I am the one who knocks


Why Is QE Failing?

in central banks/Economy by

You might have noticed something rather disturbing unfolding over the past half decade or so when it comes to QE.

Have a look at global central bank liquidity:


(Chart: Citi)

So here we are, right back to the peak in terms of flow and yet what do we get for it? Still sluggish growth, still non-existent inflation in Europe and Japan and still subdued global trade.

Why, you ask?

Well, because the trickle-down wealth effect isn’t working. All of this stimulus is simply blowing bigger and bigger bubbles and as we said on Tuesday, keeping creative destruction from being destroyed.

So what’s the solution (well, besides allowing the damn thing to collapse like it should have in 2008 and rebuilding something that makes sense)? Well, you could fix the transmission channel to the real economy for one thing. Here with a brief explanation is Goldman’s Charles Himmelberg:

“We speculate here that, in addition to easing the unintended burden on long-term bond investors, the policy discussion will also begin to focus more on the desirability of choosing policy tools that target short-term bank credit rather than long-term capital market debt. This is partly because the latter may entail unintended costs, as described above, which may offset the benefits. But, more importantly, we suggest it is because risky investment activity – the investments that drive innovation and economic growth – tend to be funded primarily via short-term bank credit. If monetary policy could be targeted, it would ideally aim to create incentives for the pools of capital that are best-equipped to take the kinds of risks that help drive innovation and economic growth. These growth investments and their investment risks are typically borne by small business owners, entrepreneurs, private equity funds, venture capitalists and hedge funds. These investors traditionally rely more heavily on equity, so monetary policy is arguably limited in what it can do. But to the extent that such investors also rely on credit, they tend to rely on shorter-term bank credit. Which policy tools are best equipped to encourage investors and business owners to take the kinds of risks that help drive innovation and economic growth? It is hard to see how this goal is served by tools (such as QE) that aim to reduce long-term yields. The issuance of long-term debt is more or less restricted to government or large, well-established corporations.”

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