Sunday, September 16, 2012

Lance — QE Won't Work Because There's No Demand For Credit


Traders get it. Economists, not so much.

Business Insider
QE Won't Work Because There's No Demand For Credit
Lance Roberts | Street Talk Live

38 comments:

Dan Kervick said...

Talked to my son on the phone tonight, who is an Econ major who has interned in finance, and that's the first think he said too - "don't think QE is going to work because there isn't enough demand for loans."

Yves Smith has a great post today outlining all the problems with the housing market - starting with the lack of income and income security, lack of employment and heaviness of debt among younger people. It's not about a few points of mortgage interest rates.

I don't get why a guy like David Graeber only gets one side of this triangle. A debt jubilee might be a nice stimulative boost - but it only wipes some of the debt slate clean and brings us back to the "Go" square in the same damn system. It does nothing to fix the underlying structural problems with income distribution and the employment system.

We need a social system that provides opportunities for everyone to work, and that more equally distributes the output of our combined work to all citizens.

Ralph Musgrave said...

Exactly how much “demand for credit” there is, is immaterial. The important objective is to bring about adequate demand. Period. End of.

The exact proportion of that demand that businesses and households apportion to investment is up to them: i.e. the free market. Businesses and households do not need imbecile politicians or imbecile central bankers telling them what proportion of the resources available to them should be allocated to borrowing, lending, investment, etc.

vimothy said...

Why isn't there any demand for credit?

Tom Hickey said...

Why isn't there any demand for credit?

Household balance sheets over-leveraged still, and incomes stagnant. Like of creditworthy customers showing up at banks, and people still paying down debts and saving since they see limited prospects in store.

Much of the increasing credit use in the US is going to college loans, which seems to be the new debt bubble. This is further reducing the increase in debt in other areas and effective demand, too, as the monthly nut of younger people going to loan service cuts into discretionary spending.

paul meli said...

"Why isn't there any demand for credit?"

You have got to be kidding me.

Tom Hickey said...

paul, when the essence of your theory says that supply and demand are price-determined, then those holding that theory naturally wonder why the volume of credit doesn't respond to a huge drop in price, as the cb cuts the interest rate to near zero and rates are at historical lows pretty much across the board.

But the same phenomenon applies to the the volume of goods' sales (demand) in a deflationary environment in which there is a spiraling down of both price and demand.

vimothy said...

What I'm looking for is a non-circular explanation. If you say, "QE won't work because there's no demand for credit" (leaving aside the issue of whether that really describes the actual mechanism), that's not too far from saying, "the economy won't recover because it's still in recession".

paul meli said...

"What I'm looking for is a non-circular explanation."

vimothy, expansion of an economy via the credit circuit is a short-term (relatively speaking) process that has limits. It isn't a perpetual-motion machine, which you and other monetarist types continually seem to buy into.

Credit is similar to a battery, while it has charge it can produce flow but eventually it will have to be recharged and it can't recharge itself.

Credit expansion is dependent upon fiscal expansion once it reaches its limits.

y said...

What's your explanation, Vimothy?

Do you think QE might 'work'? If not, why not?

paul meli said...

"QE won't work because there's no demand for credit"

"the economy won't recover because it's still in recession"

These two statements are not similar.

In the first, one action is dependent on another to succeed. The key word is action.

Where is the dependency in the second statement?
Recession is the current state of the economy. The key word here is state.

Two entirely different things.

vimothy said...

Paul,

You have to ask yourself what it would mean for QE to succeed and what it would mean for credit demand to increase.

Y,

My feeling is that the important action is in the forward guidance rather than QE. Presumably, the FOMC has some kind of portfolio balance effect in mind, but I'm not sure why they're targeting the MBS market in particular, and I haven't got the time to go hunting for an answer.

(I've no idea whether either aspect will be successful, but it seems like a step in the right direction. I would also like to see the Fed's new approach coupled with more active & distributionist fiscal policy).

paul meli said...

"You have to ask yourself what it would mean for QE to succeed and what it would mean for credit demand to increase."

vimothy, that is way too open-ended a response. You are always hedging.

You are capable of making a definitive statement aren't you? Give it a try.

You show us what it would take for QE to succeed and for credit demand to increase. I've already stated in so many different ways that neither of those things is likely to happen and why.

Based on my understanding of the underlying system QE can have no net effect on flows in any meaningful way. There is no transfer mechanism.

QE can't put net dollars in the hands of wage-earners yet that is the cohort that must have the spending power to create meaningful economic activity.

Credit is an artificial source of demand, is unsustainable and at present is at a functional ceiling.

