RBI governor Rajan, when not being taken to task by a tie-less Bernanke, recently railed against QE spillovers. Most pertinently he said (with our emphasis):
By downplaying the adverse effects of cross-border monetary transmission of unconventional policies, we are overlooking the elephant in the post-crisis room. I see two dangers here. One is that any remaining rules of the game are breaking down. Our collective endorsement of unconventional monetary policies essentially says it is ok to distort asset prices if there are other domestic constraints to reviving growth, such as the zero-lower bound. But net spillovers, rather than fancy acronyms, should determine internationally acceptable policy.
Otherwise, countries could legitimately practice what they might call quantitative external easing or QEE, whereby they intervene to keep their exchange rate down and build huge reserves. The reason we frowned on QEE in the past is because we believed the adverse spillover effects for the rest of the world were significant. If we are unwilling, however, to evaluate all policies based on their spillover effects, there is no legitimate way multilateral institutions can declare that QEE contravenes the rules of the game. Indeed, some advanced economy central bankers have privately expressed their worry to me that QE “works” primarily by altering exchange rates, which makes it different from QEE only in degree rather than in kind.
Unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation…
– Mario Draghi, April ECB press conference
Don’t try saying that with a mouthful of peas.
More seriously, spot the caveats. A few members of the ECB governing council have since added to the noise around ECB QE — Nowotny, Mersch, Constancio, Coeure and Weidmann — but we feel better no informed than when the presser ended on Thursday. Read more
The rather less dramatic sequel is brought to you by Nomura:
Actually, it’s a €1.5tn question… at least according to SocGen. But it’s not very clear if that matters considering the barriers to euro area QE are so high.
We don’t suppose the killer argument in favour will be that “an ECB QE programme of €1.5 trillion could lower the 10y Bund yield by 100bp, pushing it down close to the 10y yield of JGBs (0.6%)”, though it’s worth a shot. There might be more mileage in pushing the Dax angle. Read more
That isn’t one of the pungent lines from a BofAML note on Tuesday — dissecting “an international leverage binge, yet another carry trade, the third in 20 years,” by issuers of corporate bonds in emerging markets.
But there are plenty already:
The Fed giveth and the Fed taketh away
The long-term emerging market equity story is the story of wars
In each cycle, risk morphs – we repeat the mistakes of our grandfathers, not our fathers.
That, and a call for this $2trn carry trade to unwind as the Fed begins rolling liquidity back. Which makes investing in EM not so much about EM — as about what the Fed will be doing as it exits policy.
Just how much would tickets go for at a German Constitutional Court hearing into any future quantitative easing programme by eurozone central banks… if a €1tn programme could easily buy a fifth of German bonds in a year?
Here’s an interesting little side note from Joseph Abate at Barclays’ Global Rates team last week on the subject of rising demand for paper money:
Despite the attention the bitcoin and other electronic payments attract, the demand for old-fashioned paper money is surprisingly robust. Paper money is growing at a 7% annual rate, reflecting non-US demand and the $100 bill’s role as a store of value.
• Growth in currency demand has cooled since early 2012, yet it remains considerably faster than nominal consumption.
• Much of the demand for US currency results from its use as a stable store of value, which is reflected in high per capita holdings and its use abroad.
• Super-low rates on highly liquid assets such as money funds and checking account balances have meant that the opportunity cost of holding currency is low.
• Currency growth will determine how quickly the Fed’s balance sheet normalizes after it stops buying assets and re-investing maturing securities. We expect the precautionary demand and the higher opportunity costs to slow annual growth to 3% or less.
First, rewrite history (as Aufhebung). Read more
We promised at the end of our previous post that we would qualify the economic case for the introduction of “free money” with some direct references to Willem Buiter, Citi chief economist and former BoE MPC member.
So here follow some of his observations on all things “money” during a liquidity trap, as plucked from his papers on seigniorage, the nature of irredeemable fiat money, numerairology and the use of virtual currencies to break through the ZLB from the last decade or so. Read more
In our money entanglement posts this week, we presented the view that a nation’s money should not be judged as a neutral and interchangeable stock of identical value units, since it’s actually made up of a web of competing monies, issued by many different entities.
These units appear to be identical, however, because system preferences — especially during periods of economic stability — encourage convergence to the most liquid and most money-like of all the units: namely the state currency.
In reality, however, not all money units are created equal.
It is during financial panics that the market is violently reminded of the inherent inequality of the money that circulates through the system. The panic grows as the market realises the money market is so entangled there is no efficient way of segregating corrupted value units from trusted units, at least not without turning to overt collateralisation. Read more
In the last few weeks the “Is QE deflationary?” debate has fused with the “What’s the natural rate of interest anyway?” and the “Is it really all about the risk premium?” conversation.
Many important insights have been offered by a whole host of people. A notable development, however, came in the shape of Tyler Cowen’s post on negative T-bill returns in which he considered the phenomenon of T-bill “entrance fees” during a zero-rate climate and how this can take returns for many investors into negative nominal territory, while providing advantages to those with access to “special technologies’” even when official rates are very mildly positive. Read more
As we’ve noted before it’s all feeling a little 1999 out there.
