EC QT Is Not The Opposite Of QE

There are around $8 trillion of bonds today that continue to offer a negative yield. The central bank of Japan and many countries in Europe (not just EMU, but also Switzerland, Sweden, and Demark) have negative deposit rates. If anything else had a negative return like this, economists would quickly identify incongruence between supply and demand. 

Modern governments (representative or otherwise) are reluctant to allow the economy to fully clear (what Andrew Mellon cried during the Great Depression" Liquidate. Liquidate. Liquidate"). Capital is not sufficiently destroyed at the end of the business cycle, which has gotten longer and flatter. Modern military conflicts do not destroy enough capital. The commanding heights of the 21st-century economy are not nearly as capital intensive as the 20th-century economy. Consider the FAANGs compared with US Steel and the Generals (Motors and Electric) or Sears and Amazon.

We live in a Midas Moment. The gods of yore cursed King Midas by giving him what he wanted: The golden touch. Whatever he touched turned to gold. It was fine when it was a tree, but it was disastrous when he hugged his daughter or tried drinking wine. So, too in our day. We are cursed with abundance and the surfeit of capital, which is difficult to recognize given the common ideological lens and the gross disparity of its distribution.

The QE/QT hypothesis cannot explain interest rate movements during the operations or after the purchases have ceased. US rates often fell on the announcement of QE and rose during the actual operation. An alternative hypothesis that capital is like other factors of production and can be in surplus suggests interest rates may remain low for a protracted period. It recognizes that monetary policy is not simply a scientific expression of the transformation of quantities, but it is a signaling device of intentions and desires. Like the marginal reserve system itself, it is ultimately about confidence, and in this regard is more like transubstantiation than building an airplane.

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Read more by Marc on his site Marc to Market.

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Gary Anderson 1 year ago Contributor's comment

I think it is more than weak growth and low inflation. Add to those the use of bonds as collateral like never before, and hoarding by Europe, and we see that the new normal means low bond yields and hoarding of bonds. It does not matter, QE or QT, there has been a relentless decline in bond yields over time since 1985. Bonds are the new gold. It will be hoarded and they will not act like people think they should act.