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June 11, 2021

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The “money printing” fiction focuses too narrowly on only one part of it: the creation of bank reserves. The Fed or whatever central bank buys an asset and issues reserves to the seller that. The Real Money Maker. The Real Money Maker was created to inspire, promote and speak success to those who seek it. Please feel free to share your words of wisdom.

What’s the harm? Even if it doesn’t work well or much at all, this QE stuff can’t hurt. Sure, it’s a lot of noise but that’s really the point; expectations-centered policy is all about managing expectations, so if the general public is treated to a spectacular show, the bigger the better, eagerly enthused by the entertainment all is expected to be well.

Or at least not as bad as otherwise (jobs saved, in other words).

For those who continue to see all this as real money printing, an historical dilemma allegedly alike only Weimar Germany, therefore what a week to be highlighting these issues. Inflation numbers in China (PPI) were reported earlier to have been the highest in almost thirteen years while the US CPI – as you no doubt heard yesterday – was like something out of the 1980’s; near literally.

These accelerating rates of change are exactly what critics have been warning about since the first American QE (less was made of Japan’s given its “deflationary mindset” had been entrenched for more than a decade beforehand). Reckless money printing would always, always lead to out-of-control monetary inflation and worse. Given not just May’s CPI but also April’s, this makes two straight months of rates unseen in America since George Bush – the father.

Yet, over these past two months really approaching three, this view has been more strenuously rejected in the one place which otherwise would be overeager to sniff out the slightest probability for it. Yes, bonds. The very same instruments which stand to be destroyed should this inflationary fiction ever transform into such horrific reality.

The first tiny credible thread to it would unleash a bond sell-off putting 1994’s “massacre” to full shame.

On the contrary, going back to mid-March in US Treasuries, and earlier, February 25, around much of the rest of the world’s sovereign debt markets, inflation has been priced less likely by the day – a consecutive pair of the biggest CPI’s in decades, rates fall as if they didn’t happen at all.

Why?

To some, maybe many, the answer must be QE. Central banks like the Federal Reserve are, right now, buying up tons of these bonds, billions, tens of billions in purchases including US Treasuries undoubtedly keeping rates from rising in that ’94 kind of way. It sounds perfectly plausible; there remains no serious evidence whatsoever for it.

As I’ve written too many times before, the theory’s nice yet useless in practice. Bond yields do and have behaved independently of strictly the bond purchasing aspect of any LSAP (large scale asset purchases, of which QE is the major type). Take US QE1, for example, when LT UST yields immediately rose upon its very announcement in December 2008. They didn’t actually come back down again until the middle of 2010 when it started to become clear “something” was still very wrong in the (money) world (a fact more thoroughly established in 2011 when, following after the end of the second QE, yields plummeted after it was over).

Central bank literature agrees; to a point. What most studies say is that they can’t find any tangible impact on interest rates, maybe a dozen basis points perhaps half a percent (if the LSAP is absolutely enormous). These results actually speak for themselves in that numerous QE experiments have yielded such scant yield influence despite several really big ones.

On the other hand, now more than twenty years after Japan’s first QE, and more than a dozen since the US began experimenting with same, it’s finally beginning to sink in that there really could have been a net negativeimpact from this money-less monetary puppet show.

Inflation, in other words. Presuming that to be the opposite of deflation (it isn’t, but that’s another debate), officials worldwide have let slip the “money printing” - and then stood by helpless as infants as in each and every case it led to only more disinflation as well as, too many times, outright deflation.

Maybe it has been just too terrible to ponder, thus keeping any such rational thoughts from reaching the public sector hivemind. Perhaps this lack of inflation could be partly, perhaps greatly, due to QE itself.

The introduction of quantitative easing corresponds to serious already existing problems in whichever monetary system (though, in truth, there’s really just the one which matters). So, it’s not as if QE is foisted upon an otherwise healthy set of circumstances hastening some previously unwitnessed decay. Got that much going for it.

You can understand the somewhat cavalier attitude resulting; it’s already pretty bad to begin with, so, really, why not give a full go? What does anyone have to lose, it can’t get any worse, can it?

Well, yes, it actually can. There are several ways but the most direct harm comes from the other side of this kind of transaction. The “money printing” fiction focuses too narrowly on only one part of it: the creation of bank reserves. The Fed or whatever central bank buys an asset and issues reserves to the seller that didn’t exist prior. Money printed, QED.

No. The reserves may not have existed before but the asset bought up sure did. In practice, QE or any LSAP exchanges one asset for another from the bank’s perspective which is the only one which truly matters. More reserves, less bonds. It may sound harmless enough until you truly realize how vital these assets are to the monetary system especially its global, offshore vastness beyond the small subset of primary dealers performing the actual debt swapping with the central bank.

The reason I’ve written about this collateral business for such a long time (dead horse, and all that) is because it has taken these many years for all this to finally and truly sink in – in an exceedingly small though no longer zero number of places. Over the past couple years, in particular, a few central banks including the Fed have “allowed” staff members to piece together and publish their findings – which are exactly those we’ve been saying for all those (deflationary) eons in between.

Just last month, Sweden’s central bank became merely the latest to do so. What’s interesting about this particular study, Sveriges Riksbank Working Paper Series #402, published in May 2021, is that the authors focused on an almost perfectly segregated case study while being able to analyze heaps, mountains of extremely granular data to raise the robustness of their conclusions that much more.

To begin with, Riksbank purchased only government bonds allowing researches to isolate essentially a control group, comparing effects in the government market with any in the unspoiled wider private debt marketplace.

What they found isn’t actually surprising; again, we’ve seen – and I’ve written constantly – about it for years on end. There’s no need for a spoiler alert: QE strips collateral, forcing bank dealers to adjust in ways that unilaterally propose a reaction to serious harm to systemic monetary condition and operation.

In the academic literature, this has been called the sca