The problems faced by the QE era make me wonder if QT is a mirage

If we were to step back in time to when the new QE era began around a decade ago we would not find any central bankers expecting us to be where we are now. In a way that is summarised by the fact that the original QE pamphlet of the Bank of England from the Charlie Bean tour of the summer of 2009 has a not found at this address description on the website these days. Or if we look back this speech from policymaker David Miles finishes like this.

Concluding, David Miles says that quantitative easing will assist spending but also notes it is hard to decide
what the “.appropriate scale of purchases is when the power of the mechanisms at work are difficult to
gauge.” He also notes that the timing and means of reversing this monetary easing will “.depend on the
economic outlook, which in turn depends on conditions in financial markets in general and with banks in

As to the reversing we are still waiting as all we have had is “More! More! More!” as we note that despite record highs for equity and bond markets financial market conditions are apparently still not good enough.

Switching to the real economy we see that in fact we are back in something of a trough right now. We discovered yesterday that the UK is flat lining and we know the Euro area is similar and the United States has been slowing down as well.

The New York Fed Staff Nowcast stands at 0.6% for 2019:Q4 and 0.7% for 2020:Q1. ( the numbers are annualised )

To that we can add Japan which faces the impact of the rise in the Consumption Tax to 10% this quarter.

Next and in some ways most revealingly is the way that QE has acquired a new name. In Japan it has morphed into QQE or Quantitative and Qualitative Easing at the time purchases of equities and commercial property began. Since then it has become QQE with Yield Curve Control. We await to see if the review being conducted by President Lagarde leads to changes at the ECB but we do know this about the US Federal Reserve. From CNBC on the 8th of October.

Powell stressed the approach shouldn’t be confused with the quantitative easing done during and after the financial crisis.

“This is not QE. In no sense is this QE,” he said in a question and answer session after the speech.

The reality is that it fulfils the description of David Miles above in the case of the Treasury Bill purchases with the difference that they have a shorter maturity, although of course back then QE was not meant to be long-term.

The Bank of England looks ahead

Last night Andrew Hauser who is the Executive Director looked at the state of play.

Before the financial crisis, our balance sheet was modest, at 4% of GDP. Since then, and in direct response to the
crisis, that figure has risen to around 30%: a more than seven-fold increase.

He then looks ahead and point one covers a lot of ground to say the least.

The first is that, judged by historical standards, big
balance sheets are here to stay. That’s not a prediction that QE will never unwind: it will. But we have a
bigger responsibility than we did to provide liquidity to the system, in good times and bad, and to a wider set
of organisations, to maintain financial stability. And that’s not going away.

It was nice of him to give us a good laugh about it being permanent! At least I hope he was joking. The liquidity mention doffs it cap to some extent to the mess that the US Federal Reserve has got itself into as well as the fact that changes to the structure of the system such as banks being required to have more capital have put increased pressure on this area.

The next point meanders a bit but we eventually get to an estimate of circa £200 billion for a QT target or objective,

Point two is that big doesn’t mean outsized – so the balance sheet will eventually shrink from where it is today. That’s something the Bank has been stressing for some time. But the Discussion Paper has allowed us to put a tighter range on that forecast, and suggests our liabilities probably only need to be half the size they are today to carry out our
mission once QT is underway/

Ah “eventually!” Also some would think the sort of sum he is thinking of is indeed outsized.

Point three contains some welcome honesty.

Neither we nor the firms who use our liquidity really know what their demand will be when conditions normalise.

Finally we have this

The final message, therefore, is that we must have as our ultimate goal an end-state framework that can cope with
that ambiguity without shaking itself, and us, to bits.

How Much?

The Bank of England balance sheet is more than just QE

Three quarters of the Bank’s assets is in the form of a loan to the Asset Purchase Facility backing £435bn of
gilt holdings and £10bn of corporate bonds, while another £127bn has been lent to banks under the
Term Funding Scheme. A further £13bn of liquidity has been extended under the so-called
‘Index Linked Term Repo’ facility, part of the Sterling Monetary Framework (SMF).
Nearly all of that activity has been financed by an increase in central bank reserves.

He does not point it out but this structure led to another consequence which is that the Term Funding Scheme (and some smaller factors) adds to the official definition of the national debt raising it by around 8% of GDP.

Hard Astern Captain

I have long considered the Bank of England course reversal plan to be unwise and perhaps stupid.

First, the MPC does not intend to begin QT until Bank Rate has risen to a level from which it could
be cut materially if required. The MPC currently judges that to be around 1.5%.

– Second, QT will be conducted over a number of years at a gradual and predictable pace, chosen by
the MPC in light of economic and financial market conditions at the time.

– Third, the QT path will take account of the need to maintain the orderly functioning of the gilt and
corporate bond markets including through liaison with the Debt Management Office.

– And, fourth, the QT path can be amended or reversed as required to achieve the inflation target.



Frankly the very concept of the Bank of England raising interest-rates as high as 1.5% is laughable under the present stewardship. I have long thought that the plan as described above demonstrates that there is no real intention to reverse QE. There are former policymakers who explicitly endorse this such as David Blanchflower. But there are also implicit issues such as waiting for yields to rise and prices to fall as well as thinking there can be an “orderly market” when the biggest holder sells. When you intervene in a market on such a large scale there is always going to be trouble exiting. One answer to that is to not get too exposed in the first place and to me selling when others might be selling because of losses as well is classic Ivory Tower thinking.

None of that is Andrew Hausers fault as he is in this regard merely a humble functionary. So we shuld thank him for his thoughts that even if QE somehow was teleported away things would still be different.

Bringing all this together, our conversations with firms suggest the current sterling PMRR is of the
order of £150-250bn.

Meanwhile if Livesquawk are correct Switzerland might be adding more not less extraordinary monetary action. Also the original reason was external ( Swiss Franc) whereas now it seems to have spread.

Oxley said, “There is good reason to take the SNB’s forecasts seriously: it has not tended to change its policy stance in the past unless its inflation forecast foresees deflation at some point over its three-year horizon. If the bank crosses the deflationary Rubicon again, this would lend support to our below-consensus view that the bank will end up cutting the policy rate to -1.00pct in the first half of 2020.”




9 thoughts on “The problems faced by the QE era make me wonder if QT is a mirage

  1. QT was never going to last, it was only a matter of when not if, the Fed in just a few weeks, has as a result of NotQE (to bailout the repo market), added almost half of the reserves it cut during the years it took to cut them during QT.

    And this is before any further instability in the repo market or the bond market, it could get much worse, here is a link to an excellent article that says it is just the beginning:

    And as for the Bank of England, it’s all gone rather quiet on Carney’s replacement hasn’t it?

    • Hi Kevin

      Apparently the US Repo issue is just fine.

      “The Fed isn’t worried about repo disruptions heading into yearend. Repo operations have “gone well so far,” and “pressures appear manageable” in the final weeks of the year: Fed Chair Powell” ( h/t @lisaabramowicz1 )

      I gather he also mentioned looking at coupon payments or bond which would be QE4…

      I guess the Carney replacement will be one of the first jobs of the new UK PM. Maybe a Monday announcement assuming the election has produced a government?

  2. Great blog as usual, Shaun.
    They had one of the Munk Debates in Toronto earlier this month to discuss the proposition: “The capitalist system is broken. It’s time to try something different.”
    The NP link I have provided doesn’t mention that Katrina vanden Heuvel, the American arguing with Varoufakis in favour of the proposition is the wife of Stephen F. Cohen, one of the English-speaking world’s greatest experts on Russia and the Soviet Union. The pair of Americans defending capitalism were all Ellis-Islandey, stuck in a pre-2008 world. I was struck that neither of them acknowledged that QE was any kind of threat to capitalism. It turns central bankers into central planners, as John Cochrane, the Grumpy Economist, once said.

