Dear ECB What effect is your Quantitative Easing actually having?

One of the features of the Quantitative Easing (QE) era is that things have not turned out as the  economic theories predicted. The basic issue of it being a form of “printing money” is true in terms of liquidity created –  the creation is electronic rather than in terms of physical notes and coins – but the effects have not fully bourne that out as we move through the monetary system. For example there was a stage when the Bank of England found that whilst it was operating its £375 billion of QE the banks redeposited some £260 billion of it back at the Bank of England. The European Central Bank is finding that its push is being neutered to  a fair extent as well. In the latest Press Conference Mario Draghi told us this although of course he did not put it quite like that. Matters start well from his point of view.

the narrow monetary aggregate M1 growing at an annual rate of 10.5% in April.

You could also say that he likes the broad money pick-up

The annual growth rate of M3 increased to 5.3% in April 2015, up from 4.6% in March.

But loan growth to households is disappointing.

The annual growth rate of loans to households (adjusted for loan sales and securitisation) increased further to 1.3% in April 2015, after 1.1% in March.

If you think that this is not much for all the effort well wait for the lending to business figures.

The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) was -0.1% in April, after -0.2% in March, continuing its gradual recovery from a trough of -3.2% in February 2014.

Supporters of QE would argue that this is early in the piece as it only started in January. I do hope therefore that they are not the same people claiming it has caused the recent uptick in economic growth! However if we look at other QE efforts the position has been similar and of course the ECB has been bashing away with policies to improve loans to businesses for years and look at the numbers. As we discuss often on here something has changed in the credit crunch era with regards to business borrowing as for example I looked at on the 2nd of this month the UK has a very similar problem.

Actually you do not have to take my word for it as I note this from Mario Draghi.


So yes QE starts as a form of money printing but by the time it has found its way through the monetary system much of the push disappears.

What about financial markets?


It was not so long ago (April) that the ten-year yield of Germany plunged to 0.07% in a frenzy of bond buying. We later had the “flash-crash” and on May 12th I pointed out that it was now ten times larger at 0.7%. Well this morning it reached 1% and then went as high as 1.04%. Quite a change is it not? Also it is a lot higher than when QE began in the Euro area. From Ransquawk.

German 10y yield now = 1.01% German 10y yield on day announced QE = 0.45%

This poses quite a litany of questions. For example the ECB has purchased some 159.6 billion Euros of sovereign bonds up to now and as of the end of May some 34.4 billion Euros of these were German bonds. We know from the Bank of England that such purchases are supposed to raise prices and lower yields.

Through lower borrowing costs and higher wealth, asset prices then raise demand, which acts to push up the consumer price level.

Of course in this contradictory world we have already seen the head of Austria’s central bank Ewald Nowotny tell us exactly the reverse. From Monday’s article.

‘s Nowotny says rising 10yr yields are a ‘success story’ (h/t )

I will leave Ewald to explain to business borrowers in Austria why paying more for loans will improve business borrowing and indeed to owners of the 100 year Austrian bond why that fact that the price has fallen more than 60 points is a success!

What was that about never believing anything until it is officially denied! Still if what happened in Japan at a similar period continues to work Ewald will have plenty more “success” to be a cheerleader of.

So we see that the expectation of QE and then the announcement of it boosted bond prices and lowered yields but now we are wondering if Maxine Nightingale was right all along.

Ooo and it’s alright and it’s comin’ ‘long
We got to get right back to where we started from

To be more specific we are back to late September 2014 at these levels.

Safe Haven Alert

This is a subject where the credit crunch has changed things. Government bonds used to be considered as safe investments. There always was an issue with this as for example in the UK inflation often punished holders of UK Gilts. But can a 10 year German bond yielding 0.07% be considered “safe”? Certainly not in my view. Even shorter-dated bonds have their issues now especially when they offer a guaranteed loss if held to maturity via negative yields.

Or putting it another way central bank interference via QE has made bond markets very volatile which means that they are failing in their role of promoting market stability.

The Euro’s exchange rate

This was something which was performing according to theory as we saw expectations and then the realisation of QE combined with a falling value for the Euro. In the middle of March it fell below 1.05 to the US Dollar which was very different to the nearly 1.37 of last July. But now it is at 1.13. The Euro has also pushed the UK Pound £ back below 1.36.

The trade-weighted index fell to 89.5 in mid-April but has now risen to 93.6. So we see that the reality of QE not only is now seeing higher yields but also a rising currency or exactly the reverse of the theory.

One bit of economic theory that does seem to be working is that higher yields in a country or area support the exchange-rate. Or to put it another way in more practical terms the carry trade looks like it is back. Of course that has led to a double-whammy for the ECB as it decides whether to tell us up is the new down or not.

Equity Markets

One of the supposed certainties of QE is that equity markets rise. The liquidity provided may only weakly reach households and may not reach businesses at all but the 0.1% seem able to get it to boost their equity portfolios! The Eurofirst 300 equity index has surged since the real QE rumours began last December but even it turned lower in late May.


This subject is much more complex than it first appears as we note that money does appear as liquidity is produced but then much of the growth “disappears” as we look at wider measures. Much seems to go into asset prices although here currently we are seeing something of a set back especially in bond markets. The clearest move has been for a lower Euro exchange-rate although even it has changed direction recently. It is like looking at a battlefield where someone has laid a smokescreen!

This has not stopped some from already declaring ECB QE to be a success as economic growth pushed ahead in the first part of 2015. That ignores the impact of the falling oil price which in my opinion was a much stronger force. Actually the World Economic Forum seems not to have noticed that the oil price has bounced back to some extent, perhaps the author does not drive.

Other indicators, however, paint a different picture. Notably, price growth turned positive last month, suggesting that the threat of deflation has been eliminated.

Who would have thought that many of the effects of QE would be so uncertain so far down the road?

Quango Mania

It is the UK Mansion House speech tonight and already it would appear we have this to consider.

Committee of the Commissioners for the Reduction of the National Debt

I am trying to decide whether that is more reminiscent of the South Sea Bubble or the writings of George Orwell!

Apparently we will have a budget surplus in “normal times”. So not any time soon and maybe never?




13 thoughts on “Dear ECB What effect is your Quantitative Easing actually having?

  1. Hi Shaun

    Some of the paradoxes, and especially volatility, you mention are addressed here:

    Many believe that QE is initially at least deflationary because ZIRP keeps zombie businesses alive and therefore there is no Schumpeterian “creative destruction” which results in overcapacity leading to increased price competition (deflation). However, sooner or later the position becomes unsustainable and there is a bust which still leaves the QE liquidity there (unless presumably mopped up by the CBs – most unlikely I think) but with a reduced supply because businesses have finally failed; this leads to inflation. Fairly neat and not implausible but how accurate an explanation – who knows?

    Re Osborne I believe he is working very hard to achieve the accolade of the most incompetent and thick Chancellor in UK history. My interim assessment is A+ in this regard.

  2. Much of the QE money does indeed seem to have gone into asset prices so not only equities but also property, fine art etc the prices of which have soared worlwide. So virtually none of it would appear to have helped businesses nor the average person who is mostly worse off because of their housing costs and poor returns on savings. However the 0.1% have done very nicely because they hold most of the assets. It would appear that bonds are not the safe haven they once were which again has most effect on the masses as their pensions are invested there.

    • Hi Jan

      There is a hint of the art world to be found in this story which has become something of an issue in Canada and the Carney is Bank of England Governor Mark Carney.

      “In email correspondence between Solomon and art collector Bruce Bailey, Solomon uses code words to disguise the identity of each man: Carney is “the Guv” and Balsillie is “Anka,” the latter an apparent reference to a similarity in looks with singer Paul Anka.

      In one email exchange from 2014 — after Carney made a purchase — Solomon tells his art collector partner that Carney’s international contacts will be very important as they move forward in their attempts to sell more paintings.”

      Apparently Mark Carney was keen to keep his art purchase secret.

      “Solomon, in an email to Bailey, noted Carney has a “super sensitive” position in England and Carney had advised him that he had to be very “discreet” about this purchase. Solomon provided Bailey with Carney’s home address for shipping and Bailey handled those arrangements.

      In another email, in December 2014 after the Carney deal, Solomon reiterated that Carney could help them access the “highest power network in the world.”

      Just to be clear the so far Governor Carney is a bystander in the CBC issue but it kind of makes the art point….

      The other issue with what has happened with bonds is the effect it has had on the insurance industry and annuities.

  3. Hi Shaun,

    The only effect we have seen to date that can be attributed to QE is asset price inflation, everything else may have happened anyway where money getting into the real parts of the economy has been so small. But bankers, like Hollywood and the MSM never let the facts get in the way of a good story, especially when it puts them in a good light! If Labour’s UK tripartite bank regulation regime had been as successful at bank regulation and setting the ‘right’ interest rate at 10% of the level of their spin and them telling us how good they were, our 6 year recession/depression and the banking crisis would never have happened!

    As for Japan they are trying to inflate away an otherwise inevitable Sovereign default, to me it is not if but when.

    I’m glad I’m not holding any ‘safe’ Greek or Ukrainian bonds right now. I’ve not forgotten that a hangover from the 1930’s depression and WWII was 30% of countries defaulting on their debts in the 1950’s. Any country that owes over 100% of GDP are on the fringes of that territory and that does not currently leave many Western European countries in a good place wrt debt, especially with unfunded pensions, pay-as-you-go health provision and a demographic timebomb.

    Lets hope that battered old kicked can, still has plenty of life left in it.

    • Hi Rods

      Well the new plan in the UK seems to involve selling RBS shares at a loss of between £1.40 and £1.50 each depending on how you calculate it. Apparently this sends a signal that it is on “the road to recovery” (Chancellor Osborne at Mansion House tonight). This of course begs the question of why the taxpayer does not wait for the recovery and make a profit!

      It does however help the Chancellor hit his target for the UK national debt to GDP ratio. In a way that sums it all up any ruse which improves the numbers is fine and ignore reality. i do hope that the can does not have a boomerang function……

  4. QE saved the Banks from 1930’s style depression and has stuffed the rest of us to a 1870’s 30 odd year recession

    well it seems we can “impute ” our way out of admitting to that

    who would have thought that the rich and powerful would only look after themselves ?

    that Kan must be made out of titanium !

    Shaun , its obvious the next steps will be to milk more money from the middle classes and pay it to the rich , afterall the poor have nothing , thats what being poor is

    If resources are getting tight then its natural that the top 0.1% will take as much as they can – and guess what we see ……


    • Hi Forbin

      I have been looking at some of the official house price inflation data (partly following the discussion that Andrew Baldwin and I had in Fridays comments section) and so the imputed issue in this case rent in GDP is on my mind!

      One way of this may be the RBS share sale tonight after all if prospects are as good as Chancellor Osborne has said at Mansion House tonight ,why sell?

      Oh and you have a kindred spirit next door to me. As the smoke alarm was going I went to check and she replied. Sorry its the popcorn and I do not know how to turn the alarm off…….

  5. If I were Draghi I would be doing my utmost to talk the Euro down as it is the one thing that has made a difference and quite quickly at that. I am sure that Merv could give him some lessons as he appeared to be a past master at it.

    The Euro rising against the pound is going to hit the UK as it is happening just as millions of folk are paying for holidays and will be buying Euros to take with them. It will also cost us quite a bit more on our EZ imports as most will be priced in Euros and, as has been frequently mentioned, we import more from the Eurozone than we export to it. I wonder if anyone calculates the cost to the UK of each 1% rise in the Euro against Sterling? In theory it should boost our exports to the EZ but the effect has bee n pretty weak so far.

    • Hi Pavlaki

      Mario Draghi has been very quiet of late. Perhaps he is busy with Greece as the ECB had to increase its Emergency Liquidity Assistance by 2.3 billion Euros yesterday.

      As to the UK Pound £ versus the Euro whilst it has recently been pushed back a bit the main move was up and holidaymakers will welcome it at 1.37 much better than last summer. As to the marginal propensity to export such figures seem to be low these days especially for places like Switzerland.

  6. Shaun, you have been disingenuous in this piece:

    “But loan growth to households is disappointing.

    The annual growth rate of loans to households (adjusted for loan sales and securitisation) increased further to 1.3% in April 2015, after 1.1% in March.” That’s almost a 20% increase which is perfectly respectable and you know it.

    Regards non – financial corporations still deleveraging this ties in with my argument made a while ago about the secular trend of falling demand in advanced economies and businesses therefore being loathe to invest further.

    “Of course in this contradictory world we have already seen the head of Austria’s central bank Ewald Nowotny tell us exactly the reverse. From Monday’s article.

    “‘s Nowotny says rising 10yr yields are a ‘success story’ (h/t @Schuldensuehner)”

    As an ex bond trader I’m sure you know full well that rising yields are good news for the economy as they demonstrate higher inflation expectations along with a growing economy encouraging investors into equities in expectation of greater returns over bonds. With yields as low as they are I doubt any business will be unduly perturbed at paying 3% or 4% on a bond they issue.

    You may remember I forecast growing GDP in the EZ for the 2nd half of 2015 last November which of course would mean equity market rises. The current fall, as again, I am sure you are aware but have not bothered to point out is related to the Greece debacle.

    The growth will gather pace through this year due to, as you say oil and general commodity price falls but also because of narrow money growth. Recent indicators are making me wonder about 2016.

    I am disappointed by today’s post you’re much better than this Shaun.

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