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Farewell Qe, You Have Been A Magnificent Success

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I can feel the love on this thread already :) .

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10526947/Farewell-QE-you-have-been-a-magnificent-success.html

Some quotes:

The diverging fortunes of the QE bloc and the EMU bloc prove beyond doubt that monetary stimulus packs a powerful punch. Without becoming entangled in the vendetta between Friedmanites and Keynesians - I value the insights both in the post-bubble phase, as well as "Austrian" insights before the bubble builds - the central bank experiment of 2008-2013 shows that blasts of money can greatly offset the pain of budget cuts, even when interest rates are zero.

This should come as no surprise. There is nothing new about QE. The Bank of England conducted variants of it in Napoleonic times, watching the weather vane for easterly winds up the Thames. It would calibrate liquidity needs by buying Gilts as the ships came in. The Venetian Grain Office did much the same in the 14th Century. The Genoese and the Flemish had their own variants.

The US has not spiralled into inflation as so many feared. The Fed's measure of core PCE inflation (without food and energy) has dropped to 1.1pc, close to the post-Lehman trough, and too low for comfort. Mr Bernanke has surely taken a risk tapering into this deflation downdraft, and may live to regret it. The Fed may be underestimating the sheer force of the deflationary wave spreading through the global economy from China as the country invests $4 trillion each year, much of it in factories and industrial plant.

Be that as it may, the US budget turnaround is impressive. The deficit is running at 3pc of GDP on a quarterly basis, a remarkable fall from the 12pc peak in 2009. The debt ratio has stablilised and even begun to fall as recovery causes a delayed surge in tax revenues. The federal debt has dropped from 101.5pc to 99pc of GDP in the past six months.

This may surprise those who think it necessary to generate a surplus in order to cut debt ratios. That is the Schwabian housewife syndrome, which confuses an economy with a family budget. This error is written into EMU law through the Fiscal Compact, a formula for two decades of depression. In reality, nominal GDP merely has to grow faster than the debt stock. Magic does the rest.

America's deficit ratio has dropped below those of Ireland (7.4), Spain (6.8), Portugal (5.9), Greece (4.1), or indeed France (4.1), despite their austerity pain.

We can all agree that America's recovery has been feeble. The unemployment rate has fallen to 7pc, but that masks the damage as discouraged workers drop off the rolls. The labour participation rate is still near a 40-year low of 63pc. Yet there is no comparison with the eurozone's jobless rate of 12.1pc, let alone the crucifixion of Southern Europe's youth.

Even Britain has begun to decouple from the eurozone. Total numbers employed have reached 30m for the first time. The unemployment rate has dropped to 7.4pc.

You hear a refrain in Berlin and Brussels that the recovery of the QE bloc is somehow feckless, phony and illegitimate, that the money printers are just building up more debt, putting off their day of reckoning while Europe takes its punishment early. Nothing could be further from the truth.

Such thinking is a tangle of fallacies, reflecting the zero-sum mindset of the Puritans, almost Malthusian in character. It confuses debt levels (irrelevant) with debt ratios (crucial). It focuses narrowly on public debt, ignoring the displacement from austerity overkill onto private debt burdens.

What matters for an economy is public, corporate and household debt taken together. This combined figure has fallen from 280pc to nearer 260pc of GDP in the US since the post-Lehman peak as households slash debt.

The eurozone is a mirror image. Combined debt has kept on rising, overtaking US levels on the way up. Household debt ratios have hardly fallen at all. If the central thrust of EMU policy is to cut debt burdens, it has failed.

Those who feel angry over what has happened should remember that creditors lose everything if economies are so bady mismanaged in a crisis that mass default ensues, as in Greece, or Cyprus, or the US in the early 1930s, or if the political system disintegrates altogether. Remember too that governments bailed out the banks after the Lehman crisis, and therefore bailed out savers, too. The moral contours of QE depend on your angle of vision. But would you rather be surrounded by mass unemployment?

He is too sanguine for me, QE has its place but it should have been used to boost public works, UK infrastructure and also decentralise the UK and give the regions a chance instead of London-centric policy. But much of what he says is highly pertinent.

Edited by FaFa!

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QE has been an awesome success at can kicking.

The banks which were too big to fail have got even bigger.

The rich have got richer, everyone else has got squeezed.

