click for larger graphic
Source: Political Calculations



Earlier this morning, I suggested that when we consider the results of QE on NFP, we also consider what the world might look like in its absence. (Long term readers might recall I suggested we do the same thing with the bailouts as well, with the results being deeper selloff, more early pain, but a stronger and healthier recovery).

As it turns out, Political Calculations already did imagine what that might look like last month — the results being the chart above:

“The difference between the nominal GDP that was and the counterfactual of the nominal GDP that otherwise would have been is all due to the Fed’s quantitative easing programs, as measured by the cumulative change in total assets held by the Federal Reserve since the end of 2012-Q3. How we measured the relative impact of government spending cuts and tax hikes is explained here and their applicability is explained here.”

If QE never came into existence, the world might look different in a variety of ways:

1) Rates would be higher;

2) Home sales would likely be at both lower prices and lower volumes;

3) Auto Sales would either be weaker or skewed towards less expensive cars (or both);

My assumptions that follow this is that without QE:

1) employment would be softer, perhaps considerably so;

2) The normal clearing process for Housing would be occurring;

3) The economy would be significantly worse;

4) There would be an increasing number of foreclosures;

5) The TBTF bailed out banks would once again be in trouble;

The last assumption is that as things got appreciably worse, Congress would be forced to act with a major stimulus. I fthey failed to do so, there might be a signifciant change November 2014.

There is some irony in that the people who hate the Fed the most are potentially the biggest beneficiaries of their policies . . .

Category: Bailouts, Economy, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “Does No QE = Recession ?”

  1. BenE says:

    Exactly. Faith in this blog restored.

  2. louis says:

    Would it not be easier at this point to just reset the debt on the mortgages that are in danger of default?

    The banks have been reset and their capital injections have flowed to the street, resulting in all time highs. If the consumer debt was restructured couldn’t the other side of the equation participate in the recovery. They are still leaving soldiers behind on the battlefield.

    • rd says:

      Welcome to securitized lending. Nobody is in charge of the negotiations or can agree to terms from the debt-holder side. The banks just “service” the debt and there are more fees from delinquent accounts than non-delinquent accounts.

  3. krice2001 says:

    Barry – Got this on FB from a friend via FB message. Somehow seemed relevant here.
    Otherwise, one can search Youtube for “Fear the Boom and Bust”. It’s a rap of Hayek vs. Keynes – thought it was pretty funny…

  4. 4whatitsworth says:

    Great chart! I believe you are correct that without QE we would have had a recession in 2013. I was starting to sell in early 2012 until I realized that the FED had backstopped asset prices with QE infinity. I also believe that the tax hikes are a much bigger impact that most people admit and was surprised with the market run we have had this year but you can’t fight the FED.

    I still think we are in the same boat the economy is trying to get better and taxes going up. There is still the Obama Care taxes that will hit in 2014 such as: 3.8% over $200k/$250k, Medicare Part A Tax increase of .9% over $200k/$250k a $63 annual fee for every premium.

    At some point QE infinity may need to end then we will see what the great new society looks like.

  5. wally says:

    So your conclusion is that the Fed is enabling an anti-growth Congress?

  6. george lomost says:

    The word “might” has taken pride of place in your vocabulary lately. Not saying you’re wrong but hypotheticals are just that.

    BTW, if interest rates had been say 5% for the last 3 years my wife and I would have:
    - gone out to dinner at least twice as much as we do now.
    - replaced out second car (23yrs old) with a more recent used car.
    - taken at least 1 significant vacation somewhere in the U.S. (San Diego or New Orleans are our priorities) with attendent hotel stays, side trips, nice dinners, etc.

    Notice the absence of “might” or other hypotheticals. Betcha no one in your line of business has had the (you pick the word) to try to calculate the effects of the reduction in fixed income from the goosing of Wall St.

    • There is no doubt that low rates hurt people who live off fixed income.

      Do you have any equity/RE or are you a single asset class investor? That might have offset some of your lost income from bonds.

    • DeDude says:

      And you are the exact type of person/effect that has not been included in the above chart. A lot of small savers with fixed income being supplemented with interest on CD’s or treasuries have found that this supplement was reduced/lost as rates were reduced (and real rates turned negative). Some may have been foolish or desperate enough to move their “safe” money into something with higher risk and return. My guess is that most have simply sucked it up and reduced their spending – that is what the kind of people who have savings in safe assets do.

  7. Frilton Miedman says:

    While monetary policy has definitely staved recession via cheap ,mortgages & debt, it has amounted to table scraps for those who don’t derive substantial portions of their income from stocks.

    For lack of any fiscal solutions, thanks to the Tea Party, it’s better than nothing.

  8. aguaditoo says:

    Hm, the source “Political Calculations” is not credible. The “calculator” they use is farcical:

    They equate 1:1 all QE purchases to additions to nominal GDP, which is of course false in national income accounting.

    Maybe this was already known but I think that should be more clear that this is not a credible model.

    • What is the appropriate multiplier?

      What is the net economic value of keeping rates lower?

      I havent the slightest clue!

      • BenGraham says:

        aguaditoo is right unless you assume that QE, by buying bonds, is essentially a FISCAL action, i.e. direct funding of federal spending (but then you’d have to not double count it). BR, what is the right multiplier? No one knows which is why this chart is bunk. What is the value of keeping rates low? Does that assumption consider that rates might have been just as low without QE? Say no QE. Recession and deflation follow, ergo rates are just as low. Very possible! I find QE to be a self-fulfilling theory- one can make it mean whatever they want because we don’t know and we certainly don’t have evidence.