It is absurd to believe that the credit circuit alone can sustain a growing economy. Mathematically impossible.

I've given you a good target, go after it.

vimothy said...

Macroeconometrician James Hamilton has a nice post about "QE3" (he points to a third aspect of the programme, which I hand't noticed: swapping the Fed's ST tsy holdings for LT tsys):

http://www.econbrowser.com/archives/2012/09/effects_of_qe3.html

He quotes a humble sounding Ben Bernanke:

"The policies that we have undertaken have had real benefits for the economy that they have provided some support, that they have eased financial conditions and helped reduce unemployment. All that being said, monetary policy as I've said many times is not panacea, it is not by itself able to solve these problems. We are looking for policymakers in other areas to do their part. We will do our part and we will try to make sure that unemployment moves in the right direction but we can't solve this problem by ourselves."

vimothy said...

Paul,

You show us what it would take for QE to succeed and for credit demand to increase.

It would mean that the economy has recovered.

paul meli said...

"we will try to make sure that unemployment moves in the right direction but we can't solve this problem by ourselves.""

They really can't do much at all. It's all about fiscal.

BTW, quotes like these aren't helpful in making your arguments. You're substituting other-peoples-thinking for your own.

Come on in the water's fine.

paul meli said...

"It would mean that the economy has recovered."

vimothy, this makes no sense. Just another non-response.

It's based on "Rooster Logic".

Someone, help me out here, please.

vimothy said...

Amusing to see you lined up with the hardcore Freshwater / RBC types on this issue. Have you ever looked at any of the econometric evidence on the real effects of monetary policy?

vimothy said...

Surely it's not that hard an argument to follow.

"QE won't work because there's no demand for credit".

Okay, but why is there no demand for credit? (If that's what we have).

There's no demand for credit because the economy is in the toilet (or whatever).

But that just shifts the problem back one stage. It's not helpful to say that QE won't work because the economy is in the toilet. WHY is the economy in the toilet?

paul meli said...

"Amusing to see you lined up with the hardcore Freshwater / RBC types on this issue. Have you ever looked at any of the econometric evidence on the real effects of monetary policy?"

vimothy, I'm not lined up with anything other than low-level system math/relationships. I've never read a single word of economic literature other than what I've seen on blogs. I see no reason to start now.

I'm well aware that monetary policy can effect movements under the right conditions, it's effects are limited however. It's important to use the right tool for the right job.

Non-exposure to economic dogma is a feature not a bug.

Econometrics is a high-level study of data relationships within an economy. Those data sit on top of and are dependent upon the underlying system relationships.

Without an understanding of the underlying realtionships nothing meaningful can be deduced from the data.

I have no idea what idea(s) you are trying to promote here. There is rarely if ever a point to your arguments, they lead nowhere.

You give the impression that in your view economics is just a big thing floating in space moved by animal spirits, unconstrained by any other factors (well, maybe magic).

That's a sure sign that you're thrashing.

paul meli said...

"There's no demand for credit because the economy is in the toilet (or whatever)."

There's no demand for credit because there is little if any room for credit expansion.

Credit expansion depends on the ability and willingness of wage-earners to service the debt payments.

One cohort can't expand their credit because debt service would eat into their nut. Most won't give up eating or sleeping under a roof to buy stuff they don't have to have.

Another cohort, of which I am a part, is not willing to expand credit to buy stuff they don't need. It makes no logical sense to spend future income on consumption now, besides the fact that it leads to a hopeless situation.

The business cohort isn't about to borrow money to expand production if it has no customers to buy that production (see the above). A business doesn't expand it's market by hiring people - a business cannot prosper on sales to it's own employees. It follows that all businesses combined cannot prosper on sales to their own employees. It requires a larger universe of customers.

This is only the umpteenth time this has been said in so many different ways.

Pre-1980 or so, the economy was not driven by credit, it was driven by increasing wages and savings left over post WWII. Post 1980 as taxes on the rich were decreased and profits began accruing more to capital than wage-earners it became necessary first for households to have two wage-earners and then begin borrowing to maintain their standard of living. it was a stupid idea but…that's where we are.

None of this is surprising to anyone that understands stock/flow consistency and the nature of credit.

What has transpired was inevitable and unsurprising. Intuitively most people realized this but were swayed by "experts" assuring them that the magic could go on forever.

A brillant game of musical chairs where the 99.9 % are the losers.

Tom Hickey said...

vimothy, recoveries always involve increasing demand for credit as a major causative factor because the money has to come from somewhere, and in modern capitalistic economies, that is chiefly private credit extension that funds investment in housing. The housing channel is the economic driver, and it's the chief way that cb monetary policy works through the effect of interest rate setting on mortgage rates. This is a principal reason for the Fed's commitment to keep rates low long enough to fire up housing again.