The question is can they rebalance the ship, I doubt it as the stupidity which caused the problem is still there. However they have done a wonderful job of keeping the plates spinning but the job of keeping them going has got that much harder.

Govts have increased their debt levels and now even more tax receipts go on interest payments, meaning we need even larger GDP's to keep the plates spinning.

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1) 'It confuses debt levels (irrelevant) with debt ratios (crucial)'

It's as if imputed rents aren't a constituent of GDP.

2) The simple reality is that they did QE to bail out the banks,period.THE CB's could just have printed that money and given it to Joe Public to spend,but no,they dished it out to the banks who promptly shrank their loan books.

3) It's hard to compare the USA with other nations simply because the dollar is the world's reserve currency.

4) As yet we don't have the benefit of hindsight on whether QE has been a success.Measuring employment levels-heavily manipulated anyway-is one thing but then forgetting to mention (in the UK's case at least) that whilst unemployment has dropped to 7.4%,we added £121 billion to our national debt last year.

5) The Fed,by the time this round of QE ends will be sat on $4.36 trillion of assorted govt and MBS debt.Thus we can only assess the cost/benefits of QE when those bonds are back in the open market.

Edited by Sancho Panza

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Easily the most deluded piece I've seen from him. (I generally like his insights and follow fairly closely as I have met him a few times.)

There are so many omissions and distortions I don't know where to start.

Just a tiny little one - he mentions the total debt (public and private)of the US as having fallen, but doesn't mention what's happened in the UK during the same period.

Nor does he point out the main reason for the reduction in total US debt - house price crash and debts written off in the States, he claims it's down to households reducing debt. I guess that's one way of describing for people going bankrupt and the banks writing off the debt.

Also I believe he holds gold, he's declared it before, at least, though maybe not now - so I guess you might expect him to cheerlead QE.

There can be no recovery for the UK without a house price crash, real terms or nominal, that's the reality and he knows it but fails to point it out.

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The 'has not spiralled into inflation as so many feared' is premature.

A lot of chatter about a commodity spike in 14/15 if the stock markets come off the all time highs.

Feels like we're coming to end of Act 1 of 3 to me right now.

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Printing worked really well for the Weimar, for Argentina and others.....NOT

And a bullet produces nothing after its initial cost.

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Was the story supposed to end like this or is there to be a final twist...the BRICs currency buckling under pressure (pound back to 2009 levels against yuan and killing the rupee), gold crashed to $1200, our CPI down to 2.1%. What happen to hyper-inflation and the dollar and pound train wreck?

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You can argue all you like about whether it is right to bail banks/investors/rich/property holders/older etc. out all day long.

What cannot be forgiven is the failure to redress the effects of monetary policy using fiscal policy.

In fact they added fiscal policy to bailing out sections of the country - notably the profits of the building companies, property owners, estate agents etc etc using various guarantee schemes.

Disgusting. Any person under 30 who is not considering emigrating needs their head examining.

I wholeheartedly agree and, in fairness, he does address this to some extent. As I said, he is too sanguine and also perhaps the lines he draws between the US and the UK are too broad. It seems assumed on this forum that the US had the proper crash of housing values. The long term issues remain unresolved. My contention is that, sadly, the situation is sustainable and I think the wealth divide is permanent. I agree with the emigration thing - that's what I did. Though I'd argue the cut off date for having any chance of buying a house at reasonable levels is 35, and that's pushing it. Anyone younger than that was faced with HPI a go-go.

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I was very fearful of QE when it became clear that the Fed and the BoE were going to more than dabble at it.

In retrospect, and from a purely selfish perspective, I'm now experiencing a sense of foreboding over its possible withdrawal. Why? Simply because there has never been an easier time to make money in the markets.

In more normal times there's an adversarial feel about investing – you know that whenever you buy something that you believe is good value, conceptually there's someone on the other side of the trade who is selling because they think it's a poor proposition or because they have spotted a better opportunity elsewhere. Furthermore the seller may be smarter than you or may have better information.

However for the past few years it hasn't seemed like this. Instead it's more like being a bunch of kids let loose in a financial sweet shop where you look at all the tempting goodies on offer and once you've chosen, the kind, bearded economics professor hands you your corporate bonds or equities with a beaming smile on his face, promising you that he will never allow you to lose money on your holdings and that he will do his level best to increase their value.

