QE Myths Run Deep

by Warren Mosler, Mosler Economics

QE (quantiative easing) in the US has again done what it’s always done – frightened investors and portfolio managers ‘out of the dollar’ and into the likes of gold and other commodities.

And because sufficient market participants believe it works to increase aggregate demand, it’s also boosted stocks and caused bonds to sell off, as markets discount a higher probability of higher growth, lower unemployment, and therefore fed rate hikes down the road.

But, of course, QE in fact does nothing for the economy apart from removing more interest income from the economy, particularly as the Fed adds relatively high yielding agency mortgages to its portfolio.

As ever, via the interest income channel, QE will eventually produce a ‘crop failure’ for the dollar.  Functionally it works to strengthen the dollar and weaken demand, reversing the initial knee jerk reactions described above.

But the QE myth runs deep, and in the past had taken a while for the initial responses to reverse, taking many months the first time, as fears ran as deep as headline news in China causing individuals to take action, and China itself reportedly letting its entire US T-bill run off.

But with each successive QE initiative, the initial ‘sugar high’ is likely to wear off sooner. How soon this time, I can’t say.

Global austerity continues to restrict global aggregate demand, particularly in Europe where funding continues to be conditional on tight fiscal. Yes, their deficits are probably high enough for stability –  if they would just leave them alone – but that’s about all.

And as the US continues towards the fiscal cliff the automatic spending cuts are already cutting corporate order books.

And oil prices are rising, and are now at the point cutting into aggregate demand in a meaningful way.

Yes, the US housing market is looking a tad better, and, if left alone, probably on a cyclical upturn.  And modest top line growth, high unemployment keeping wages in check, and low discounts rates remains good for stocks, and bad for people working for a living.

Too many cross currents today for me to make any bets –  maybe next week…

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About the Author

Warren Mosler is co-founder and Distinguished Research Associate ofThe Center for Full Employment And Price Stability at the University of Missouri in Kansas City. CFEPS has supported economic research projects and graduate students at UMKC, the London School of Economics, the New School in NYC, Harvard University, and the University of Newcastle, Australia. He is Associate Fellow, University of Newcastle, Australia.

Warren is the founder and principal AVM, L.P., a broker/dealer that provides advanced financial services to large institutional accounts. He is also founder and principal of Illinois Income Investors (III), specializing in fixed income investment strategies for 29 years. He is presently located in the U.S. Virgin Islands where he heads Valance Co, Inc., the corporation that owns the shares of III Offshore Advisors and III Advisors, the companies that manage AVM and III.

Warren has a degree in economics from the University of Connecticut. He has 38 years of experience in a variety of fixed income markets, including derivatives. He writes at his blog moslereconomics.com and widely in the press and blogosphere. Warren is considered to be the founder of Modern Monetary Theory (MMT). You can read a longer bio here.