Mega Investment Bank Suddenly Pooh-Poohs QE

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

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  43 comments for “Mega Investment Bank Suddenly Pooh-Poohs QE

  1. jest says:

    Great Writer! He tells it how it really is!

  2. Vespa P200E says:

    Well now they tell us after QE experimentation is turning out to be a dud while enriching some and copied by global CB cabals.

    QE I, II and 2-yr long QE III (Sept 2012 to Oct 2014) brought about to re-elect ObaMao and help Benny leave the helm looking good to appease the bankster handlers.

    As we face next leg down or Great Recession II the Fed is simp;y out of ammo with rate at 0.25% (vs 5.25% in late 2008) with strong USD and China’s contagion much akin to what happened to the Japanese stock and real estate market in 1989.

    What will granny Janet do?

    • Honda CBR says:

      Fed out of ammo, are you kidding me.
      Negative interest rates, hallo, anybody home???

      • Wolf Richter says:

        Check how well that’s working out in the Eurozone, Sweden, Switzerland, etc.: their markets are crashing. See my prior article on that, including a chart of their crashed markets, right here:

        So that’s not going to help very much.

        • meat wad says:

          It won’t help, but it will be “something to do”, so they’ll do it, right?

          A little stock market levitation or some bubble, who knows, to give the MSM some excitement & kick the can down the road a little longer.

        • chris Hauser says:

          at the moment, it does seem as if all the contradictions are combining into inescapable reality.

          ah, value back in vogue. though in a relative fashion, taking into account the tides, swells, waves and whitecaps, and a whirlpool or two.

          i’m optimistic. i have to be.

  3. peter brown says:

    The more plans fail the more planners plan, so God knows what these idiots will come up with next.

    • Toddy says:

      What was the total again of sub prime shale loans? It was mentioned here somewhere…

      Couldn’t they just let that bubble hiss, accept a 2-year recession, then move on?

      I fail to see why it’s impending doom.

      Sure, painful. Sure, lousy globAl outlook. But hardly Armageddon.

      What exactly am I missing?

  4. Jonas says:

    Dear Wolf, another cogent article on a very macro theme. Zooming out even further, or whole economic model is based on ‘consumption’, which to me at least seems kind of hollow. The economic problems we experience are those of a rudderless society.

    The whole QE and debt situation reminds me of the decades of malaise the world experienced in the run up to WW2. The disaster of that war then pulled the US out of its funk in a spectacular way. Today though, nuclear weapons thankfully make any large wars inconceivable.

    Without a compelling large National program we might be facing another decade of stagnation as the world suffers from the effects of bad debt. Such situations have happened many times before, and they can go on for decades.

    The best remedies have typically been episodes of inflation mixed with redistribution efforts to support and enlarge the middle class. But that’s not happening, how sad.

    So if economies need another stimulus, my dream would be that it goes toward funding science jobs and infrastructure projects. Or why not spend the next 500B to build a real moon base? That’d create millions more jobs than giving the 500B to the ultra rich, and would be good for humanity. People lack enthusiasm, they are fed up with the corrupt system. Absent a major war, I think society as a whole needs another major project to focus on. The ancient Egyptian built pyramids in times of plenty and their civilization lasted longer than almost any other. As an extension of keynes economic theory, instead of just extra general spending during recessions we should do something useful instead.

    • Jonathan says:

      Ahahaha, if they are interested in space travel they would have done it decades ago.

      Instead, they would rather use their obscene wealth on their 10,000th Ferraris, Lear Jets, luxury yachts and London real estate while complaining how a chronically underfunded NASA is the prime example of how central planning failure by the government is ruining the hopes of humanity, aka “I’m already so fucking rich yet I still need others to pick up the slack instead of doing it myself”

    • night-train says:

      Jonas: I agree and have argued for that approach since the house of cards fell. Do something big. Do something that provides a vision for the future. Make the vision something that captures the imagination of the country, which might help reduce the polarization that now defines us. Do something that creates good jobs for the citizenry and things we need done anyway. The projects will be carried out by private sector corporations and contractors who already benefit from corporate welfare. But, by doing what you propose, the working folks will get their hands on the money before it ends up with the banks. Money always ends up in the big banks. The only question is, what route it takes and how many benefit along the way.

    • Mark says:

      ” The ancient Egyptian built pyramids in times of plenty and their civilization lasted longer than almost any other. As an extension of keynes economic theory, instead of just extra general spending during recessions we should do something useful instead”.
      How contradictory is your statement.
      How old are you?
      Let me give you formula, useful formula you can start today: Don’t buy crap you don’t need, eat less and eat good quality food, exercise your brain (learn something new) not only your biceps, get good paid job, stay out of debt and save your money.
      And best of all: DON’T advocate spending money if there is no money to be spent.

