Monday, October 10, 2022

Ben Gets A Nobel - Is It Time For QT For Real Yet?

 Ben Bernanke, fondly known as Helicopter Ben, just got the Nobel Prize in Economics.  To be exact, Alfred Nobel never established a prize for economics (no fool, he) - instead, it was established much later in 1969 by the Sveriges Riksbank, the Swedish central bank. So... a bit of professional camaraderie going on here?

Mr. Bernanke is best known for flooding the system with cash to avert a second Great Depression in 2007-09, aka engaging in Quantitative Easing (QE).  At the time, it looked huge. But I'm willing to bet that even he was amazed at the audacity of the Fed and Treasury to print so much during 2020-22, to take QE to heights never before imagined.  To boldly go where no helicopter has gone before (yes, I'm a Trekkie).

Which brings us to inflation today.  What is the cause? No matter how much politicians and mainstream Wall Street analysts want you to believe that it's because of logistics bottlenecks and wartime shortages, it just isn't true - at least not by as much as they claim.  The real cause of roaring inflation is the printing of enormous quantities of money by the Fed, ECB and BOJ,  period. Just Google what Milton Friedman, a Nobelist himself, had to say on the subject.

Therefore, to bring inflation down the only truly effective tool today is Quantitative Tightening (QT), to reduce the money supply of dollars, euros and yen by shrinking central banks' assets. Again, period.  

Everyone is bemoaning higher interest rates, ie the price of money, but very few are raising the issue of quantity. Alas,  QT is proceeding at a snail's pace, if at all (it isn't happening in the eurozone, it isn't happening in Japan and is only now starting, very slowly, in the US).  

It's like trying to cure COVID, a viral disease, by using antibiotics. Sure, they will prevent opportunistic infections, but the patient is going to keep suffering and perhaps pass to greener pastures.

Fed Balance Sheet Assets

It seems that central banks were very willing to use an unconventional tool (QE) to prevent economic meltdown during the Debt Crisis and the pandemic, but are now relying only on conventional rate hikes to fight inflation, which was caused by QE to begin with. Not only does this not make any logical sense, it is unnecessarily damaging the economy, too.  High(-er) interest rates cause all manner of economic pain, the most obvious being the cancelation of  productive investment.

The Fed, ECB and BOJ urgently need to use the right tool to fight inflation: Quantitative Tightening.


  1. btw was thinking about the Hang Seng... it has been quietly plunging off a cliff...

    usually, when something like this happens, the newspapers are in an uproar... now, all I hear is silence.... it is really eerie.... the dog that did not bark eh?^HSI

    1. True. I think everyone is trying to figure out if it is time to buy again/double down, in all markets: stocks, bonds, commodities. In my experience, this is precisely the time to be completely out. Significant bottoms look very different from this - globally.

    2. I think I agree... as Hell was said about the Gilt... (paraphrasing)... any lower and something is going to break...