      • I’ve seen several analyses which suggest that when adding debt / credit to the economy, the marginal benefit to GDP is about nil right now.

        Even if one bought into the notion that “No QE = Recession”, there is the deeper question of whether the next recession can be postponed forever. History says not, so unless “this time is different” the next question is, will more QE make the inevitable recession worse?

        For every debtor or borrower paying interest, there is a creditor earning it (or bondholder, which is the same thing in different phrasing). So in terms of interest, QE shouldn’t have much net effect on GDP. But in terms of principal needing to be repaid (and possibly being defaulted on), I would suspect that “more debt = greater risk” for the economy in a recession.

        Would love to be educated on this by others here.

      • ironman says:

        We arrived at the 1.0 multiplier empirically. If you do the math, after applying the multipliers for changes in government spending and taxes, you’ll find that the difference between nominal GDP (as recorded) and the counterfactual GDP for each quarter since the Fed restarted QE is approximately equal to the cumulative change in the Fed’s total asset holdings. That’s how we determined the value for the QE multiplier.

        As for the national income accounting aspect, what we do know is that through its influence on interest rates, QE works across several of the variables in the GDP accounting formula, including C (consumption), I (investing) and even X (net trade), and not just G (government), so it’s not limited to affecting just a single accounting component of GDP. Claims that a GDP multiplier of 1.0 for QE is invalid because it doesn’t fit a poorly preconceived notion of how national income accounting works are simply not credible – especially unsupported claims that aren’t backed up by competent analysis.

        We’re more than willing to be wrong. Somebody needs to competently prove that we are.

      • BenGraham says:

        ironman, you say ” after applying the multipliers for changes in government spending and taxes, you’ll find that the difference between nominal GDP (as recorded) and the counterfactual GDP for each quarter since the Fed restarted QE is approximately equal to the cumulative change in the Fed’s total asset holdings”… BUT…there are so many unprovable assumptions in this method it can credible. First, you assume that the multipliers applied to gov spending and taxes are a) accurate and b) relevant in that time period. Neither is a ‘fact’. Second, you assume that the difference is not due to mis-estimating the first point, but instead due to the change in the balance sheet. Third, if the QE is showing up in bank reserves and not entering the “real economy” as many point out, then just how do these asset purchases cause GDP to rise? If this magic occurs due to lower rates, then the mechanism should not be measured directly as you do. If it occurs because the Treasury spends all that additional debt, then you’ve already accounted for it by measuring government spending (G), don’t double count it. You’re whole methodology is based on assumptions and adding apples to oranges.

  9. rd says:

    Another factor: ZIRP and QE are keeping the interest rates on the Federal, state, and municipal debt lowered by a couple of percentage points. The additional interest paid on government debt would blow a hole in the federal budget and deficit. The austerity police would be howling in full voice. The recent shutdown/ceiling crisis would look like a picnic.

    also, companies have been selling debt at rock bottom rates and their balance sheets are generally looking pretty. That reduces the potential for them to immediately panic with any drop of bad news.

  10. DeDude says:

    I seriously doubt that QE4 has had that much of a positive effect. But given that GDP is what it is; then either the tax hike/spending cut have had less negative effect than stated or there is a booming baseline growth that somehow eluded us all (my guess it that the effects of tax hikes are grossly overstated).

  11. 4whatitsworth says:

    Hmm.. it is interesting that some of us see this data as a good representation, and some see it as bogus. One can’t help but wonder why that is and who is right. I suppose that is what markets are for.

  12. Angryman1 says:

    There has been no QE. Rates would be higher? Nope. No impact. Real rates have risen in recent months.

  13. sensibleinvestor says:

    Can we ever get out of QE?

  14. Mattw says:

    QE = No Recession = Good?

    No recession means the bad guys mostly get to keep their jobs. It means those who make bad decisions don’t have to pay. It means bad ideas get to grow. It means corruption gets to grow. It means the next collapse is probably going to be worse.

    No Recession = No Solution = Bad

  15. theLorax says:

    QE = corporatism (Italian fascism).

    You applaud this ideology?

  16. manifest says:

    Stephanie Pomboy sure thought so and shared that perspective during your recent TBP2013 conference.

  17. I love the sobering approach to both of these articles, Barry. 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.

    Empirically, we saw the Danish central bank experiment with negative nominal rates in 2012, and the 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.

    Richard Koo weighed-in today with his idea of the “QE trap.”(*) While he’s unabashedly biased toward this opinion, he provides another counterfactual, 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, for example:
    1. Increasing asset values (short term consequence) offset by decreasing investment (long term)
    2. Currency wars


    • Also, I think a lot of the people saying “QE didn’t work” use that as synecdoche. In other words, a lot of the QE-skeptics and QE-opponents rail against QE 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, these people defame and disparage QE to make that unnamed “better option” seem more attractive in comparison.

      I myself now see the urgency under which QE was implemented. That monetary policy was a short-term measure that plugged a 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 that mailed checks to everyone; yes, long term investments in things like our alternative/renewable energy infrastructure, R&D, etc.

      Now, 5 years later, 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 yield gains…

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