Lombard Street ‘s Dario Perkins agrees. He’s just released research entitled “Party like it’s 1999″, in he notes: Read more
We first proposed the idea that QE could be (but wasn’t necessarily) deflationary a couple of years ago. It was dubbed a counter-intuitive idea by Tyler Cowen.
More recently, a similar proposition has been made by Stephen Williamson — though this time using models and proper math. His view is a little different to ours because it’s less focused on the safe asset squeeze and more on the conditions that generate a preference for cash over yielding paper in the first place. Hint: you have to think the purchasing power of cash will go up regardless. Read more
The Federal Reserve’s Framework for Monetary Policy –Recent Changes and New Questions. Click to read the full doc.
Citi credit strategist Matt King has responded to our QE downsides post with some thoughtful remarks via email.
He wanted to elaborate on the relevance of this chart from his earlier presentation in the context of an eventual tapering:
For all the gnashing and wailing about the dangers of quantitative easing from some of the super rich, the fact remains that owners of capital (ie the rich) have done very well from QE.
Now, as we’ve noted before, plenty of serious people are paying attention to the inequality question, and its not clear what monetary policy can do about inequality even if it should do something about it. But news that US housing is turning frothy again, with San Francisco prices up 25 per cent over the last year, has Albert Edwards of Societe Generale reaching for the exclamation marks. Read more
As we noted in our previous post, the real significance of the Fed’s FRFARRP trial (or FARPs for short) may be that it takes us ever closer to the Widow’s Cruse economy envisaged by economist John Maynard Keynes.
Some might say that ‘QE unlimited’ was already the first step towards this world of inexhaustible monetary supply — for it created a central bank which was prepared to provide liquidity on demand for as long as unemployment remained too low. Read more
The Fed’s taper no-show this week resulted in a plethora of commentaries and articles flagging the risks of the world’s collective addiction to QE.
To name a few: Read more
Do bank failures really exacerbate output declines? Do they consequently justify extensive responses to prevent future failures?
Ben Bernanke famously argued in 1983 that bank failures did exacerbate the Great Depression because of how they impacted credit intermediation channels. His findings helped to justify much of the extraordinary intervention we have seen since 2008. Read more
Which part of future Fed tightening “is now completely up in the air”?
The answer (according to Societe Generale) is in the useful table below… click to enlarge: Read more
Scott Skyrm noted on his blog earlier this week that it took only six months of Fed QE purchases to move GC rates from an average of 0.24 per cent in December 2012 to an average of 0.05 per cent this month.
There is, consequently, a growing distortion in the short-term funding markets, which is clearly one of the first unintended consequences of the QE programmes to surface: Read more
China is leaking. It’s probably America’s fault. China is, after all, the the most exposed to the quantity effect of liquidity withdrawal due to QE tapering and may have the most difficulty dealing with it.
From Nomura on Monday, for example:
Foreign exchange purchases by financial institutions dropped by RMB41bn, despite the high trade surplus of USD27bn and strong FDI inflows of USD14bn.
Check it, from JP Morgan’s Flows & Liquidity team:
The 233 repo fails in the month of June is four times larger than the typical monthly pace of 60-70 and the trend is quite suggestive. (A fail is where one market party fails to deliver the security or cash it had promised to send to another entity within a specific time frame. It’s a problem for both buyers and sellers since it means they could have to go and buy them out in the open market for what could be a higher or lower price.)
From JPM, with their emphasis: Read more
Risk is on. The sun’s out (at least in London). Cue two fun slides from Julien Garran of UBS. Click to view.
Merrill Lynch’s Michael Hartnett sure knows how to grab the readers’ attention…
Apparently the recent sovereign bond yield spike has almost completely wiped out the Bank of England’s QE bond portfolio’s unrealised profit. As Bank of America Merrill Lynch’s John Wraith said:
…the mark-to-market gains that were previously being registered by the Bank of England’s portfolio of Gilts acquired through the UK’s QE Asset Purchases since March 2009. As recently as 2nd May, this portfolio was showing an unrealised profit of £26.8bn; this had collapsed by 24th June to just £1.2bn.
Get your pitchforks out. Read more
The working theme at FT Alphaville towers is that we’re in somewhat of a damned if we do taper/suspend QE, and damned if we keep going with it.
There is, as we’ve long been noting, good reason to suspect the economy cannot handle any more quantitative easing in its traditional form.
What’s more, we now know that even the whiff of tapering — which is anything but an unwind, as we’ve noted here – can cause undue chaos in risk assets. In which case, perhaps tapering isn’t as much of an option as many believe it to be.
After all, QE reflects the sovereign put. It’s the government subsidy which takes volatility away. If you stop dishing it out, there’s every chance bad things may happen.
And the following chart, which comes to us by way of Aurelija Augulyte, reflects this relationship perfectly: Read more
…And the treatment of public debt in the government’s books gets left in some disarray.
Remember this from the ONS, in February? Read more
Alternative title: the slow death of the money multiplier.
Bank of America Merrill Lynch’s Michael Hanson and team note on Tuesday that while the world and its dog obsess about an upcoming QE exit, things continue to look pretty bleak on the money multiplier side of things. Read more
Yes yes — suddenly, a bad last day of May for the stock market: