FXstreet

QE is now a tried, tested and proven method of rescuing economies from systemic collapse. However skeptical or downright hostile many factors have been to QE, it has worked. The main cry was, ”we are going to get hyperinflation from this policy.” We haven’t. In fact the exact opposite is happening, QE seems to make deflation. Who knew?

It can be very good to have a policy work that is badly understood. It keeps the ravenous predators of the market at bay. If no one understands a magic trick, it becomes just magic. The magic exists so long as the trick isn’t properly understood.

Does anyone really understand the long-term consequences of QE? Let’s just say there is significant debate and as such this disagreement suggests that no one really knows how this will unwind.

QE has finished in the U.S. Well, that’s the official line. This end prompted a few market corrections, especially in the late autumn of last year.

The end of QE must mean the reverse of QE, which helped create a recovery, i.e. a slump. A slump would create a market crash. End of QE is therefore a huge big sell sign marked, run away…

But the market didn’t crash. It whipped around and bit the shorts on the rump and tore upwards leaving cautious investors like myself with a pile of cash wondering why they left the buy and hold religion.

QE in a sense is over, there is no conspiracy, but QE still lives. It’s just not growing.

In QE you buy bonds and by doing so a government becomes the market for its own and others’ bonds. The government makes the price, artificially supports the price of one of the biggest assets classes on earth. This artificially squirts money around the system. The Fed is still doing this.

But didn’t you say QE ended last year? Yes and no.

About 15% of the Fed’s bond pile is turning into cash every year and it’s taking the cash and indirectly putting it back into the economy. The Fed is still pulling bonds out of the market and into its bottom draw and pushing, say 1% of its QE balance sheet back into the system every month. That is why the stock market isn’t crashing and that’s why bonds are still paying out zip in interest.

It won’t be until the Fed starts to shrink its ‘unconventional’ balance sheet that things will get sticky, but why do that, now or ever? Except perhaps if inflation took off, when pulling cash in by simply not replacing bonds that mature would snuff inflation out.

The problem lies elsewhere. How does the U.S. stop the dollar zooming through the roof again because of a QEing Japan and Europe?

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