Kiwi Busted QE And Its Relation To The Reflation Story

In theory, it goes like this: QE or any sort of large-scale asset purchase (LSAP) undertaken by a central bank is needed during times of trouble in order to reduce interest rates in general. Buying bonds seems like it would lower yields, and lower yields mean more accommodative credit, therefore a boost to the real economy.

So simple, straightforward, and intuitive, who could possibly argue otherwise?

And the theory has been studied (to death). Ever since the Bank of Japan pioneered this quantitative method of monetary policy, there’s now two full decades of experience with it being employed (since 2008) in wide a variety of global jurisdictions. The cumulative evidence does point to the conclusion that this technique does appear to reduce interest rates.

Sort of. Here’s what, oh, the Reserve Bank of New Zealand (RBNZ) has to say about LSAP effectiveness:

When we buy assets, this increases their price and so reduces their yield. That means the interest rate, in this case on government bonds, fall. This has the effect of ‘lowering the tide’ on other interest rates in the economy, particularly longer-term interest rates of two years or more. It also reduces the cost of borrowing for households and businesses…

LSAP programmes have been conducted in the euro area, Japan, Sweden, the United Kingdom and United States.

The evidence shows LSAP proved effective in providing much needed support, lowering long-term interest rates and exchange rates, and underpinning economic growth and inflation.

Studies found the government bond purchases worth 10 percent of GDP have, on average, lowered 10-year government bond yields by around 50 basis points. [emphasis added]

It’s true; many academic studies from around the world focusing on different program types in different places have come to similar conclusions using all kinds of regression analysis. They find that QE programs do correlate with falling interest rates; maybe even “around 50 bps” (the “around” part means rounding up).

Even if we take them at their numbers, and presume correlation equals causation (because they’ll tell you, they do account for the difference when regressing variables), you should still end up wondering why they even bother with this stuff.

Purchase bonds equivalent to ten percent of GDP, and rates are at most half a percent lower?

Talk about underwhelming; not exactly the powerful printer, the massive “accommodation” and “easing” told about in every mainstream media article on the subject. In fact, you’re probably already putting those 50 bps into context of, say, the United States’ experience; the 10-year UST yield had been “around” 4% when Ben Bernanke’s Fed cranked up QE1 in December 2008 (down from around 5% as things really got started the year before) and are today less than 1.75% today (and that’s being talked about as some ginormous financial hurdle).

Of that, ~225 bps decline over the years, a lot less than 50 bps of it is QE (the Fed just reaching the 10% threshold recently, and that’s cumulative for all the years of it). And it’s really more like 325 bps since 2007, and top to bottom just about 450 bps. Barely much of it comes out in the most favorably set up mathematics to be arguably “caused” by the Fed’s LSAPs.

In short, the market itself has done far, far, far more where interest rates going lower have been concerned. That seems pretty important, don’t you think?

The official response – in public – is that, yes, rates have dropped on their own but QE made them go (a relatively tiny bit) lower than they otherwise might have. This is the monetary policy equivalent of “jobs saved”, a manufactured counterfactual attempting to salvage something more relatable (to the average person) than the even-more-made-up term premium argument.

In private, even authorities know this doesn’t really fly. Cue up Richard Fisher (of all people):

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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