QE GONE AMUCK

In a recent post, "Whatever It Takes," we noted the following:

In a weekend editorial, "No need for hostilities in the money currency war," one anointed genius writes, "The ECB should ignore accusations of competitive devaluation."


Much of the justification for EU QE we have read came from those citing U.S. and UK monetary policy, the assumption being they were not only successful but worth emulating. After all, it seem to work for them. Why not us and what's the holdup?

Talking that up with a litany of excuses why QE is pure and devoid of any nasty ulterior motives, especially those as nasty as competitive devaluation, the Financial Times quipped:

There is little to suggest that the ECB is skewing its policy easing towards weakening the exchange rate.


There were two points in our post, one about the currency wars--Singapore without any warning yesterday cut its interest rates and Denmark which cut rates there--and the idea as expressed in the above quote about emulating what as yet is an unproven successful consequence to the Fed's QE programs.

Reuters today reported:

The Danish central bank cut its key interest rate for the third time in two weeks to another historic low after intervening in the market to keep the crown within a tight range against the euro. 

The central bank cut its certificate of deposit rate to -0.5 percent from -0.35 percent, making a reduction of 45 basis points since Monday last week. 

While analysts said last week that its actions might not be enough to weaken the crown, few expected another cut so soon, especially as Denmark's rate went below the eurozone equivalent of -0.20 percent, making it less attractive than the euro. 


From MarketWatch, Stephen Roach, former chairman of Morgan Stanley Asia and now a Yale University faculty member, yesterday wrote: 

The ECB, however, will have a harder time making the case for wealth effects, largely because equity ownership by individuals (either direct or through their pension accounts) is far lower in Europe than in the U.S. or Japan. For Europe, monetary policy seems more likely to be transmitted through banks, as well as through the currency channel, as a weaker euro EURUSD, +0.06%  — it has fallen some 15% against the dollar over the last year — boosts exports.

The real sticking point for QE relates to traction. The U.S., where consumption accounts for the bulk of the shortfall in the post-crisis recovery, is a case in point. In an environment of excess debt and inadequate savings, wealth effects have done very little to ameliorate the balance-sheet recession that clobbered U.S. households when the property and credit bubbles burst.

MarketWatch

Real consumption has grown slowly since the recession, despite massive quantitative easing by the Fed.

Indeed, annualized real consumption growth has averaged just 1.3% since early 2008. With the current recovery in real GDP on a trajectory of 2.3% annual growth — two percentage points below the norm of past cycles — it is tough to justify the widespread praise of QE.

Japan’s massive QQE campaign has faced similar traction problems. After expanding its balance sheet to nearly 60% of GDP — double the size of the Fed’s — the BOJ is finding that its campaign to end deflation is increasingly ineffective. Japan has lapsed back into recession, and the BOJ has just cut the inflation target for this year from 1.7% to 1%.

Finally, QE also disappoints in terms of time consistency. 

For Roach's full article here's the link.

http://www.marketwatch.com/story/the-lemmings-of-qe-2015-