My concerns about QE:
1. It was a placebo that won’t work next time thus creating a surprise, not yet fully discounted by the stock market.
2. QE and associated polices of NIRP and bailouts, including the Japanese and Swiss central bank’s purchase of equities have created moral hazard that encourages speculators to operate in a riskier manner thus building up a higher degree of hidden risk that eventually will bubble to the surface and disrupt the economy.
Imagine investors seeking to make income from writing naked put options. If they were lured into a false sense of security that they are entitled to a perma-bull fantasy of central banks bailout of markets then they may act recklessly and take on too much risk writing puts. This will result in larger, deeper, more bizarre, faster crashes thus damaging everyone’s economic confidence resulting in less consumption as people seek to save more. Assuming the Invisible Hand can somehow anticipate this and discount the risk then businesses will react to the risk of crashes by refusing to commit to capital expansion projects and will instead hang on to old shopworn, low tech equipment to avoid being stuck with new capital assets during a depression. Insurance companies, vital for businesses to function, will have to reduce insurance coverage to businesses to offset the higher contingent risk of a huge Flash Crash which would affect their portfolio and affect the health of the economy.
3. QE and Nirp do a greater degree of deflationary influence on consumers than they exert an inflationary, confidence building influence. This is because the devastating blow of a hapless pensioner having his bonds refinanced down to Nirp yields when the retiree is too old to work will result in people becoming alarmed about how bad things are; by contrast, a lower cost to borrow may not overcome a rising risk premium associated with business risk during a Soft Depression, thus low rates won’t stimulate economic activity amongst borrowers.
4. QE creates a shortage of safe assets. These assets are used as a form of money by foreign central banks and used for collateral by securities and insurance companies. These vital functions have been disrupted in Japan and in the EU by their bond-destroying NIRP policies.
5. A key component of marketing and business growth is for merchants to create a safe and inviting environment to go shopping. If a shopping mall is offensive, scary, and crime ridden then sales will drop. If consumers in a Zirp world go shopping after paying a central bank “tax” of negative interest rates, they may react by feeling poorer and thus try harder to save even while enduring a negative interest rate. Their shopping will be in low-profit, low wage stores, thus exacerbating a recession. They may become despondent and alienated from government, resulting in some type of less cooperative behavior with government, resulting in a waste of resources trying to maintain order, or they may withdraw from economic activity or immigrate to other countries. Future would-be immigrants who can earn and save may decide not to come into the U.S.
6. The “Money Illusion” is a behavior where consumers become fixated on nominal yields rather than real yields. A world of negative yields that are actually zero real yields will make consumers angrier than they should be because people operate off of old, irrelevant memories of the “good old days” in the 1990’s when they could earn 6% or even 8% in investment grade bonds. Consumers who purchase cash value life insurance or annuities will get angry when confronted with negative yields in these instruments, resulting a breakdown of the insurance industry when the thrill of tax saving is ruined by negative interest rates in insurance products. Assuming an insurance company charges 2% a year and has a base rate of negative 2% yield during a period of negative rates then consumers will have to accept a 4% negative yield on their cash value insurance or annuities, virtually destroying that industry when consumers lose the benefit of tax-free compounding, etc.
7. If stocks deserve to be priced at a PE10 ratio of 15 then they need to come down to half of their high water mark. If QE is a powerless placebo then when the SP drops in half it may stay in half, especially as retired consumers get angry that they will have less purchasing power.
The idea that a wealthy investor sells his bonds to Fed during QE and then goes to the market and spends the funds on consumption has been discredited. What also should be discredited is the idea that the investor immediately buys stocks with the QE provided cash. I think if an investor was desirous to own X% of assets in bonds and he sold them to the Fed he will soon review his plans and decide he made a mistake and decide to purchase a slightly different set of bonds, thus making rates drop a few months after a QE program.
It takes a certain type of mature, affluent investor to commit to owning a portfolio with a high allocation to bonds. Such an individual might not abandon his bond admiring philosophy during QE and thus the Fed’s money-printing purchase wouldn’t really motivate the investor to start a business or buy stocks.
Investors need independent financial advice about the risks of QE.