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The Legends of Quantitative Easing

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Shalom Patrick Hamou
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The second assumption of Quantitative Easing is that by lowering long-term yields on Treasuries you are going to lower the yields on Corporate Loans and provide more capital to these corporations.

As I explained Quantitative Easing is bringing the Treasuries yield curve below what would be its fair value with the hope of providing businesses with funds that are below 0% once discounted for interest rate risk. For example the fair rate for 10 years Treasuries would be 3.50% and the fair yield of 30 years treasuries would be around 4.60%. With the present yields on long term treasuries it is akin to set, secretly and unobserved the risk free rate at -1% thus subsidizing the borrowers with the Fed's money.


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The Present Yield Curve (Green) and the Normal Yield Curve (Orange)


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The Present Yield Curve (Orange) and the Shadow Yield Curve Yield Curve (Green) as Deduced from the Long-Term Yields Engineered by the Fed.

The idea is to jump start the economy and hopefully get it back to a normal regime. That can not be done:

The first question is what are the yields that would be supply to the pre-crisis economic development? And secondly and more importantly how can you reverse what is called the Greenspan Conundrum or Bernanke Saving's Glut and return to an adequate long-term yield in order to be able to let the market adjust itself?. Our research tells us that it was due to the growth of income/wealth disparity and this economy does not know how to reverse that secular trend. Worse the recession has increased the speed of growth of that income/wealth disparity.

So the long-term yield that would be needed to return to the pre-crisis level of economic growth and devloppment can be very low.

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve's last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.

That would mean that, according to the Fed the ideal rate on the 30 Years US Treasury Bond would be... -0.40%!!!! which is impossible to reach given the zero lower limits on interest rates!

There is no theoretical limit above 0% to which the Federal Reserve could bring those yields: the Fed has no theoretical limits to the size of its balance sheet. Remember it is the Fed so it is emitting the money and it can emit as much as it pleases.

The problem is that if it can bring down the Treasuries yield curve the action on private loans and investments is less direct. For the present moment it works relatively well for corporations which can emit bonds, even those with a junk rating, But that action is obviously inefficient for the small businesses for which the marginal return on investment is going down and the default risk premium is shooting up.

Efficiency of Doctor Bernanke Fantasy Math So Far:

The only measure of the efficiency of the monetary policy, according to the monetarists, is the M3 component of the money supply. The Fed conveniently decided in March 2006 as they knew that the Liquidity Trap was the inevitable to stop publishing that critical piece of data. However several think tank do compute it following their own formula. One of them is John Williams Shadow Government Statistics.


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we see that in order to return to the pre crisis level of economic developpment we should be at +18 unless of course the money has by some magical twist acquired a super sonic velocity which I would strongly dispute. Some of you might take comfort from the slight improvement of the last few month, which nonetheless still exhibit a year on year decrease. The reason is simple: the July August 2008 M3 money growth had just started to decrease so it does not means that M3 is getting better it just started from a lower basis.

According to monetarist theory it means that the economy is still in a deep recession and that governments statistics that tend to exhibit a mild growth are lies. It is well known that promises engage only the one that receives it.

Although the NBER who tells several month after the fact when the US enter or exit a recession said that this one ended in June 2009!! His Chairman In a Bloomberg video,
Harvard University Professor Martin Feldstein, who sits on the Business Cycle Dating Committee of the National Bureau of Economic Research says, as an oratory precaution at the Jackson Hole retreat that "there is not much the Fed can do"

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Shalom Patrick Hamou Social Media Pages: Facebook page url on login Profile not filled in       Twitter page url on login Profile not filled in       Linkedin page url on login Profile not filled in       Instagram page url on login Profile not filled in

I have an engineer diploma from Ecole Centrale de Lyon (France) and a MBA from Boston University. Since 1986 till 1994 I have worked as a broker dealer on the French Domestic Fixed interest market. Since the spring of 1994 I have worked on the (more...)
 
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