He started the series with this:
The problem with [the "non-result result"] analysis is the lack of a control group…
This seems to get lost in the debate over QE. The debate–either ignorantly or disingenuously–makes claims such as “Look how few jobs have been created, and look how high unemployment is.”
Understanding this logic, and lacking a control group, we must employ a counter-factual. The question one should be asking is “How many less jobs would have been created? How much higher would unemployment be?”
Then, from his third piece on the subject yesterday:
There are several reasons I disagree with the thesis [that "more than 100% of equity market gains since January 2009 have taken place during the weeks the Fed purchased Treasury bonds and mortgages" i.e. QE]. In no particular order:
- Complexity (e.g. Single vs. multiple variable analysis in market forecasts)
- Market performance following secular bear markets (e.g. down 50%+, oversold, etc.)
- Earnings rallied as much as market have since lows
- Timing may be coincidental (i.e. Correlation does not equal causation)
While not necessarily a staunch supporter of QE, Barry’s had a sober approach to the argument, suggesting that, essentially, ‘it was better than the alternative’ (i.e. nothing). I couldn’t help but jump into the discussion, adding some more context to fully flush-out the debate.
Here are my comments…
To treat this as a T-square proof, I think there’s a counterfactual to the counterfactual that illuminates the difficulty of policymaking…
While QE/ZIRP raised the present value of preexisting, cash-flowing assets, it discouraged new investment by lowering IRRs (expected returns) to an insignificant level. In other words, executives look at a proposed project and say: it’s not worth undertaking this project for a 2% IRR, given the risk & opportunity costs. [With the risk, for example, there's a real, probabilistic likelihood of negative returns or losses that don't appear significant in models for which expected returns are higher--like 5 or 10%. Also, there's an opportunity cost of forgoing a comparable, absolute return in "risk free" assets like Treasuries.]
Empirically, we saw the Danish central bank experiment with negative nominal rates in 2012, and their move failed to stimulate investing.
In the US, you’ve seen this empirically manifest again in low CapEx. Our gross fixed investment/GDP is running at 12%, ranking the US #143 in the world–a low only undercut [slightly] by Greece @ #144.
Nomura’s Richard Koo weighed-in today with his idea of the “QE trap.” While he’s unabashedly biased toward this opinion–having coined the term “Balance Sheet Recession” and repeatedly cited Japan’s liquidity trap as an analogue for the US’s–he provides another counterpoint, saying we’d be resuming trend GDP growth by now, were it not for QE/ZIRP. (I’d add that we’d be resuming that trend having had to weather 4-5 years of near-depression-like conditions.)
This sounds awfully Austrian (for my taste), but I find myself evaluating policy intervention as more & more of a zero-sum game, since nothing happens in a vacuum. Consider two examples–one showing the domestic wash (a catch-22) and the other the global conundrum (beggar-thy-neighbor):
- Increasing asset values (short term benefit) offset by decreasing investment (long term drawback)
- Currency wars (global zero-sum)
Also, I think a lot of the people saying “QE didn’t work” use QE as synecdoche. In other words, a lot of the QE-skeptics and QE-opponents rail-against the program not because they hate QE in isolation, but because they think there was a better option along the way. These people wish that some other stimulus program had either been implemented at the outset or eventually succeeded QE. As is the human condition, some of these people–the loudest ones–defame and disparage QE to make that [unnamed] “better option” seem more attractive in comparison. That’s just the way people “talk” about passionate topics like politics and sports.
I myself can sympathize with the urgency under which QE was implemented. Extraordinary monetary policy was a short-term measure that plugged a gaping hole in the system. The short term solution of QE/ZIRP should’ve been succeeded or complemented by fiscal stimulus. No, not the Bush stimulus (tax rebates) that mailed checks to everyone; yes, long term investments in things like our alternative/renewable energy infrastructure, R&D, etc. [I personally think a progressive immigration policy can cure a lot of our demographic woes too.]
Now, 5 years later, were we to have implemented a combination of short term stopgap measures and long term kickstarters, I don’t think QE would’ve had to have been scaled-up the way it has, as employment & economic expansion associated with those investments would be yielding gains. That, however, is my pie-in-the-sky…