    • The answer or the solution isn’t obvious, but I think as time goes on and the west’s economies atrophy further, the “solutions” proposed and attempted by central banks and governments will become more and more interventionist and more extreme, more stimulus both monetary and fiscal to pay for the deficits, welfare, medical care, more benefits, more subsidies, pensions etc.The state pensions crisis in the US is a good example, Illinois is the most bankrupt of all the states and is hanging by a thread, the pensions payments will I believe break that thread, some day soon it will default on its pensions payments and then it gets really interesting, will the Federal government pay them? If they do there are half a dozen more states right behind them, New Jersey, Connecticut, New Hampshire, Kentucky, California etc etc.who will ask for the same, how will the government pay them? – with debt monetized by the Fed of course.By then it will be QE99+ and counting, every time a wheel falls off, more funny money will be required, meaning the next stimulus has to be even bigger than the last.(If anyone is prepared for a shock, Google property taxes in the states above and see what people have to pay – the equivalent of our council tax, and what they have to pay for health insurance, your gast will be flabbered).

      As the subsidies and payments grow, inevitably the west will move further and further towards state controlled communism(but never called that or acknowledged to be that by the mainstream media-they already have terms ready for their policies -“Modern Monetary Theory” – translation – debt doesn’t matter, Universal Basic Income” – free money – who wouldn’t vote for that!

      As currencies/money lose their purchasing power, and as the crises develop and become worse as the incentives for work and entrepreneurship are destroyed by progressive taxation and devaluation, (who will go to work for less than fifty cents on the dollar when you can get the same or more by staying home?) the people will by then be begging for it from their leaders.

      The “Globalists” will then have us exactly where they want us- totally under their control and entirely dependent on them for everything so that we will never rebel against our slavery.

      • Kevin, that’s a very powerful and depressing summary! Thanks, I think.

        My concern, which leads to the same conclusion, is that the Governor of the Bank of England and their board/wannabe successors will never think the solution is less of their involvement and, consequently, they will only wade further in.

  3. to be in favour of reversing QE, you need to answer yes to the following 2 questions and be able to justify your answers.:

    1) should there be less currency in circulation?
    2) should there be more government bonds in circulation

    Currency, here, includes both notes and coins in circulation (which is mainly notes) and the deposits that banks have to keep at the BofE in their reserve accounts, which they use to settle transactions between a customer of one bank and a customer of another bank and also between their customers and the Treasury (settling tax payments for example). It is also their reserve accounts that get debited when the BofE supplies them with paper currency to meet demand from their customers.

    If your answer to question 1) is yes, you need to explain whether there should be less paper currency in circulation (and how that would be achieved) or whether (and why) banks should be less liquid – or both.

    If your answer to question 1) is that there is probably the right amount of currency in circulation, but your answer to question 2) is yes, there should be more government bonds in circulation, then the answer is not that QE should be reversed nor that it should be increased. The answer can only be that the government needs to continue to run a deficit, possibly even increasing its deficit, and sell more government bonds.

    If you believe there needs to be both more currency in circulation (either paper currency or in banks’ reserve accounts) AND there needs to be more government bonds in circulation, then the only answer is that the government needs to continue to run deficits AND the BofE needs to purchase more assets.

    • Hi Robert

      You have in fact defined the monetary base rather than currency. It can be added to via Open Market Operations which do not have to be of the QE form. There is also the option of the facilities in the Sterling Monetary Framework.

      As to the fiscal deficit I rather suspect that is a moot point as it is going up anyway! How much we will probably find out Friday and if it is a lot then more QE will all its consequences gets more likely.

      • currency IS the monetary base.

        It’s the sum of notes and coins in circulation plus the balances in commercial banks reserve accounts. Currency, in the form of balances in commercial banks’ reserve accounts, is created whenever the Treasury, or its central bank, spends. The spending can be on goods and services, transfers (such as to state pensioners, welfare recipients etc) or purchasing of promissory notes (which is the form of spending the CB tends to engage in)

        The vast majority of currency created by this spending is destroyed by taxation. Of that which is left in circulation each year (equal to the annual deficit), some will remain as currency and some will be swapped for bonds. How much remains as currency and how much gets swapped for bonds, depends on how much of each the non-government sector demands.

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