I officially have no idea what QE2 is even supposed to be doing at this point.

Bill Gross is getting ridiculed for thinking that yields on Treasury bonds will rise when QE2 ends, even though the purpose of QE2 is to keep Treasury bond yields low.

It seems that the average economic reporter believes:

1) the end of QE2 will not cause a rise in Treasury yields

while simultaneously believing

2) QE2 is necessary to keep yields low.

Surely I must be missing something. The only way it makes sense is if the real purpose is something more like this.

4 Responses to QE2

  1. Taggart says:

    Bill Gross thinks yields will have to go up after there’s no QE2 to buy a huge portion of treasuries. If the government has to go and actually find buyers (not China, and not just as an instrument of growing the money supply), yields will have to go up in order to entice the market. There’s some evidence that this may not in fact be the case. At the beginning of the year most serious analysts predicted 4-4.5% GDP growth this year. Now halfway through the year they’ve adjusted that prediction to 2% (look at the numbers where we are right now and it’s impossible for us to get to 4% this year). The fact that we’ve had a flat recovery all year means that rates really don’t have to go up from here, we just haven’t seen the economy rebound. In fact if we do see another recession this year (now going on week 7 of market losses), we could see real prices go down and de facto deflation. Also, if you look at most of PIMCO’s funds, there’s still quite a bit of government debt in them as well.

    This causes a problem for the crowd that consistently calls low job growth reports “surprising”, because it takes admitting that the government grows the money supply buy having one entity (the fed) “buy” securities from another entity (the treasury), among other things (including the “unexpected” revised growth numbers).

    On a side note, I think Bill Gross is a genius (look at the returns on PTY compared to closed end equity funds), but I think his timeline is off on this one by 6-12 months. That said, I’m buying TBT this week, because I think there’s going to be an end of QE2 panic.

  2. Handle says:

    It’s to prevent a Fisher-esque debt-deflation vicious cycle in the face of massive foreign currency manipulation and trade-balance distortion (and therefore employment-level suppression). By this very low bar – the program has not been an utter failure.

  3. vimothy says:

    One thing to bear in mind viz-a-viz US debt is that if everybody knows that QE is going to end on a certain date then the event should *already* be included in the price. At least, that’s the theory.

    I’m not too up on what the Fed thinks its doing (UK-based Sith resistance here), but anyone got linky to Fed officials explaining it’s actions to a non-lay audience? I imagine its more about portfolio balance effects and money supply expansion (tho maybe the Fed doesn’t use those terms).

  4. vimothy says:

    The Business Insider piece was a bit TLDR for me, but I scanned it quickly and if certainly gave off bad signals.

    Lemme suggest something a bit shorter and more rational as a way in to understanding quantitative easing: http://mattrognlie.com/2011/05/26/how-did-small-losses-lead-to-the-great-recession/

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