      • Jonas says:

        I’m all those things you advocate; it is you who might be making contradictory assumptions. I would guess you regard someone deep in debt, or living a bad life, as deserving of the fate they have. Coming from a solid middle class background myself, and having lived abroad, I’m more compassionate with those who are less fortunate.

        In the times of kings and peasants, those peasants weren’t lazy, stupid or deserving of their lack of opportunities. Sure, some folks are incorrigible, and it’s their right to be so. But gradually making debt slaves out of our populace through unfettered capitalism (which breeds monopolies) is no way to go. Living cleanly doesn’t help people with 50k of debt who scrape by paycheck to paycheck while working 70 hour weeks.

        And worst of all, the financial system the private sector built isn’t even doing its job of distributing earnings fairly to the actual people who produce and consume the products. In fact, it’s prone to spectacular failures. So How can anyone argue that today’s system isn’t fundamentally unfair, that it’s people’s own fault when the wealth gap widens or class mobility is so low ?

        • dove says:

          I agree with Jonas. Mark was obviously blaming the working class people for the debt problem, while overlooking the fact that the asset bubble, real estate bubble etc. were inflated by the money changers (Central bankers) through fraudulent money printing to enrich the speculators, which in turn causing the working class to have to take on large amount of debt to just have a roof over their head. How hypocritical and self-righteous for someone to tell the struggling poor whose job were just outsourced to the third world slave labors: “Don’t buy crap you don’t need, eat less and eat good quality food, exercise your brain (learn something new) not only your biceps, get good paid job, stay out of debt and save your money.” I guess mark must be living in a bubble.

      • polecat says:

        “get a good paying job” …………..right, sure…….go ahead…pull the other one

        • Mark says:

          Exercise your brain (learn something, get some skills), and then get a good paying job, once you get that job stay out of debt and save your money.
          Next time read carefully, words are put in order with purpose.

    • Vespa P200E says:

      “So if economies need another stimulus, my dream would be that it goes toward funding science jobs and infrastructure projects. ”

      Wait didn’t we already do that with the “shovel ready” projects on QE I & II not to mention “revive” UAW via cash for clunkers? More importantly where would the fund come from?

      As for infra projects – well take a look at China. It didn’t work out for them other saddled with more government debts. As for science prject – I think we have way too much of worthless non value add sharing biz and SillyCON valley, and as another said look at NASA – talk about complete waste since man landed in moon.

      I think what US and rest of the world is facing is slow growth if any and Japanese playbook which portend decades of anemic growth and QE galore with nothing to show.

      • Jonas says:

        Wait – China didn’t work out? I took a few classes in college about Chinese history, where we read source documents about conditions and life there as recently as 30 years ago. I went to China last year in the fujian province, where I spent a week in sanming. It’s breath taking what they have accomplished, just awesome. Their recipe of tariffs and state support for Enterprises, so central planning, have worked wonders.

        China might not know how to keep growing from here on out, I mean their own plans are to switch to a consumer, service driven economy. Philosophically that’s a hollow goal. But everything up to now has been nothing if not a miracle. Now if we took just half of their zeal and devoted it to a grand National project we could achieve great things, with full employment and prospering middle classes just the icing on the cake.

    • chris Hauser says:

      for the moment, i have enough stuff, as do many others. and the rest of the world that doesn’t, doesn’t have much to buy it with.

      aggregate demand for the moment is low. is fact.

    • nhz says:

      as to the ‘compelling large National program’:

      We do have the Forever War (on terror), don’t we? Millions have died already in this war waged by the US and its masters, more and more countries are getting with the program blowing up innocent people all over the globe. And with the huge migrant streams and totalitarian controls this is causing almost everywhere things can only get worse. It’s a sure way to drain the last blood from the middle class in Europe and keep the people distracted from what is going on behind the scenes. Some day this turmoil will come to the US as well, but by then it will be too late for them to do something about it.

      I fully expect more QE and ‘helicopter money’ directly to the people, initially probably only to the debt serfs at the bottom who are already hugely profiting from the current policies (just like the parasites at the top) and will keep the current politicians in power, at the expense of the shrinking middle class. In my country you now need to have 1.5-2x the median income to have the same spending power as those on social security (or migrants), due to the huge subsidies for all these people at the bottom (e.g. rental and mortgage subsidies) and the punitive taxes for those who are not dependent on the government. When they are done, there will be no middle class left, only debt serfs and the 0.1%,

      Seems to me the plan of the elites is right on target.

