Felix Salmon

The surprising value of not tapering

By Felix Salmon
September 19, 2013

I’m very late to this — I was a bit distracted by other things today — but the big storyline of the day seems clear: the Fed didn’t taper, and markets surged in response.

So here’s my question. If you take the amount of tapering that the market expected yesterday, and the amount of tapering that the market expects today, what’s the difference, in dollar terms? In other words, by the time tapering ends, and the Fed is no longer engaging in quantitative easing, how much extra money will it have spent buying bonds, if current market expectations hold, compared to what the market expected on Wednesday?

Then comes the next question, which is this: how much did the value of US fixed-income assets rise on Thursday? And, for that matter, how much did the value of US stocks rise on Thursday?

I don’t know the exact answers to the questions, but I’m pretty sure that the latter numbers are much larger than the former — that the market reaction, in dollar terms, was hugely greater than the extra amount of QE that the market now expects.

If that is indeed the case, then what we’re seeing is what you might call the QE multiplier — the amount by which every dollar of QE effects the markets as a whole. I don’t know what we thought the QE multiplier was on Wednesday, but in light of Thursday’s market action we might need to revise our guesses: the QE multiplier is, I suspect, much larger than most of us would have pegged it at.

And that, in turn, is surely a reason to keep on easing. If QE does no good, then you might as well not do it. But the lesson we learned on Thursday is that the markets really, really love QE. And insofar as robust markets feed through into a healthier economy, the logical conclusion is that we should retain current policy well into 2014. The downside is limited — and the upside is much bigger than we thought it was.

16 comments so far | RSS Comments RSS

I don’t understand how you can say ‘the downside is limited’; or on what basis you feel you can quantify this.

What is the value of a reasonably responsive capital market? Does it matter that ours appears deeply broken? Bad news is good news? Good news is bad news? Downside limited.

EVERY asset class is now correlated (deflationary and inflationary assets rally in tandem), and the value of everything hinges on what comes out of a certain banker’s mouth.

Is corruption a possibility under these circumstances? It seems plausible. Price betrays early knowledge.

Posted by socalled | Report as abusive

Sure, the markets love it, because the QE money goes directly into the pockets of the banksters. How much good is it doing for the rest of us? There hasn’t been a “QE multiplier” driving up my paycheck.

Posted by Moopheus | Report as abusive

I’m with Moopheus.
We are in the mess we are in, fundamentally, because things were bought at a higher price than can be supported by fundamentals, i.e., houses and the MBS’s that the FED so willingly buys now cannot actually be afforded by potential home buyers. The FED is part of the troika of FED/Treasury/politicians that believe that ANY loss by any rich/venal/criminal/idiot banker is a loss that should not be borne – the banks should be subsidized by the middle class.
And yet Reuters has another article about the ever declining income of the middle class…

“While the Standard & Poor’s 500 index gained 16 percent on a total return basis last year, including reinvested dividends, the Census Bureau report showed median household income slipped to $51,017 from of $51,100 in 2011.”
http://www.reuters.com/article/2013/09/1 7/usa-economy-poverty-idUSL2N0HD0RU20130 917

Posted by fresnodanhome | Report as abusive

@Morpheus has it right.

Felix, please explain the transmission mechanism from QE to the real economy. How does it do anything besides rope people into asset bubbles?

Posted by the_pop | Report as abusive

Felix, so let’s do some math since you were too lazy to even try, given as you were caught up in other things.
The Fed is injecting $85 B a month. While no one knows how long the taper will be delayed, lets for funsies assume that this ‘extension’ is half the life of the next 12 months. In other words, postponed the start by 6 months. We can quite simply construct an equivalent scenario for 12. Anyway, that’s about $40B per month *6 = $240B. Let’s also assume reasonably that the Fed’s actions are keeping rates 200 bps lower than they should be. In other words, 2% of 240B is the Fed stimulus = ~$5B. Peanuts. And how much did markets rise? ~1% (though they’re down today). The US stock market is valued at ~$25 Trillion, so 1% is $250B (did I get the zeros right?) so your multiplier is essentially 250/5 = 50x. Impossible. Even if you assume this decision delayed the inevitable by 12 months, that’s a 25x multiplier. So, clearly this multiplier explanation doesn’t work. This is a bubble. Everyone is pegging their hopes on the same $5B in additional stimulus, seeing the impact everyone else is having, and driving their valuations up. On the other hand though, I’m happy it only rose 1% or $250B. That’s not a lotta crash to come either.
Anyway, my larger point being, maybe your previous post about journalists being happy, indolent and lazy is coming true… try harder next time. You can do it (you used to)… :-)