Tom Hickey said...

BB "The policies that we have undertaken have had real benefits for the economy that they have provided some support, that they have eased financial conditions and helped reduce unemployment. All that being said, monetary policy as I've said many times is not panacea, it is not by itself able to solve these problems. We are looking for policymakers in other areas to do their part. We will do our part and we will try to make sure that unemployment moves in the right direction but we can't solve this problem by ourselves."

Translation: I've got the interest rate at the zero bound and am holding down the yield curve. This has driven financial assets in general back to pre-crisis levels, but I can't budge the housing market, which is where the employment is both directly in construction and indirectly in housing related purchases. People are not borrowing even with historically low cost of borrowing and I can't make banks lend or people borrow either. So we have a lack of effective demand, due to lack of available funds in the hands of people ready and willing to buy. The only other channel to get funds into their hand is through fiscal means, which the Fed is not permitted to use since that is reserved for Congress. While we have prevented a worse scenario from happening, we can't effect a recovery either, so Congress has to step up to the plate and offset the increased saving desire due to the deleveraging that continues, as well as replenishment of savings for a future that looks uncertain and possibly precarious.

Tom Hickey said...

vimothy But that just shifts the problem back one stage. It's not helpful to say that QE won't work because the economy is in the toilet. WHY is the economy in the toilet?

Do you read MMT blogs such as MNE, NEP, billy blog, and Warren's? Do you still not get the difference between a business cycle and a financial crisis that result when the Ponzi stage implodes?

Neoclassical economists don't understand this distinction and as a result are lost in explaining what is happening and why. MMT economists and other Minsky-PKE economists were explaining before the crisis even hit, when they were already waving red flags.

paul meli said...

"…the money has to come from somewhere…"

Tom, maybe the most important single statement in economics.

y said...

"Pre-1980 or so, the economy was not driven by credit, it was driven by increasing wages and savings left over post WWII. Post 1980 as taxes on the rich were decreased and profits began accruing more to capital than wage-earners it became necessary first for households to have two wage-earners and then begin borrowing to maintain their standard of living."

The MAJOR shift left out in your analysis is that the US went from a balanced current account before 1982 to an increasingly large current account deficit after 1982. This move is what lead to the "financialization" of the US economy and the increasing dependence on domestic private debt and US government deficit spending.


paul meli said...

"The MAJOR shift left out in your analysis"

y: Yes, left out on purpose, to keep it simple. If the basic message isn't getting across in the simple scenario what is the point of adding complexity?

y said...

Paul, why can some countries run huge deficits whilst for others it is very difficult?

Tom Hickey said...

y asks, why can some countries run huge deficits whilst for others it is very difficult?

A big reason is they need to borrow in a foreign currency, e.g., to get the imports they desire, like oil, which is denominated in USD. So they have to get USD either by issuing their currency in exchange which drives down its value, get the other currency through exports, or borrow in it. Often, the choice is made to borrow in the foreign currency to avoid devaluation/inflation, especially when they can't get the amount desired through exporting.

paul meli said...

Tom, yes and you are more qualified to answer that than me.

The bottom line for me is that balanced trade is the safest strategy, as the imbalances aren't a risk and we can keep our own workers employed.

It has never been necessary for us to run large trade deficits. If we have excess production, fine sell it but not at the expense of our own workers. Consuming a lot of cheap junk has not necessarily made our lives better.

Seems like the trade deficit has merely been another avenue of rentierism, of which there are many. The parasites consume the host.

Tom Hickey said...

It has never been necessary for us to run large trade deficits.

As long as the rest of the world (ROW) needs to obtain USD, the US must supply them if it wishes the USD to be the reserve currency, which the US regards as its "right" as the global hegemon.

And the US has fixed it so that oil is denominated in USD. This acts like a tax domestically to create continuing demand for USD externally.

geerussell said...

In a closed economy we talk about accommodating the net savings desires of the private sector to maintain aggregate demand with complete faith that this won't turn us into a nation of layabouts saving 100% of our government stipend and producing nothing.

Yet in an open economy, we are overcome with fear of a Kaldorian bread & circuses dystopia... where we fail to find any productive way to employ ourselves as cheap-junk-making jobs leak out all the while enabled by the rest of the world who will choose to hoard dollars to infinity.