  5. Chris says:

    To say that CB’s have painted themselves and the global economy into a corner is an understatement. We are in a circular pattern of little to no economic growth and resulting CB meddling with interest rates and money supply in an effort to goose the economy. Alas, the solution to this mess is even more distasteful than the malady. The problem is that our global economy is premises on 1st world consumption and 3rd world production. The US and Europe have eviscerated their industrial base for the sake of cheap labor and little regulations overseas. This is a wonderful medium term move as it improved corporate profits and benefited shareholders mightily. However, in the longer term, those jobs lost to free trade outsourcing never got replaced with ones that were as good if not better. Rather, starting in the 90’s, as the FED embarked on lower interest rates and, coupled with loose lending practices, a massive housing bubble manifested itself. These artificially inflated home prices were used as a piggy bank to fund consumption and create inordinate consumer debt. So, here we are: a diminished middle class that is being crushed with their own debt. Kinda’ hard to import and sell a bunch of material crap when there is nobody to buy it. The solution: a total reset based on a balanced economy of production and consumption. If you produce a surplus beyond what your people need then you export the excess. If you have a deficiency of what you need then you import to cover the difference. This necessitates a great degree of coordination of social welfare and regulations over business practices between nations as the playing field needs to be somewhat level. This sounds simple enough but getting from here to there will be a wrenching transformation. Nonetheless, without a balanced approach to economic production and consumption we will be locked into a cycle of boom and bust that will become increasingly untenable and ultimately doomed to collapse.

  6. rich says:

    QE did not work for 99% of the world’s people, but it worked extremely well for the top 1%. This, of course, will not change, because those who hold all the aces are not about to change the card game.

    1/19/15 OXFAM International:

    “The combined wealth of the richest 1 percent will overtake that of the other 99 percent of people next year (2016) unless the current trend of rising inequality is checked, Oxfam warned today ahead of the annual World Economic Forum meeting in Davos.”

    • nhz says:

      Maybe it didn’t work well for 95% of the world’s people, but it definitely worked well for a lot of people in the West who were heavily in debt and have e.g. seen their mortgage costs cut in half or even lower while rental costs (outside the subsidized rental market) have increased by 50-100% after 2008. Those who were financially irresponsible in the past have been hugely rewarded – not just the bankers and other parasites at the top, but also many parasites at the bottom.

      Government spending on all kinds of silly subsidies and pet projects in Europe has magically increased thanks to free money for politicians because of QE (my own country receives money from investors for borrowing from them, what’s not to love about that for a politician). It definitely isn’t just the 1% that is benefiting from this policy and that is why it will be almost impossible to change direction.

  7. ERG says:

    Why not just cut out ALL the middle-men and send every citizen money? No need to work. No need to save. No need to invent. Yes, I’m being sarcastic.

    Switching from one version of the Broken Window Fallacy to another will not do a damned thing! There is NO substitute for hard work, saving, and investment where the MARLETPLACE decides who wins and who loses. We’re still in the industrial revolution. we’d better be!Converting raw materials into finished products with human innovation playing a role along the way is the only way an economy thrives through a REAL connection to between buyers and sellers.


  8. Victoria says:


    In actual fact Natixis has published many pieces critical of QE over the past few years concentrating on its role in generating devastating income inequality so this is not a new development at all.

    Many thanks for your writing over the years Wolf. I am
    A religious reader of your blog.

    Kind regards,

  9. Jazzbo says:

    In the aftermath of the debt explosion that helped cause the financial crisis, emphasis clearly should have been on reducing excessive debt. But instead the response was free money and massive additional debt creation all designed to prevent a recession. The result: multiple bubbles, disappointing real growth and a highly uncertain future.

    Today even China, the economic miracle worker, sensing the waning of an era of debt fueled hyper growth, is seeking ways to prolong the faux prosperity. How? by introducing consumers to the buy now, pay later way of life. The response is disappointing but is no doubt consistent with the values of a world addicted, perhaps fatally, to instant gratification. Politicians including central bankers interested in survival dare not utter the word austerity.

    So Wolf: it is not at all “inexplicable” that central bankers have ignored your words of wisdom. I think you may have meant to say “inevitable.”

  10. Mary says:

    Like Victoria, I appreciate your sharp analysis and clear, direct writing. Thank you.

    As a sign of appreciation, I’m not blocking the often weirdly creepy ads Google sees fit to shoot at me along with Wolfstreet. Right now it’s ads asking if I know the secret signs of an impending heart attack–illustrated with closeup photos of what appears to be a decaying corpse. Okay, I’m old, but jeez!

    • Wolf Richter says:

      Mary, thanks for the kind words, and for not blocking the (creepy) ads!

      I wish they’d run attractive meaningful, informative ads that you would actually want to click on to find out more… the kind of great deal you’ve been looking for.