Posted by FDum | Report as abusive

What’s also weird to me is using a 1 day bounce of the markets to evaluate monetary policy. What happens if the markets drop by the same amount tomorrow for no apparent reason?

Posted by spectre855 | Report as abusive

Felix, please…..According to the New York Fed’s own data 2/3 of QE goes back to the Fed as excess reserves. The banks are not lending and you know that the monetary transmission mechanism is clogged. You must also know that the federal reserve member banks make a quarter of a percent on the excess reserves that they deposit at the fed. That works out to a little better than $1.7 billion over the course of a year. Nice profits for the member banks and zero risk.

Posted by Missinginaction | Report as abusive

@spectre855 Look at the chart of Wed’s market: there is a 1% spike exactly as the announcement is made, otherwise trading was flat all day…

Posted by CDN_Rebel | Report as abusive

So we should just drive up asset prices with no concern for what may happen in the future? Wow, it’s so amazing nobody ever thought of that. Oh wait, Alan Greenspan did in 1995. And when the stock bubble popped the Fed had to hold its foot on the gas to get the economy out of recession, which created a housing bubble, which when it popped lead us to the current mess.

These serial bubbles do nothing but enrich the wealthy and the financial sector at the expense of the middle class. How does anyone not see that?

The wealthy largely collect rents, and the financial sector doesn’t invest in productive capacity which makes society richer. America is getting _poorer_ by directing all of these resources away from its citizens and towards speculative activity. Doesn’t anyone understand that?

Posted by rp1 | Report as abusive

Fantastically daft.

Posted by tom_the_bear | Report as abusive

I second spectre. Haven’t we covered this ground before? Day by day market swings are pretty random, NOT a meaningful representation of changing expectations. Your daily market report is typically nonsense.

P.S. The Efficient Market Hypothesis is bunk.

Posted by TFF | Report as abusive

Then what we’re seeing is what you might call Felix’s Folly, his never-ending effort to explain complex daily market movements with simplistic explanations that lead to easy judgements and recommendations. I don’t know what we thought Felix’s willingness to simplify complex issues was on Wednesday, but in light of this terrible article we might need to revise our guesses: Felix’s willingness to simplify complex issues in order to make unsupported assertions is, I suspect, much larger than most of us would have pegged it at.

Posted by Badbisco2 | Report as abusive

Uhhh…..What lesson did we learn on Friday?

Posted by Missinginaction | Report as abusive

http://www.correntewire.com/there_is_mor e_than_one_way_to_burn_down_the_reichsta g

What if the debt crisis is not brinkmanship? What if the kleptocracy wants a default? …

Posted by lambertstrether | Report as abusive

“Doing the same thing over and over again and expecting a different outcome” – sure, the stock market benefits but how many average working people have big investments in the stock market? Plus, many of the major corporations on the board have outsourced their labor and built factories in other countries, so how does that help our workers? Or our tax base, since these corporations get tax breaks we can only dream of?

Follow the money – to the banks and the stock market. Interest rates so low that it is not worthwhile putting your money in a savings account. This affects many who have depended on the interest in the past.

Another QE just tells me our economy is NOT improving – if it were, there would be no reason for another QE.

Posted by AZreb | Report as abusive

Casinos really like it when you keep putting dollars in the slot machines, it pays out nicely for the house and a few winners.

Posted by 2Borknot2B | Report as abusive

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