Seems to me something gives way well before the extremes are reached. Either the rest of the world tapers off its hoarding from a desire to raise its standard of living or we pursue other productive endeavors at home because not everyone will be content living on the wage floor. Or a combination of the two.

y said...

the US govt could have chosen an mmt-style approach at the beginning of the eighties, with full employment and productive public investment. Instead they opted for deregulating the financial sector, cutting top rate taxes, increasing bond-interest welfare to the 1%, increasing unemployment for the masses, and large scale militarization. Govt deficits and debt increased but the spending went to the wrong places. The US never fully benefitted from the rest-of-the-world desire to accumulate USD. Most of the benefit simply accumulated at the top.

If they'd managed to keep a lid on inflation in the 70s, it might never have happened that way.

vimothy said...

Paul,

My “point” was to try to move your argument from grandiose declarations of fact made without reference to theory or data to the actual problems that the Fed’s new strategy is trying to resolve. It’s specious to claim that QE won’t work because credit demand is low if increasing credit demand is precisely the object of the programme.

You say that,

“QE can't put net dollars in the hands of wage-earners yet that is the cohort that must have the spending power to create meaningful economic activity.”

The issue is not whether the “cohort of wage earners” has the spending power to create “meaningful economic activity”, but rather, why the labour market is so weak, despite an ostensible recovery in output, and whether there are downside risks to that recovery in the near term (the FOMC thinks, with the consensus forecast, that there are).

“Meaningful economic activity” is already occurring. “Wage earners” are spending, businesses are investing, the economy is growing, etc, etc.

vimothy said...

Paul,

Credit expansion depends on the ability and willingness of wage-earners to service the debt payments.

One cohort can't expand their credit because debt service would eat into their nut. Most won't give up eating or sleeping under a roof to buy stuff they don't have to have.


Clearly, if asset prices rise and interest rates fall (and are expected to stay low into the future), then the ability of wage earners to service their debts goes up, and so, other things equal, either they can either afford to borrow more or they can afford to spend more of their income on things other than debt service.

The business cohort isn't about to borrow money to expand production if it has no customers to buy that production (see the above). A business doesn't expand it's market by hiring people - a business cannot prosper on sales to it's own employees. It follows that all businesses combined cannot prosper on sales to their own employees. It requires a larger universe of customers.

Aside from the evident failure of logic here (the set of all businesses pays the wages of the set of all customers—thus, by implication, planet Earth must have been selling to a colony on Mars for its entire history; the Martians to a colony on Jupiter; Jupiter to Saturn, and so on in an infinite regress), customers are buying and businesses have been expanding production, as you would know if you checked your ideas against some easily available data. Corporate profits have been strong, inflation is up, personal consumption is up, business investment is up, economic output is growing, etc, etc. And yet, the labour market has not recovered. It seems that something else is needed other than lack of demand to explain this phenomenon.

Tom Hickey said...

vimothy It’s specious to claim that QE won’t work because credit demand is low if increasing credit demand is precisely the object of the programme.

And where is the transmission from QE to increasing effective demand? "Expectations" is fluff that says nothing.

The transmission mechanism most often mentioned is driving up asset prices artificially, that is, without corresponding change in fundamentals, through "easy money" i.e., loose monetary policy that encourages use of leverage by lowering its cost. Well, both equities and commodities are doing very well thank you, and have been for some time. Certainly enough to see some results of the putative "wealth effect." Where is it in rising effective demand? Effective demand seems to be falling recently, and it looks like the US is entering another recession.

Tom Hickey said...

Clearly, if asset prices rise and interest rates fall (and are expected to stay low into the future), then the ability of wage earners to service their debts goes up, and so, other things equal, either they can either afford to borrow more or they can afford to spend more of their income on things other than debt service.

How so, since many if not most workers are not holders of equity and commodities, and housing remains flat. The driver of credit seems to be income, which is flat, not rising asset prices (less housing). Try as he may, BB cannot stoke the housing market, and rising equity and commodities have not resulted in higher effective demand so far.

Tom Hickey said...

customers are buying and businesses have been expanding production, as you would know if you checked your ideas against some easily available data. Corporate profits have been strong, inflation is up, personal consumption is up, business investment is up, economic output is growing, etc, etc. And yet, the labour market has not recovered. It seems that something else is needed other than lack of demand to explain this phenomenon.

ECRI says that the US has entered another period of recession. Doug Short compares ECRI analysis with his indicators here and agrees the draft is down even though some leading indicators are rising.

Tom Hickey said...

vimothy, Warren posted a JPM report that may account for lagging demand due to loss of net worth resulting from the crisis here.

I would agree that it is a factor, although I would not say it is the only significant one. Income is also key in addition to wealth, IMHO. Most people service expenses-debt from income. The pre-crisis substitution of HELOC lines of credit for income was an unusual event that is not likely to recur anytime soon.