EC The Magic’s Gone

For the magic trick to work, it has to be credible. The audience has to be given something concrete upon which they will suspend their disbelief. Quantitative Easing was just such a trick, though only the public held onto any basis for success. You still hear it all the time, how QE was “money printing”. That was the trick.

It doesn’t work if there is the slightest doubt. We know as late as 2013 even policymakers had them, the Dallas Fed President’s hushed “monetary head fake”. That actually makes it sound better than it was, that officials were doing the faking rather than being in the group who fell for it.

No, QE didn’t work. Not in the slightest. Even as a technical matter it was a pure failure. Proponents say that it lowered interest rates at the very least, no matter what might’ve been the results further down the line. Again, nonsense. Everywhere QE was instituted bond rates had already fallen often quite substantially long before whichever central bank booked its first purchase.

In Germany, for example, the 10-year bund yield was near 3.60% in April 2011 and heading higher. By the time the ECB was forced into rate cuts later that year, it was already under 2.00% for the first time. When QE was begun about three and a half years later, the benchmark 10s were near zero without requiring a single transaction against any of the NCB’s accounts (Europe’s PSPP was carried out by National Central Banks).

In early 2019, now as QE has ended the yield for Germany’s 10s is practically zero once again. In trading today, it fell to just 18 bps, almost exactly where it was in April 2015. Mario Draghi says Europe was booming in 2017, yet Germany’s yield trajectory reflects a very, very different economic interpretation.

Notice how the further Europe’s economy falls behind its pre-crisis baseline, the lower interest rates tend to stay no matter what or how much “stimulus.” This is no magic trick, nor is it a coincidence.

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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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