Yes, Curves Have Been Forced To Speak Japanese

Economists’ R*, or R-star, is a fiction. It’s one that they came up with after-the-fact to try to explain why their policies didn’t actually work the way policymakers had initially promised. While in public, officials still speak glowingly of each QE, one after another after another, in private they know it deserves absolutely no praise.

Study after study has shown basically the same thing (this pulled from a 2012 IMF research paper):

Research on the effectiveness of earlier quantitative easing has yielded mixed results, with most pointing to limited effects on economic activity. While most papers found evidence that quantitative easing helped reduce yields, its effect on economic activity and inflation was found to be small. The reasons cited included a dysfunctional banking sector, which impaired the credit channel… [emphasis added]

Helped reduce yields. That’s a very curious way to frame (in order to arrive at “mixed results”) what is its only detectable, possible contribution. In fact, even this much is debatable; ask yourself, what is it that QE is always “helping” lower rates? As I put it last week “celebrating” the undeserving theory’s unholy twentieth anniversary:

In other words, falling rates correlate with QE’s if only because rates are already falling by the time central banks get around to conducting these programs. And if yields are already dropping as things get bad enough to convince central bankers to unleash their psychology, what good are even lower interest rates than the low rates bad things have already brought up?

This is where R* supposedly comes into it. The modern central banker’s only job is to figure out a way to influence behavior; but you can’t put “behavior” into an econometric model. Thus, an imputed “natural rate” seems a plausible enough stand-in to the detached statistician with no real feel for actual economics (small “e”). To achieve success, in the regression analysis, the Fed or ECB need only drive rates below computed R* – even if the market itself is already pushing them lower. 

If it seems a bit too wishy washy if not completely contradictory for what monetary policy projects for itself, that’s because it is complete nonsense. Here’s what I wrote just before the onset of Inflation Hysteria #1, back in March 2017 right at the beginning of what would shortly become that whole globally synchronized growth debacle:

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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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