If they do finally stop QE I'm certainly going to miss it, and perversely I'll probably find myself looking forward to another financial crash.

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Was the story supposed to end like this or is there to be a final twist...the BRICs currency buckling under pressure (pound back to 2009 levels against yuan and killing the rupee), gold crashed to $1200, our CPI down to 2.1%. What happen to hyper-inflation and the dollar and pound train wreck?

Well exactly. I remember when inflation was at 5%, I and others stated it wouldn't get north of 6% and got vilified. CPI announcement threads were long and heated. Now it has all gone quiet on that front. The US was going to blow up due to the mega deficit, now it is down to 3%, the problem is the level of the debt apparently. Presumably when that starts to retreat meaningfully, and Pritchard points out it is starting to, doubtless the UK will suddenly be different to the US etc etc. There'll always be something, despite the numbers.

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If they do finally stop QE I'm certainly going to miss it, and perversely I'll probably find myself looking forward to another financial crash.

How can they stop?

I don't see how it's possible without generating the crash and depression that was supposedly being avoided, so what was the point of it?

It seems to me the point of it has been to rob and starve the young and/or poor and enrich the rich.

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How can they stop?

I don't see how it's possible without generating the crash and depression that was supposedly being avoided, so what was the point of it?

It seems to me the point of it has been to rob and starve the young and/or poor and enrich the rich.

QE gives the room to pay down the debt. Once it is paid down and the private sector is recovering, then QE can be tapered, which is what we are seeing.

How's not having QE in Europe working out for the youth of Club Med?

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CPI announcement threads were long and heated. Now it has all gone quiet on that front.

As per previous post I made - I don't think it has.

Stock markets can't go a lot higher. Commodity prices are low.

People are talking about a rotation in to commodities again now.

Commodity price increases cause inflation - stock valuation increases don't.

It's very possible the inflation part of the cycle hasn't fully started yet. We could be on verge of a 4 year bull market on commodities - especially if growth returns and production capacity/investment has been impacted by recession.

(f)commodity_prices.jpg

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QE gives the room to pay down the debt. Once it is paid down and the private sector is recovering, then QE can be tapered, which is what we are seeing.

How's not having QE in Europe working out for the youth of Club Med?

On the UK front, how does what you say work when the "growth plan" is for the consumer to take on more debt?

How can people pay down the debt whilst increasing it at the same time to generate growth?

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As per previous post I made - I don't think it has.

Stock markets can't go a lot higher. Commodity prices are low.

People are talking about a rotation in to commodities again now.

Commodity price increases cause inflation - stock valuation increases don't.

It's very possible the inflation part of the cycle hasn't fully started yet. We could be on verge of a 4 year bull market on commodities - especially if growth returns and production capacity/investment has been impacted by recession.

That's a reasonable point, but I think what Pritchard is arguing is that people said QE would cause massive inflation - but it hasn't. Your argument would be that ending QE will cause inflation as money exits the stock market. That's basically the opposite of the common assertion that QE causes inflation but I think your point is interesting. However I think the drying up of Chinese commodity demand will offset that easily, but I don't have the numbers to prove it.

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QE gives the room to pay down the debt. Once it is paid down and the private sector is recovering, then QE can be tapered, which is what we are seeing.

How's not having QE in Europe working out for the youth of Club Med?

About as well as QE has worked out for the millions formerly employed in the US now classified as no longer actively seeking work.

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That's a reasonable point, but I think what Pritchard is arguing is that people said QE would cause massive inflation - but it hasn't. Your argument would be that ending QE will cause inflation as money exits the stock market. That's basically the opposite of the common assertion that QE causes inflation but I think your point is interesting. However I think the drying up of Chinese commodity demand will offset that easily, but I don't have the numbers to prove it.

Inflation= loss of buying power...

US=== most people have lost buying power and are losing it more and more...just read the TIcker forum for details.

Printing always appears to work at first...but never quite enough...so they do more, and its never again quite enough, so they do more and this argument is shown to be the reality every time they do it, and it NEVER works.

It cant.

But it sure fools a lot of people EVERY TIME THEY DO IT.

