Rickards revisits perpetual QE
Jim Rickards revisits the issue of perpetual QE in his latest interview with King World News, here.
He says his piece was misunderstood by many, saying that the point of QE is not to monetize the deficit but to keep interest rates low. For that purpose, the $750B to be yielded by principal repayments on the MBS portfolio ($500B) plus the Treasury portfolio ($250B) is adequate to put fear into the market.
The principal reinvestment program was started about August 17, 2010 and QE2 was added on November 4. A timeline is here.
The purpose of QE2 was to purchase a further $600B of longer term treasuries before July 1st, 2011 starting Nov. 4, as explained here.
I don’t understand Rickards’ new argument for these reasons.
First, I think the purpose of QE is to monetize the federal debt (not specifically the deficit) in order to keep interest rates low AND provide a buyer for the federal debt at interest rates lower than they would otherwise be. The Fed apparently judged that the existing reinvestment of principle payments was insufficient for that purpose. Therefore, they extended QE with QE2 to monetize another $600B of the longer term debt.
The QE2 program is generally regarded as a failure because longer term rates went up, but they have not gone up much yet (about 0.5%), and it is possible that rates would have spiked if the Fed had NOT been there with $300B in easy money at the longer term bond auctions.
Second, if the reinvestment program was judged an insufficient source of easing in November when QE2 was launched, why would it be a sufficient source of easing NOW if QE2 went away? Is this a goldilocks situation where QE2 was too much and nothing was too little, but the reinvestment program was luckily just right?
We no longer have the original $1.5T of MBS. That has diminished to $0.95T, probably reflecting defaults more than principal repayments. Also, in the latest month of data, I found there had been $80B of QE2 and only $22B of reinvestment, suggesting that Rickards’ estimate of $500B due to reinvestment is much too high (12 * 22B/year = 264B/year).
Looking at these figures I don’t see how one can argue that quantitative easing is somehow going to continue under a different name. We’re just going to get a lot less QE.