So long QE. Was mighty fine knowing you. Until next time (which won’t be long…)!

2 mins. to read

Yesterday was a remarkable day in the monetary history of the United States. The Federal Reserve, through its 993rd open market operation since 25th August 2005, effectively ended its quantitative easing programme (version 3), and which expanded its balance sheet from under $1 trillion to more than $4 trillion in the short time span of just 5 years.

Such an episode is remarkable in that its dimensions are without parallel in history – at least, that is, for the time being…

As for QE’s results, the advocates say that it is probably too early to comment, at least if we consider any real economic variables as the final target for the programme. QE’s detractors however believe that the unbridled money printing program has been a complete disaster, simply enriching the top 1% of the globe’s populace at the expense of everyone else. Oh, and bailing out those pesky bankers too to make matters worse!

However, in terms of financial markets, we can certainly say that the 300% rise in US equities and the historic low yields on treasuries are more than enough evidence for the success of the programme. Hmmm…

To us, a glaring question remains for investors. And that is, if the past tells us anything about the future, then the end of QE means that turbulence is in store for financial markets.

One of the main reasons why we are at version 3 of QE is because the Fed had to restart its past programmes due to the debt overload (that still has not been solved) and the lurch lower on prior occasions for financial markets at the end of QE1 and QE2. While some would argue that this was because the real economy was still weak, others would say that a large part of demand for equities simply vanishes with the end of a QE programme, and therefore prices have to catch up with the declining demand.

The end of QE would be very good news for investment in general if it was a temporary programme tailored towards helping the government with an expansionary fiscal policy to smooth the business cycle and help revive the economy with a short-term boost. But, as Yellen, Greenspan, and Bernanke know (or ought to know), there is no connection between monetary policy and the real economy in the longer term, other than through the general price level. While it may be difficult to define the “short term” and “long term” with precision, 5 years is certainly not inside any broader short term definition and thus, it is clearly time to put an end to a policy that is not aimed at anything other than to create asset price inflation.

For now, investors still have the Bank of Japan’s bold actions and the covered bond purchases from the ECB to entertain them in the period that will elapse between the end of QE3 and the almost inevitable start of a new QE programme (as soon as the FED sees the equity market going down by 5-10%). After all, monetary policy is no longer employed to control inflation but rather to assure that the rich stay that way while the middle class disappears. Even Janet Yellen has already admitted that rising inequality is now a concern. You don’t say! Perhaps when the Fed restarts its QE programme, it can also turn on the printing presses for more food stamps…

Filipe R Costa


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