Your Unofficial Europe QE Preview

Policymakers need to have enough simple tools in their toolkits for the simple public. They now routinely make the argument that one possible reason QE maybe, might not have been as effective is because simpletons like you and me didn’t really understand it enough.

The debate now comes down to a single question; either they don’t have enough juice, or just maybe they have none. This is no trivial distinction, and it is being actively carried out in the bond market particularly at the long end – which has mainstream observers typically perplexed.

The bond market thinks central banks are out of juice and inflation will stay below target for, well, ever. The longest-dated Treasurys are priced for inflation to average 1.6% for the next 30 years, and German bonds for just 1.3% inflation.

Bond buyers know that QE is coming especially and Europe, and that in all likelihood because of this predicament central bankers will have to get creative with it, like Japan, so how could they possibly not be pricing long-run success? What the bond market really thinks is beyond the ridiculous assumptions about R*. The Fed and ECB aren’t out of juice, they simply don’t have any at all. That’s just what long-term bond yields and inflation expectations are saying. It doesn’t matter where the Fed starts with Fed funds or the ECB with its MRO-Deposit Rate corridor, there’s no money in policy even when getting to bank reserves.

And that makes all the difference. If the world runs into more monetary trouble, there’s a very broad, deep consensus about how there is nothing a central bank and its moneyless monetary policy can do to get us out. That’s what prices are really saying.

The problem for the public is merely that this deeply offends every mainstream sensibility; disbelief and bias persisting despite a mountain of unimpeachable evidence. 

The bond market had at first given central bankers the benefit of the doubt, the opportunity to show themselves worthy of the myths and legends, but only up until the 2011 crisis (Euro$ #2). QE was new and many were willing to give it a chance, and then it proved totally ineffective (if you have to do it more than once…) as policymakers were horrified to find no matter how many bank reserves had been created the liquidity crisis spread globally anyway.

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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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