflation, and political unrest.

And their next gen western educated economists seem to be doing the traditional interest rate hiking response to inflation they learned in school, which only makes it worse through the ‘fiscal channel’ of higher interest payments by the govt on the demand side, and rising costs of real investment on the supply side.

Headlines:

China Raises Lending, Deposit Rates as Inflation Accelerates
Investors Should Cut China Property Stake, Gave Says
PBOC’s ‘Vicious Cycle’ Worsened by Fed, Yu Says: China Credit
China to Do More to Manage Inflation Expectations, Zhang Writes
World Bank Cuts East Asia Outlook, Warns on ‘Bubbles’
South Korean central bank looks to gold

China Raises Lending, Deposit Rates as Inflation Accelerates

October 19 (Bloomberg) — China raised its benchmark
lending and deposit rates for the first time since 2007 after
inflation accelerated to the fastest pace in 22 months.

The one-year deposit rate will increase to 2.5 percent
from 2.25 percent, effective tomorrow, the People’s Bank of
China said on its website today. The lending rate will
increase to 5.56 percent from 5.31 percent, it said.

China’s inflation quickened to 3.5 percent in August,
highlighting overheating risks that have prompted the
government to curb credit and clamp down on the real-estate
market this year. Higher interest rates may encourage inflows
of speculative capital from abroad, complicating management
of the fastest-growing major economy.

“Policy makers need to better anchor inflation
expectations by boosting real interest rates,” Liu Li-Gang,
a Hong Kong-based economist at Australia and New Zealand
Banking Group Ltd., said before today’s release.

China last raised benchmark rates in December 2007, with
central bank Deputy Governor Zhu Min saying on March 25 that
rates are a “heavy-duty weapon” and alternative measures
were working well.

Today’s move came after two surveys showed manufacturing
accelerated in September and input prices jumped, signaling
stabilizing growth and inflation pressures.

Global Recovery

“China would be wise to raise rates,” Dariusz
Kowalczyk, a Hong Kong-based senior economist at Credit
Agricole, said ahead of today’s announcement. “It has led
the global recovery and yet is one of only a few emerging
Asian nations that have not begun to reverse the steep rate
cuts orchestrated during the crisis.”

Chinese officials are grappling with the risk created by
last year’s record 9.59 trillion yuan ($1.4 trillion) credit
boom that fueled the nation’s comeback from the global
recession. China’s property prices in 70 cities rose 9.1
percent in September from a year earlier, according to the
statistics bureau.

China will speed up the introduction of a trial property
tax in some cities and then expand the levy to the whole
country, the government said Sept. 29, without giving a
timetable. The state also told commercial banks to stop
offering loans to buyers of third homes and extended a 30
percent down payment requirement to all first-home buyers.

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cross currents

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I wasn’t sure whether to send this, as it reveals my lack of clarity on current events, but decided to send it to make the point.

Here’s what I see:

Markets are already discounting a large QE and are also discounting that QE actually makes a difference:

The dollar went down
Gold went up
Commodities went up
Interest rates fell
Stocks went up

So we have a big ‘buy the rumor sell the news’ leading up to the Fed meeting.

AND a potential ‘QE doesn’t work anyway’ let down.

I’ve never seen a more confused set of circumstances.
I recommend all traders stay out of this one.
Making money on this probably falls into the ‘better lucky than good’ category.

One of two things will happen- QE will or will not happen, data dependent

1. Good news for the economy means QE might not happen.

So the dollar reverses, and it went down for the wrong reason anyway, as QE fundamentally doesn’t alter the dollar, so it’s probably net short.

But how about the euro? It’s fundamentally strong with no end in sight, and good econ news helps them as much as anyone.
But an over sold dollar reversing can rally it against most everything while the unwinding goes on.

Stocks up, as that would be good news for stocks?
Or stocks down as rates go up and the dollar goes up, and the world goes to ‘risk off mode?’
(Stocks were helped by the weak dollar and lower rates.)

Is good econ news good or bad for gold? More demand in general is good, but less risk, less fear, and a strong dollar hurts. And it could be over bought in the QE craze as QE in fact has nothing to do with demand, currencies, or gold. It’s just a duration shift for net financial assets.

10 year notes? QE buying reverses and they go higher in yield.
But strong dollar and weak commodities and weak stocks and the Fed still failing on both mandates means low for long is still in place, even without QE.

It’s been strange enough that rates fell with a weak dollar (inflation) and rising commodities, so who knows what actually happens when whatever has been going on is faced with some combo of no QE and/or the realization that QE doesn’t do anything of consequence.

2. Bad news for the economy means QE happens.

Dollar keep falling? Or already discounted?
Gold and commodities keep rising? On bad econ news? And when already discounting QE working?
Stocks keep rising? On bad econ news? And already discounting QE working?

To a point, based on the presumption that QE actually works to add to domestic demand.
But has it already been discounted? And if markets believe QE works won’t they discount the Fed hiking after it works and the economy ‘takes off’???

The answer?

Don’t think of the medium term, just the short term.
Short term technicals will rule due to what’s been discounted.

The dollar is the pivot point, as it’s moved the most and for the wrong reason (except maybe vs the euro).

