QE outlook

The early evidence: QE does more harm than good. TPC.


I do not believe that QE will have any positive impact on the broader economy, and, as per last, and as with past examples of unintended consequences of ill-advised government policy, will likely cause more damage than benefit; to wit:

- QE has had a psychological impact on asset prices, including equities and commodities, but has not changed fundamentals in any way
- if QE does not help the economy, then the boost to stock prices will have been ill-founded and subject to downward revision
- the dollar-debasement-fear impact on commodity prices will help commodity producers, but will impair margins for commodity-user-companies and will effectively impose a tax on consumers
- companies will therefore be less inclined to expand their workforce and consumers will be less inclined to expand their discretionary spending
- aggregate demand will continue to be lacklustre and hence below aggregate supply
- upside commodity price shocks have historically caused economic slowdowns; the last commodity price shock preceded the recession; this time around, the economy is much more vulnerable, given that core CPI is already below 1% and U6 is already near 10%
- propping up asset prices to revive the economy was the failed strategy of the 2000s (housing); the definition of insanity is doing the same thing over and over again and expecting different results
- excess reserves do not in any way motivate bank lending; deleveraging will persist, driven by both reluctant lenders and reluctant borrowers
- theoretical wealth effects from stock prices have been disputed (Shiller), and, in any case, to the extent that household wealth remains below the past peak, even with recent stock price gains, it is quite likely that homeowners are still perceiving a negative wealth effect (though the hole might not be quite as deep now that stocks are up 10%, they're still in the hole)
- meanwhile, aging baby boomers are a few years closer to their hoped-for retirement age, are twice-bitten, thrice shy of stocks (ICI reports that as of Nov 10 there were 27 straight weeks of outflows from domestic equity mutual funds), and need to continue to save to replenish their coffers
- interes rates are very low, so interest income has been degraded, implying that even more has to be socked away
- misguided concerns that QE is money-printing means dollar debasement could provide a near-term boost to export growth as U.S. export-products become more attractively priced in foreign currencies, but (a) yuan is not budging much, so will not help trade deficit with China, (b) euro has appreciated, but outlook for euro area is not promising and implies risk of currency turnaround, and, most importantly, (c) geopolitical tensions about QE could cause real trade frictions and protectionist backlash
- to the extent that easy monetary policy gets exported to emerging market nations, principally w.r.t. asset prices, those emerging market nations may be forced to impose domestic monetary restraint which will at the margin impair global growth, offsetting *any* "expansionary benefits" of unconventional Fed easy money policies


all in all, though the Fed likely does WISH to reflate the economy, there is little evidence to support the assumption that they have the CAPACITY TO DO SO --- not until the unsustainable debt burden built up over the last decade has been whittled down to levels that are manageable given prevailing income levels and given the demographic outlook; if this viewpoint is reasonable, then this is not likely to be a 2-5 year process but one that lasts rather longer


what if I'm wrong? what should we look for as signs of successful reflation?
- broad-based increase in cap-ex
- sustained increase in lending
- consistent increases in hiring (evidenced in both the household and institutional surveys) in excess of population growth