Main menu

With no shortage of liquidity, more QE is unnecessary



Here are some charts which recap my argument that there is no evidence that liquidity is in short supply, and thus no need for further quantitative easing from the Fed.


Swap spreads are excellent indicators of systemic risk, which can be aggravated by an effective shortage of liquidity. At 26 bps, 2-yr swap spreads reflect no sign of any such liquidity shortage. Swap spreads at current levels are fully consistent with "normal" liquidity conditions.


The dollar is up on the margin since last summer, but it is still very low from an historical perspective. If dollars were in short supply, the dollar would likely be a lot stronger.


Even with today's $35 drop, gold prices are still extremely high, both from a nominal and a real perspective (the average price of gold over the past century in today's dollars is about $500/oz.) Gold is a very sensitive indicator of monetary imbalances, and today's selloff comes not as  result of a future shortage of money, but rather from the fact that the market is now expecting monetary policy to be less easy—but still very easy—than previously expected.


Commercial and Industrial Loans are growing at double-digit rates. Banks are lending to small and medium-sized businesses once again, and business is booming on the margin. No sign here of any need for the Fed to push harder on the monetary accelerator.


Growth in the M2 measure of the money supply has been abundant. The Fed has eased monetary conditions in response to surging demand for liquidity—as it should—but in the absence of further shocks there is no reason for further easing measures. In the meantime, there are trillions of dollars of cash (savings deposits at U.S. banks have increase by more than $2 trillion in the past 3 1/2 years) sitting on the sidelines that have the potential to "reflate" the economy as confidence improves.


Commodity prices are still off their recent highs, but they have been rising for the past 3-4 months and they are generally higher today than they were prior to the last recession. The collapse of commodity prices in 2008 was good evidence that the Fed was slow in easing policy in response to the financial crisis, but the recent drop looks much more benign. Moreover, oil prices remain quite strong, and gasoline prices continue to rise. If anything, the behavior of commodity prices is more consistent with an abundance of liquidity (i.e., monetary policy that is very loose) than with any shortage of liquidity. Since the Fed started easing in 2001, commodity prices by this measure are up over 140%.


This chart compares the spread between 2- and 30-yr Treasuries (a good measure of the steepness of the yield curve) with the inflation expectations embedded in Treasury yields. Both have been rising for the past several months, an indication that liquidity conditions actually have been easing. The market essentially has been realizing for months now that what the Fed was doing (by keeping short-term rates very low for an extended period) was effectively increasing the supply of liquidity to the market. Again, no reason for the Fed to do more than it is already doing.

Filled Under:

0 comments:

Posting Komentar