If nothing else, the dollar will appreciate if:

No QE due to good econ news
Buy the rumor sell the news/already been discounted forces
There is awareness that QE doesn’t do anything in any case
Foreign govt buying (currency war, etc.)

The dollar continues to fall if QE is larger than expected and the belief that it does something holds.

Recent economic news and Fed speak indicate that is not likely.

The other short term market moves will be reactions to the dollar move, and not so much reactions to what made the dollar move.

I do continue to like BMA forwards.
The one thing there is to be know is that high end marginal tax rates won’t go down, and that forward libor rates won’t fall below 50 bp.

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Weber Says ECB Should Start to Phase Out Bond Purchases ‘Now’

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>   
>   (email exchange)
>   
>   On Tue, Oct 12, 2010 at 1:17 PM, Kevin wrote:
>   
>   Warren
>   
>   I am interested in your views on this development
>   
>   It would strike me as either blather or a dramatic reversal of fortune for
>   the continent
>   
>   Any thoughts?
>   

Weber has been against it from day one, which tells me he doesn’t get it at all. For now he’ll keep getting over ruled, but that can change down the road when ECB management turns over.

Yes, if this were to happen in this kind of economy it could all head catastrophically south very quickly again, and, as before, not end until the ECB resumes writing the check.

The problem is he doesn’t understand that inflation and currency weakness would follow from excess spending by the national govts, which is both not the case and under control of the ECB while they are funding. Instead he thinks the bond purchases per se somehow matter, though with no discernible transmission channel.

Weber Says ECB Should Phase Out Bond Purchases ‘Now

By Gabi Thesing and Christian Vits

October 12 (Bloomberg) — European Central Bank Governing
Council member Axel Weber said the ECB should stop its bond-
purchase program and signaled that it’s time for officials to
show how they will withdraw other emergency measures.

“As the risks associated with the Securities Markets
Program outweigh its benefits, these securities purchases should
now be phased out permanently,” Weber said, according to the
text of a speech delivered in New York today.

“As regards the two dimensions of exit consisting of
phasing-out non-standard liquidity measures and normalizing our
clearly expansionary monetary policy, there are risks both in
exiting too early and in exiting too late,” Weber said. “I
believe the latter are greater than the former.”

Weber’s comments are the strongest so far from any official
on how the ECB will withdraw its emergency stimulus measures.
They come as governments and banks in some euro nations such as
Ireland and Portugal struggle to convince investors about their
financial health and as other major central banks signal their
willingness to add more stimulus to their economies.

The remarks also come less than a week after ECB President
Jean-Claude Trichet’s last policy statement, when he declined to
comment on the timing of the ECB’s exit strategy.

The bond purchases were opposed by Weber when they were
started in May as part of a strategy to keep the euro region
together after the Greek crisis threatened to undermine the
currency. The ECB stepped up its bond purchases at the end of
September, buying 1.38 billion euros ($1.9 billion) in the week
to Oct. 1, as tensions reemerged in Portugal and Ireland.

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Comments on China’s temporary hike of Reserve Requirements

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The lesson should be changing reserve requirements for a non convertibility currency, as the yuan is domestically for all practical purposes, doesn’t alter liquidity, but does alter balance sheet composition and pricing necessary to hit return on equity targets.

And looks to me more like their stealth inflation problem hinted at previously hasn’t yet been reigned in to their satisfaction?

  • 50bp hike in RRR for six large banks, valid for two months
  • the unusual temporary move reflects the central bank (PBoC)’s concern over strong lending appetite and hot money inflow
  • the PBoC is likely to follow up with more measures based the effectiveness of current policy
  • a lesson to the developed country on how difficult it is to rein in excessive liquidity

According to Reuters, China has raised reserve requirements by 50 basis points for six large commercial banks to 17.5%. It is reported that the move is only temporary and will be in place for two months. However there is no official statement from the central bank yet.

These six banks account for around 40% of China’s total lending and nearly 50% of the total bank assets. The 50bp hike in reserve requirement ratios will lock up about CNY150 bn of deposits.

We think the unusual temporary measure reflects the PBoC’s concern over excessive liquidity in the domestic economy on the backdrop of a robust growth. The total banking lending from January to August has reached 76% of the full-year target (CNY7.5 trillion), which means the monthly lending needs to be below CNY450 bn. However the domestic credit demand still seems to be very strong. Another possible reason for this move is the mounting evidence that the hot money is flowing back due the increasing pressure on the yuan appreciation.

The PBoC move speaks of the problems in managing a generous liquidity policy and stands as both a warning and a contrast to those other central banks considering a further round of quantitative easing. Once a generous liquidity policy is in place, it becomes difficult to wean dependent companies off the cheap and easy liquidity flow. Whereas the PBoC is not “pushing on a string” and there is genuine demand for this liquidity, the warning to the US federal reserve is clear. Even for economically well-administered economies, the latter stages of generous liquidity policies become very difficult to manage. Zombie (cheap liquidity dependent) companies, potential asset bubbles and the intractability excess liquidity are all legacy issues central banks
considering QE2 must consider.

Except that those are not the result of QE, but of what is functionally fiscal support for zombies, and the only effect zombies have on the real economy is that they waste valuable labor hours. Unfortunately no one seems to know how to keep fiscal drag low enough to sustain full employment so they see political benefit to useless employment.

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