Archive for QE

Bubbles Worry Central Bankers

Soda_bubbles_macroAfter years of QE and other loose monetary policies, central banks are starting to get jitters about the effects of their policies.

An organization representing the world’s main central banks warned Sunday that dangerous new asset bubbles were forming even before the global economy had finished recovering from the last round of financial excess.

Investors, desperate to earn returns even as official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements in Basel, Switzerland, said in its annual report published Sunday.

It turns out that low interest rates do have a cost. And that cost is not just limited to increased risk taking. According to Jaime Caruana, the general manager of the BIS, “during the boom, resources were misallocated on a huge scale… [I]t will take time to move them to new and more productive uses.”

The time it takes to move these resources to where they are valued most highly is being disrupted by central bank monetary policy. Consider the size of the financial sector, or the amount of leverage in the economy. Few would say that there either of these factors were not something that contributed to the crisis in 2008. By foisting low interest rates onto their economies, central banks have slowed or stopped altogether the deleveraging and shrinking of the financial sectors, none of the adjustments necessary for recovery.

Part of the problem is that central bankers don’t understand what interest rates are.

The B.I.S. also had harsh words for corporations, which it said were not taking advantage of booming stock markets to step up investment. That is one reason that gains in productivity — the foundation of sustained economic growth — have slowed in most advanced economies, according to the report. “Despite the euphoria in financial markets, investment remains weak,” it said. “Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions.”

These central bankers are stuck in a mindset of “hydraulic Keynesianism” where prices are supposed to be manipulable to get the desired result. Never mind that corporations are currently trying to reduce risk exposure, and that low interest rates are hindering, not helping them do this.

(Originally posted at Mises Canada.)

End QE and Pop the Stock Bubble

Writing in the Financial Times this weekend, John Authers is concerned with the lack of volatility in the stock market.

More remarkable than the market’s level has been its consistency. The US not seen a correction (a top-to-bottom fall of 10 percent or more) since the turbulence in the summer of 2011 that followed the decision by Standard & Poor’s to downgrade US sovereign debt from triple A…. This is strange. Markets seldom go up in a straight line like this. Progress is made bumpily, with rallies interrupted by sharp selloffs.

Since the Fed started its QE programs the stock market has been pretty buoyant. This is especially true with the latest and ongoing round known as QE3, which covers most of the period Authers is concerned with.

stocks 1

Indeed, the upward trajectory in the stock market follows the Fed’s quantitative easing programs almost perfectly. With the recovery on Main Street still sluggish, the Fed can at least claim that it has given Wall Street some relief.

stocks 2

Indeed, the relationship between the M1 money stock and the Dow has been about as good as any statistician could hope for upon first glance.

Of course, with the Fed starting to taper its easing program there is a fear that the luck of the stock market might run out. Of course with the Fed still committed to increasing the money supply by $65 bn. a month, it doesn’t look like Wall Street’s stimulus package is over quite yet.

None of this bodes well for the rest of us.

A stock market artificially propped up by the Fed’s loose money policies is sure to end badly. Ending the seemingly endless credit creation and popping this bubble is the lesser of two evils.

(Originally posted at Mises Canada)

Yellen to End QE Someday, Maybe

126px-US-FederalReserveSystem-Seal.svgJanet Yellen spoke to lawmakers today. After making it very, very clear that bad weather is the cause of the lackluster economy,  Yellen then went on to confirm that the Fed will wind down quantitative easing (specifically, the bond-buying stimulus program) seven months from now if ”the labor market continues to improve and inflation remains low.”

Yellen is clear that if the Fed concludes that things are just right somewhere down the line, the Fed may or may not reduce bond-buying to zero. Even then, however, the Fed’s commitment to low interest rates remains in force indefinitely, we’re told.

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