Your Unofficial Europe QE Preview

The thing about R* is mostly that it doesn’t really make much sense when you stop and think about it; which you aren’t meant to do. It is a reaction to unanticipated reality, a world that has turned out very differently than it “should” have. Central bankers are our best and brightest, allegedly, they certainly feel that way about themselves, yet the evidence is clearly lacking.

When Ben Bernanke wrote for the Washington Post in November 2010 announcing somehow the need for a second QE despite the powerful and overwhelming success of the first, he didn’t say the goal was to maybe, arguably lower bond yield term premiums.

It was a recovery or nothing.

In other words, before we ever begin policymakers who are attempting to use R* as an excuse already admit there actually was no recovery. All R* means, to them, is that it isn’t our fault. QE didn’t fail, it couldn’t possibly have succeeded.

One of the reasons given is the proximity of interest rates to the perplexing zero lower bound; or, effective lower bound as it has been rebranded in order to make it sound more menacing. Short-term money rates cannot go below zero, therefore near to zero policymakers are handicapped in how much they can help the economy.

But that’s entirely the issue – how much can they help. Central bankers plead for how they require more altitude, a higher starting point for “accommodation” before ever getting to the unconventional policies like QE. It’s a weak argument; Ben Bernanke had 5.25% on fed funds in the summer of 2007, and he went all the way to zero (including one twelve-day stretch in January 2008 with a cumulative drop of 125 bps) without making a meaningful dent in the growing economic storm.

Are we supposed to accept that if Bernanke’s Fed had begun the crisis with a fed funds rate in the double digits only then would that have provided enough margin for that rate to fall and therefore would’ve made all the difference? That’s what these R* people are asking us to believe.

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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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