With a grim reality setting in for at least a temporary interruption to the euphoria, that background of a QE-less world takes hold. Without any real recovery to show for all the manipulations and intrusions, a global reality, there are none but stock prices (aside from a few confused PMI’s) to record on the “benefits” side of the ledger. The other side, costs, is brimming with entries which is why QE’s end has been pre-ordained for a long, long time.
It will be for historians to pick apart the exact moment when Bernanke’s FOMC turned against what was a “sure thing” at least in its second incarnation. When he wrote that now infamous November 2010 oped there wasn’t the least bit of doubt or hesitation; QE would work. Of course, knowing that such monetarism is the stuff of pure psychology, the most powerful part of the whole affair were the words – the actual effects, as I said at the outset, have turned against it. In the most general of respects, it was all one big con or charade that was intended to boost “confidence” in the economy.
To know something about the state of economics in the 21st century is to see the full distrust of markets and people (lay) on display. That extends into every facet of the works, but especially as it relates to the “business cycle.” The convention in these places is that recessions are nothing but a lack of confidence – to remove pessimism is to remove recession itself. Throw a little credit “subsidy” at the economy, as Alan Greenspan was so fond, and the economic blues glide under all.
As a practical matter, of course, this is all just academic folly of confusing cause and effect – pessimism is no more a cause for recession than vomiting and fever are the cause of the flu. The reason people and businesses gain such dour feelings around the turn in the business cycle is that they have very good reasons for doing so; a fact doubly and triply true in this age where manipulated psychology limits itself to apparent bubble behavior if little else. In that respect, the turn toward pessimism is as much a rebuke of artificial highs as the actual cycle, so the central banks are really fighting against their own past.
The FOMC and its European and Japanese counterparts (throw in the PBOC too) can lament “clogged transmission channels” all they want, but what they are really saying is that pessimism has transgressed not just “people” but also banks. Prudence is now an enemy of policy born, apparently, from now too much caution (strong wonder where that came from given the history of the past seven years of central bank efficacy) after being admonished by the very same people for too little of it. So in fact, here in monetary policy, central banks now want to control not just optimism of people, and not just optimism of all agents in economy and finance, but when and where it shall be dispensed most effectively.
As Janet Yellen spoke not too long ago, she desires that markets actually ignore all of this entirely and just embrace the warm and soothing comfort of ignorance. That may sound more than a little step farther than where Bernanke set off from in November 2010, but in terms of general philosophy it is exactly the same – just feel good about everything your friendly, local central banker has planned and act accordingly.
The problem has always been that “act accordingly” is not something that can be predicted, and certainly not by the limited statistics of DSGE models and their comical adherence to closed systems. “Somehow” the global economy got “too much” good feelings in assets and “not enough” in actual spending, though orthodox theory holds a definite link between assets and economy (that “wealth effect” they talk about without acknowledging the difference between paper prices set by transactions, and thus liquidity, and true wealth).
That disparity was evident going back to QE2 which then-Chairman Bernanke welcomed with unequivocal faith (again, psychology means never admitting doubt, let alone failure). The experiment of QE3 and then QE4 was about removing the “stop-go” part of the equation – testing whether QE1 and QE2 failed to achieve indisputable recovery because they were predetermined to end. So the last two episodes, coming close together, supposedly removed that limitation, thus, with fingers crossed, one variable difference in application might do the trick.
While doubts persisted internally, only lightly did they receive much display in outward communication, and never were they to betray that “open ended commitment.” But reading between the lines it was clear that policymakers were keenly aware of if not the full ineffectiveness of QE (they had almost a decade of Japanese experience at that point) at least the possibility of that. Alongside, the bubble phenomenon was accruing even academic acknowledgment in what is now called secular stagnation.
The point of that exercise in convolution was to marry a lack of success of monetary policy to some form of recognition that orthodox models hold so very little insight and thus predictive capacity. They took their shot and it followed every other version in history. In other words, QE3 and QE4 were never really open ended, they were intent, as all “good” Keynesian policies, to simply “pump prime” and let spending for the sake of spending rule forth.
That is the point we are at now. They have no choice but to claim it worked at least somewhat (psychology not just of the present, but preserving at least some credibility for the future) and to steadily remove its presence before conditions worsen. The worst case scenario is as I described, to have QE in progress at the same moment that the economy suffers another (see 2012) downturn. If they have tapered QE down to zero before that happens they can at least preserve the idea, though shaken and roughed up, of redoing QE should it become “necessary” once more. This is the last shot; they are out of bullets.
“If inflation isn’t moving above 1.5 (percent) and we get stuck into that gear, that would argue for a later liftoff” in rates, he [John Williams] told Reuters. “If we don’t see any improvement in wages, that would be a sign that we still have a lot of slack in the economy and we are not getting any inflationary pressure to move inflation back to 2 percent.”
Of course, that is the “worst case” and the article rushes to reassure how confident San Francisco Fed President John Williams remains regardless of the globally dour “mood” (psychology is ubiquitous, even in commentary about it). However, every single FOMC member and Fed Chair has been confident about everything (especially how wages somehow benefit from making an economy poorer) since they started doing this – Bernanke in 2010, everyone in 2008, everything Alan Greenspan ever said that was more than intended nonsense. Orthodox policymakers lack for nothing about confidence, which is the entire point!
As everything about central banks at this moment in time, they are coming awfully close to revealing they have no idea what they are doing. That, too, comes with the territory of seeing nothing live up to its intended benchmark, as desperation sneaks out.
In simple terms, QE has to end because they can’t take the chance of being wrong yet again while in progress. You add that “cost” to the asset bubbles and liquidity erosion and it makes a compelling case for never doing it again, anywhere. But a modern monetarist system of Keynesian basics will overlook all that if there is even a small chance for widespread ignorant embrace of unfounded happy feelings toward imprudent economic activity in the extreme. And if it doesn’t happen again as it hasn’t happened yet, the monetary beatings will continue until economic morale improves.
Welcome to Japanification. If I read “them” right, and unfortunately I speak their language all too well, they are basically saying that Japan’s path will never happen here because they are aware of Japan’s path, so even if they do the exact same things it will end up differently in the US because they know they were the same. Modern Econometrics QED.