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That's a reasonable point, but I think what Pritchard is arguing is that people said QE would cause massive inflation - but it hasn't. Your argument would be that ending QE will cause inflation as money exits the stock market. That's basically the opposite of the common assertion that QE causes inflation but I think your point is interesting. However I think the drying up of Chinese commodity demand will offset that easily, but I don't have the numbers to prove it.

QE has certainly caused massive inflation: in financial asset prices. Its long-term impact on consumer prices and the broader economy has been deflationary. The US economy has barely grown 2% pa over the past five years despite the trillions in stimulus that have been thrown at it. An epic fail.

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Can't believe people are talking about there being no inflation ... LOL!

- average price of ground beef hit an all-time high this week at $3.61 per pound.

- gas prices are 25% above their average price of the last decade.

20131218_infl1_0.jpg

http://www.zerohedge.com/news/2013-12-18/nope-definitely-no-inflation-here

Just two examples, before we get into smaller packets, lower quality ingredients etc etc etc.

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How can they stop?

I don't see how it's possible without generating the crash and depression that was supposedly being avoided, so what was the point of it?

It seems to me the point of it has been to rob and starve the young and/or poor and enrich the rich.

Exactly.The ultimate irony is that all their efforts to beat the crash will jsut make it worse and longer.

QE gives the room to pay down the debt. Once it is paid down and the private sector is recovering, then QE can be tapered, which is what we are seeing.

How's not having QE in Europe working out for the youth of Club Med?

The youth of Club Med are stuffed for a whole number of reasons

1 being in a monetary union without their own currency

2 political corruption and chronic fiscal mismanagement

3 their own housing/debt bubble and mortgage/banking fraud on an epic scale.

And QE would have helped how?

Edited by Sancho Panza

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QE has certainly caused massive inflation: in financial asset prices. Its long-term impact on consumer prices and the broader economy has been deflationary. The US economy has barely grown 2% pa over the past five years despite the trillions in stimulus that have been thrown at it. An epic fail.

The graph you posted on the Hit like a Ton of Brics thread shows following the recession that growth has been comfortably between 2 and 4%. What do you think it would be at without the stimulus? If we had had the Great Depression Mark 2 with banks going under, loss of savings and massive unemployment, I guess you think you'd shrug your shoulders and get on with it. Or perhaps you are so special you'd be magically immune.

Can't believe people are talking about there being no inflation ... LOL!

- average price of ground beef hit an all-time high this week at $3.61 per pound.

- gas prices are 25% above their average price of the last decade.

20131218_infl1_0.jpg

http://www.zerohedge.com/news/2013-12-18/nope-definitely-no-inflation-here

Just two examples, before we get into smaller packets, lower quality ingredients etc etc etc.

I hesitate to respond to you, but that graph appears to show the nominal price of beef. For it to be meaningful, it would need to be real terms. The fact it was static for 20 years nominally is remarkable. And as you say, it is just two examples.

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That's a reasonable point, but I think what Pritchard is arguing is that people said QE would cause massive inflation - but it hasn't. Your argument would be that ending QE will cause inflation as money exits the stock market. That's basically the opposite of the common assertion that QE causes inflation but I think your point is interesting. However I think the drying up of Chinese commodity demand will offset that easily, but I don't have the numbers to prove it.

All QE has done is drive down the velocity of money.

About as well as QE has worked out for the millions formerly employed in the US now classified as no longer actively seeking work.

And all the people in the UK hovering around the 4th to 6th deciles of median income who've seen their dispoable income get cut dramatically over the last five years.

QE has certainly caused massive inflation: in financial asset prices. Its long-term impact on consumer prices and the broader economy has been deflationary. The US economy has barely grown 2% pa over the past five years despite the trillions in stimulus that have been thrown at it. An epic fail.

Take away the wealth effect in the stock markets and property markets and QE has achieved very little in terms of employment and salaries for working age people.It's papered over the cracks in bank balance sheets for 5 years-thus far-and will probably do so for a few more but in terms of dollars per per cent of economic growth,it's been incredibly poor value.

The fat lady will only start warbling when the CB's have offloaded.

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1 being in a monetary union without their own currency

Why is that a problem, unless you object to not being able to QE. Everyone on here who is against QE should be praising the Eurozone to the skies - after all, there's no QE there. But 5 years on who is doing better economically, the US or Club Med?

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