  11. Uncle Frank says:

    It’s a heroin-like addiction and they can’t stop…
    China’s growth hits quarter-century low, raising hopes of more stimulus

    China’s economy grew at its weakest pace in a quarter of a century last year, raising hopes Beijing would cushion the slowdown with more stimulus policies, which in turn prompted a rally on the country’s roller coaster share markets.

  12. Petunia says:

    One of the big macro trends no one is looking at yet is the big corporate home renters. They are merging, a sign that all is not well, as well as increasing rents in a declining income environment. When they buy a portfolio of homes they do not look at the underlying condition or fundamentals of the homes. They only look at the income stream and the potential upside. Both of these are deteriorating in my opinion.

    As a renter, I can confirm that the management of these operations is terrible. The bigger they are the worst it gets. I can already see rent control and bankruptcies in their future.

  13. d'Cynic says:

    “Why didn’t our central-bank geniuses think about this years ago?”
    Because of pervasive inbreeding that in nature leads to the decline and death of a species.
    Economics is an opinion, not a science.

    • Toddy says:

      That’s the most profound thing I’ve heard in a while. Indeed.

      If you get philosophical and metaphysical you could argue that science itself is only an opinion.

      • Jason says:

        Toddy I concur with the metaphysical part. Once you’ve experienced something that religion, science, and politics fail to explain you’ve entered the Twilight Zone. It’s terrifying and liberating simultaneously.

  14. Smitth says:

    …..and if everybody debase currency to boost exports and create a surplus?

    Why we need borders and limited immigration, then we can play the “go ahead accumulate dollars” game with impunity.

  15. Yoshua says:

    We live in the age of globalization today. I just wonder: What options did the Fed and the Government have after the financial crisis ? The Chinese government decided to stimulate the Chinese economy with money printing, credit expansion, infrastructure projects, capital investments and constructions… should the U.S in this global environment have decided to turn back to Capitalism, the Gold Standard and a purifying depression to do away with all excesses caused by money printing and credit expansion… while the Chinese economy was booming ?

    It seems that QE is the only game in town today… well… at least until China hits a brick wall.

  16. Jack Smith says:

    People don’t understand that raising and lowering interest rates by whatever means is supposed to be for short periods of time.

    Them being too high or too low for years have and continue to create economic, financial problems. Ultra low interest rates and worse negative interest rates have now been seen for what they are, destructive.

    Housing prices in many Canadian cities have gone up 300%, 400% making it so impossible to buy a first home. They are just prepaying all the interest upfront today instead of a chance to pay it off sooner as most Canadians used to.

  17. jo says:

    maybe if taxed assets over 5 million it would force an actual trickle down

    • chris Hauser says:

      and then there would be selling to pay said taxes. would be an absolute necessity in world of low returns.

  18. walter map says:

    “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.”

    Apparently by design. There does not appear to have been any intention to restore the real economy, but to hold down the real economy down to provide a continuing rationale for QE/ZIRP policies, for the exclusive purpose of bailing out the financial industry.

    Perhaps I’m arriving late at this understanding, but Mike Whitney provides an explanation of this to my satisfaction.

    The Chart That Explains Everything

  19. Don Sanderson says:

    The only trickle down Canadians will see is higher prices at the grocery store and higher taxes because of the Bank of Canada and the Federal government’s misguided low interest rate, crashing dollar, taxing policies.

  20. chris Hauser says:

    in 1998 i was speaking about work with a korean business owner who i was a contractor for. he was an evangelical christian, quiet,reserved, generally few words.

    i mentioned the asian financial crisis, korea specifically, and asked what he thought.

    “they really fucked up.” was his reply.

    i hope that is not coming.

    but i’m optimistic. i have to be.

  21. Kent says:

    If QE is the panacea of a country’s ills, then the Weimar Republic would have been the richest nation on Earth in the history of mankind. But it was not to be.

    The Weimar Republic’s hyperinflation was a classic example of extreme QEs. They were printing marks 24/7.

    The price of gold in Jan 1919 was 170 marks an oz. By Nov 1923 it had shot through the proverbial roof and then some to 87 trillion marks an oz. Hard to believe? Read:

    So why is the US dollar is still so strong today after 3 QEs?

    Answer: The Fed and its agent bullion banks have the wherewithal to manipulate the price of gold down by selling large amounts of paper gold, such as Gld, since the strength of the US dollar goes in opposite direction to the price of gold.

    But, as karma has it, the day of reckoning is not too far off, since a cheaper gold price is a veritable gift to India, China and Russia, which are big buyers of gold. Think what a coiled spring will do when it is released suddenly.

Comments are closed.