In 2015, I wrote the article: Can The Fed Control The Fed Funds Rate In Times Of Excess Liquidity? Ultimately, the answer to that question was no. At the time, however, I had no idea what "excess liquidity" really was; I was just thinking about reserves. Little did I know that four years later there would be so much cash in the market that the world's central banks (with the help of Donald Trump) would actually push for negative rates.
But what have we learned about quantitative easing?
The short clip below, filmed 24 hrs prior to the ECBs announcement, can help to answer this question. It provides an honest assessment of central banking actions (namely QE and negative rates) by both a financial historian and a currency expert, but you have to read between the lines a bit.
The host starts out by asking:
Elsa, what I want to know is what have we learned about quantitative easing?...
Which he then follows up with his own answer...
There are different flavors, there are different shades. Is Mario Draghi humbled by what he's learned about QE and does he see a need for a new and different QE?
In other words, "Quantitative easing was a failure. When is Draghi going to get his head out of his arse and realize that you can't right the ship with lower rates and buying up more assets?"
lsa Lignos, global head of FX strategy at RBC, answers the question by saying:
I think central banks still broadly believe in the power of QE even if in some cases they are running out of assets to buy.
Even if? That's a big if.
Central banks are running out of assets to buy
Central banks are buying up so much paper they're running out of assets to buy. This is the problem with QE. It is a Ponzi scheme and Ponzi schemes only fail when they become insolvent.
The world is flush with currency so we don't have a liquidity problem, but we do have a solvency problem. Solvency refers to the ability of a business to have enough assets to cover its liabilities.
I can just imagine the conversations being had by central bankers across the globe:
We have a solvency problem guys. There's not enough paper out there to buy. Short-term, we're going to have to start paying people to take out a mortgage. And, we've got to keep pushing negative rates. Our long-term strategy is to maintain downward pressure on inflation with wages -- as long as wages remain low, those of us with capital will continue to reap the benefits of an increasing money supply without having to worry about inflation. The only problem is bitcoin.
You may think that last part about bitcoin is a stretch, but investors and central banks around the world are buying bitcoin. Some as a protest against the dollar, others as a protest against central banking policies, still others as a viable asset, especially at a time when negative rates are on the horizon.
When asked about negative rates, lsa Lignos, in the same clip above, responded by divulging a conversation she had with an EU policy maker. What was the policy maker's response to negative rates?
Nobody ever said risk-free rates should be high and positive. If banks are doing what they're supposed to do, they would actually be making more money. From the point of view of the real economy, it is a good thing.
What? This EU policy maker must have been channeling Scarface Tony Montoya because that is an absolutely "gangsta" thing to say. Forty years of financial theory regarding the time value of money down the drain.
This is the talking point you can expect to see -- coming soon to a media outlet near you:
Negative rates are a good thing for the economy.
It is a pitch being made all over the world. Banks have no reason to pay for deposits anymore. Who needs deposits when there are plenty of excess reserves from quantitative easing. Banks (wealth management not commercial) will certainly make more with negative rates than they would have with interest on excess reserves (IoER).
It's hard to say anything with conviction these days, but one thing is certain, liquidity is an issue (we have too much of it) and central banks are running out of options.
Well, you don't solve an overcapacity problem by lowering rates OR continuing on with another round of quantitative easing. That's essentially what the host of the show is saying to lsa Lignos about Draghi's "humbling" problem. The truth is, there is no way to unwrap a Ponzi scheme. All we can do is diversify assets (read: buy bitcoin, gold and real estate) and wait for the tipping point.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.