Your Unofficial Europe QE Preview

What QE accomplished was the opposite of what was intended – it established as an empirical matter how what was suspected in 2008 about how there was no money in monetary policy is actually the way things are. The banking system has reacted accordingly ever since. There’s the real R* right there.

No matter what they come out within Europe tomorrow, or the FOMC in the coming days, it is almost certain to make very little if any effective difference in the increasingly dour long-run trajectory. The problem in the economy isn’t one that any central bank can fix. The issue is their lacking toolkit, not the primitive and outdated tools inside of it.

It’s almost what Christine Lagarde meant last week when she said: “I am not a fairy” and then begged for fiscal spending to kick in before it becomes too late in Europe. Only in her formulation, the one which was just embarrassingly run over in Argentina, more empirical proof, central banks are paralyzed by the lack of altitude; by R*, that a low R* necessitates ever more QE because of no room for rate cuts.

This is backward. The lack of success with QE necessitated policymakers invent R*. The bond market simply understands this huge distinction. 

The reality is this: they’d have all the space in the world for simple rate cuts if any of this actually worked. Had QE anywhere been legitimately effective there would’ve been a real, nasty bond rout worthy of epic celebration; rates much higher and normal long before today.

Instead, policymakers are left to try to make the argument that monetary policy really does work, it just didn’t. If only the consequences weren’t so monumental, we could just laugh at the absurdity of it all. 

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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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