Category Archives: QE

16/7/19: Monetary Policy Paradigm: To Cut or To Cut, and Not to Not Cut

QE is back... almost. After a decade plus of failing to deliver on its core objectives, and having primed the massive bubble in risky assets, while pumping sky high wealth inequality through massive monetary transfers to the established Wall Street elites... all while denying that we are in an ongoing secular stagnation. So, courtesy of the unpredictable, erratic and highly uneven economic parameters performance of the last 12 months, we now have this:

Because, for all the obvious reasons, doing more of the same and expecting a different result is the wisdom of the policymaking in the 21st century.

24/6/19: Markets Expect the Next QE Soon…

Adding to the previous post on the negative yielding debt, here is a recent post from @TracyAlloway showing Goldman Sachs' chart on implied probability of the U.S. Fed rate cuts over the next 12 months:

Source of chart:

The rate of increases in the probability of at least 1 rate cut is staggering (as annotated by me in the chart). These dynamics directly relate to falling sovereign debt yields (and associated declines in corporate debt yields) covered here:

Notably, as the markets are now 90% convinced a new QE is coming, their conviction about the scale of the new QE (expectations as to > 3 cuts) is off the chart and rising faster in 2Q 2019 than in the previous quarters.

24/6/19: Negative Yielding Debt: Monetary Contagion Spreads

Negative yielding Government debt (the case where investors pay the sovereign lenders for the privilege of lending them funds) has hit all-time record (based on Bloomberg database) last week, at 13 trillion.

Source of charts:

Quarter of all investment grade corporate debt is now also yielding negative payouts (note: bond returns include capital gains, so as yields fall, capital gains rise for those investors who do not hold bonds out to maturity).

In effect, negative yields are a form of a financialized tax: investors are paying a premium for risk management that the bonds provide, including the risk of future decreases in interest rates and the risk of declining value of cash due to expected future money supply increases. In other words, a eleven years after the Global Financial Crisis, the macro-experiment of monetary policies 'innovations' under the QE has been a failure: negative yields resurgence simply prices in the fact that inflationary expectations, growth expectations and financial stability expectations have all tanked, despite a gargantuan injection of funds into the financial markets and financial economies since 2008.

In 2007, total assets held by Bank of Japan, ECB and the U.S. Fed amounted to roughly $3.2 trillion. These peaked at just around $14.5 trillion in early 2018 and are currently running at $14.3 trillion as of May 2019. Counting in China's PBOC, 2008 stock of assets held by the Big 4 Central Banks amounted to $6.1 trillion. As of May 2019, this number was $19.5 trillion. Global GDP is forecast to reach $87.265 trillion by the end of this year in the latest IMF WEO update, which means that the Big-4 Central Banks currently hold assets amounting to 22.35% of the global nominal GDP.

Negative yields, and ultra-low yields on Government debt in general imply lack of incentives for Governments to efficiently allocate public spending and investment funds. This, in turn, implies lack of incentives to properly plan the use of scarce resources, such as factors of production. Given that one year investment commitments by the public sector usually involve creation of permanent or long-term subsequent and related commitments, unwinding today's excesses will be extremely painful economically, and virtually impossible politically. So while negative yields on Government debt make such projects financing feasible in the current economic environment, any exogenous or endogenous shocks to the economy in the future will be associated with these today's commitments becoming economic, social and political destabilization factors in the future.

3/5/19: The Rich Get Richer when Central Banks Print Money

The Netherlands Central Bank has just published a fascinating new paper, titled "Monetary policy and the top one percent: Evidence from a century of modern economic history". Authored by Mehdi El Herradi and Aurélien Leroy, (Working Paper No. 632, De Nederlandsche Bank NV:, the paper "examines the distributional implications of monetary policy from a long-run perspective with data spanning a century of modern economic history in 12 advanced economies between 1920 and 2015, ...estimating the dynamic responses of the top 1% income share to a monetary policy shock." The authors "exploit the implications of the macroeconomic policy trilemma to identify exogenous variations in monetary conditions." Note: the macroeconomic policy trilemma "states that a country cannot simultaneously achieve free capital mobility, a fixed exchange rate and independent monetary policy".

Per authors, "The central idea that guided this paper’s argument is that the existing literature considers the distributional effects of monetary policy using data on inequality over a short period of time. However, inequalities tend to vary more in the medium-to-long run. We address this shortcoming by studying how changes in monetary policy stance over a century impacted the income distribution while controlling for the determinants of inequality."

They find that "loose monetary conditions strongly increase the top one percent’s income and vice versa. In fact, following an expansionary monetary policy shock, the share of national income held by the richest 1 percent increases by approximately 1 to 6 percentage points, according to estimates from the Panel VAR and Local Projections (LP). This effect is statistically significant in the medium run and economically considerable. We also demonstrate that the increase in top 1 percent’s share is arguably the result of higher asset prices. The baseline results hold under a battery of robustness checks, which (i) consider an alternative inequality measure, (ii) exclude the U.S. economy from the sample, (iii) specifically focus on the post-WWII period, (iv) remove control variables and (v) test different lag numbers. Furthermore, the regime-switching version of our model indicates that our conclusions are robust, regardless of the state of the economy."

In other words, accommodative monetary policies accommodate primarily those with significant starting wealth, and they do so via asset price inflation. Behold the summary of the last 10 years.