A Monetary Low Point, Even By Recent Standards
Whether it has been the American version or that pioneered by the Bank of Japan, QE is first and foremost an experiment in psychological manipulation. All central banks derive most of their “authority” from moral suasion, that old textbook “axiom” of getting market participants to act in the manner in which you only threaten. QE is different in that it is a pure ploy – expanding the “monetary” base is as directly useless as the “reserves” that are the byproduct of the open market mechanisms.
The Federal Reserve itself, no less an authority on useless byproducts, admits that there is no relation (at all!!) between reserves and levels of bank credit. It helpfully provides all the academic literature, the currency of the modern economist, necessary to show it.
The working end of the program comes from the credibility of the threat that something, somewhere might happen. Most of that is in the form of inflation expectations, as in investors arranging their expectations regimes more toward the inflationary side since they don’t read central banks’ academic papers. It is almost condescending in its misdirection – getting investors and economic agents to think there will be inflation in the future because a central bank created that which it readily admits is nothing more than a number on a spreadsheet. That might explain why, in the US version, official inflation measures surged, as did commodity prices, in the second program, but not the third or fourth (fool me once…).
The effects on asset prices are a little less arcane, though equally spurious. A panic is essentially a shortage of currency, therefore the creation of “reserves” would appear to alleviate any potential for shortage. Yet, panics are not just phenomena of money stock, but moreso of flow. That is why the federal funds rate persisted below the Fed’s target in the last months of 2008 at the same exact time LIBOR (eurodollars) came close to escape velocity. But if market participants believe that “reserves” play a role in reducing or eliminating the possibility of serious market impairment? Self-fulfilling prophecy is the real engine of central banking.
There should be a far more wholistic approach to evaluating QE, and especially QE psychology. Beyond the condescension evident at its foundation, there is an obvious loss of common sense applicability. For example, the Bank of Japan last year proclaimed that a serious yen devaluation would be enough to jumpstart the economy. I suppose we could quibble about what specifically constitutes “serious”, but I think the nearly 30% move from October 2012 forward more than qualifies.
Maybe yen devaluation is just an illusion, a changing of equations that make it look like something is being accomplished, but nothing more than increasing meaningless numbers. But that is the ultimate problem here with QE and modern monetary economics, it is entirely unfalsifiable. You can never say it didn’t work with enough “evidence” to convince its cultish adherents; they will always reply that it just wasn’t the right size (meaning more; much, much more).
That is why this morning’s announcement of “expanding” Bank of Japan programs was greeted with such comical enthusiasm. Not only is the common sense evaluation pitifully obscured, the reaction was exactly as I described above of patronizing manipulation.
First, the liquidity tender program was not really an adjustment – at all. But it was treated as such because BoJ Governor Kuroda remarked, “We have strengthened the tires to fully use the large increase in horsepower that quantitative and qualitative easing has given to our engine.” What does that even mean? Were the tires bald and rotting before? If so, then why were the tires not given attention first before any engine tinkering and horsepower expansion? Can we extrapolate anything from the fact it appears Kuroda doesn’t understand comprehensive motor vehicle systems?
Such comedy notwithstanding, rather than belabor that tortured analogy let’s set aside any prior opinions about the tender program (whether it is actually an expansion, and whether it should have been adjusted before today). What it does is increase the availability of “low-interest money” to banks.
I hardly think that is a primary impediment to the Japanese panacea envisioned by QE architects. If there is anything Japanese banks need, more low-interest money is the exact bottom of the list. Demonstrating this maddening contradiction is a passage from a BusinessWeek article expounding on the Japanese beneficence and Kuroda’s new tires:
The yen fell and stocks surged as the moves underscored Governor Haruhiko Kuroda’s stated commitment to do whatever is necessary to drag the nation out of deflation. At the same time, Japanese companies are already sitting on record stockpiles of cash, signaling limits on the likely benefits from expanding the lending programs.
To sum up Kuroda’s “commitment to do whatever is necessary” would be to point out that he is engaging in an activity that is not needed by either Japanese banks or companies.
In the end, this is really simple. The Bank of Japan wants investors and economic agents to believe that it is “doing something” that has the power to alter the country’s economic and financial course. That has never been the case, and it certainly is not now with a measure of “stimulus” in a manner already fully saturated with prior “stimulus.” And it doesn’t take any monetary expertise or specialized training to see this. Simple common sense will do. There is no Greenspan put, only an irrational fear of the Greenspan put. If the Federal Reserve or the Bank of Japan had any real power, we wouldn’t need to argue about whether there is a real recovery or not.
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