Reversing QE

Third, a real attempt to achieve a reversal of the QE programme would have a massive economic consequence. That should not be hard to work out. Reversing even a small part of the QE programme will remove significant liquidity from the economy.

Yes, that would be the point of doing so of course. We made up lots of new money and pumped it into the economy. The only reason we might want to reverse this is if we think that – for some or other reason – there’s now too much money in the economy and we want to reduce that amount.

The aim of any reversal of QE would be to reduce liquidity in the economy.

The consequence will be fairly rapid reductions in cash available, most particularly to financial markets. They would need to sell other assets to buy bonds, and the only basis on which they might do that is if the bonds were sold at a significant discount to market price, meaning a loss might be suffered by the government on sale.

Not really. The usual claim is that as much of the QE debt is medium term the process would be to await maturity of some of the holdings then not roll over or reinvest in the cash received in another tranche. So, there would be no capital loss on the bonds as they wouldn’t actually be sold. Instead new ones would not be bought.

This would also push up potential real interest rates considerably in the process.

Yes, this would be the point. This is another way of reducing liquidity of course. This is why we would be doing it.

Saying you don’t think we’d ever want to reduce liquidity would be logically valid if stupid. But complaining that the effects would be the intended effects is both stupid and logically invalid.

Consider all the knock on effects of that and asset prices would fall, rapidly.

Yes, one of the intended effects of QE was to raise asset values. Therefore folks would run out to the riskier end of the investment process in their search for yield. Reversing QE would indeed therefore lower asset values – ceteris paribus of course.

Simultaneously falling share, bond, land and house prices because of an attempt by the government to sell significant numbers of old bonds in the market in an attempt to increase the real volume of public debt without there being government spending to match could trigger a financial collapse on a scale to make 2008 look like a picnic.

Which is why – as the Federal Reserve did for a bit – the assumed path is simply not to roll over maturing debt and do it all bit by bit.

In that case why is there a threat to reverse QE when it cannot happen

Murphesque logic is so wonderful, isn’t it? He wouldn’t like it to happen therefore it never will because it’s impossible.

2 thoughts on “Reversing QE”

  1. Tim

    Thanks for posting and I enjoyed your fisking of it. I think it’s a rare occasion where he’s right in the sense of observing it is unlikely in the short term QE will be unravelled (especially with COVID still out there and the ineptitude of the Johnson administration)but it’s definitely a case of ‘blind squirrel stumbling across the odd acorn’

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