Is it saying, any more QE, and it’ll kill us all?
We have long lambasted QE, zero-interest-rate policies, and negative-interest-rate policies for the distortions they cause, the wealth transfer they create, the asset bubbles they engender, and for their ineffectiveness in supporting the real economy. And yet, inexplicably, central banks have not paid any attention to us.
But now comes Natixis, a corporate and investment bank and “among the world’s largest asset managers,” as it says, with over $900 billion in assets under management as of September 30, though the global market rout must have whittled that down. Its clients are among the top beneficiaries of QE and ZIRP, of cheap loans and soaring stocks and bonds. But suddenly, a light has come on.
Or are they begging central banks for mercy? They would have good reasons, given what is transpiring in the Eurozone, Japan, Sweden, and other places where the scorched-earth tactics of QE, designed to inflate asset prices, is now doing the exact opposite — and with vicious energy.
Recent stock market losses have reached 19% in Japan, 23% in Germany, 24% in Sweden, 28% in Spain, and a stunning 45% in Italy, all countries with mega-QE right now. Perhaps Natixis is saying: Any more QE, and it will kill us all!
In its new report, Natixis sets the scene:
Standard monetary policy theory recommends that if the demand for goods and services is still lackluster in a country when nominal interest rates have reached the lower bound of 0%, an unconventional monetary policy must be adopted which involves increasing the money supply (the monetary base).
QE was implemented in the US in late 2008, in the UK in 2009, in Japan off and on for years but its most massive iteration in 2013, and in the Eurozone in early 2015: “The central banks of the four major OECD countries therefore had what seemed the appropriate response to the economic situation,” the report said.
And yet, QE made things worse:
When quantitative easing produced a credit recovery (in corporate credit and bonds in the United States), this credit financed share buybacks but not increased investment.
That has long been one of our laments. The cheap credit that QE made available led to ever greater focus on financial engineering, a total waste of capital in terms of the real economy, while corporate investment, which would have propelled the economy forward, was lacking. These share buybacks led to unprecedented levels of debt and leverage, Natixis now concedes, “thereby reducing financial stability….”
Ben Bernanke explained the “wealth effect” in an editorial in 2010: Inflated asset prices would encourage those who are getting wealthier to spend more, and that’s how some of this money would trickle down into the real economy.
Alas, according to Natixis:
When quantitative easing used the wealth effects caused by rising asset prices, it led to bubbles (in bonds in the United States, the United Kingdom, the Eurozone and Japan; in real estate in the United Kingdom and to a lesser extent in the United States and Japan), resulting in the danger of either bubbles bursting, or irreversibility of expansionary monetary policies precisely to prevent bubbles from bursting.
Let that sink in a moment: thanks to QE, we’re now dogged by the “irreversibility” of QE for fear that ending it would burst those asset bubbles and bring the whole construct down.
Why didn’t our central-bank geniuses think about this years ago? Natixis didn’t say. Like others in the business at the time, it took the money and ran.
“The problem now is therefore the existence of bubbles,” the report says. And central banks have a “dilemma”; they can:
- Either “normalize monetary policies when the economy improves and cause the bubbles to burst,” with all the mayhem that follows bursting bubbles.
- Or “not normalize monetary policies; the very expansionary monetary policies then become irreversible, as we have seen clearly in Japan.”
One of the purposes of QE is to push down the value of the currency to help exporters. But that too wasn’t that simple. It had “negative or only slightly positive effects”:
In Japan, imported inflation has caused a decline in real wages and household demand; In the Eurozone, industrial companies have used the depreciation of the euro to increase their profit margins, so this depreciation has had very little effect on exports.
Those are the negative “macroeconomic” effects of QE. And then there are the “microeconomic” drawbacks that include “price distortions in financial markets” based on the assets that central banks buy or don’t buy; “increased volatility of asset prices” due to “excessive liquidity” provided by central banks; and “the considerably increased size of global capital flows” which “destabilizes exchange rates” for emerging countries.
So Natixis concludes that the implementation of QE, “even in accordance with the precepts of economic theory,” in these four major OECD countries “is therefore negative.”
Now they tell us!
But it may be too late. Central banks have already lost their aura of omnipotence. Forget the wealth effect. It’s all unwinding. Read… Dollar-Based Investors Eviscerated in Global Stocks