It's time to retire QE
How "QE" has come to mean everything but "quantitative easing" and why we all need to move on
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And now, QE.
Quantitative Easing, or QE, is a monetary policy strategy under which central banks buy assets in order to boost inflation and backstop financial market confidence. I am sure some (many!) readers will disagree with this broad definition of QE, but I am also confident this outline is directionally correct.
The QE that market watchers came to know and fight about in the post-crisis decade involved the Fed buying Treasury notes and mortgage-backed securities. And at the more extreme end, the ECB was buying corporate bonds and the BoJ was buying ETFs.
The practical outcome of QE is that investors get pushed “out the risk curve,” which is to say: if you’d grown used to buying really safe long-dated Treasuries to earn a few percentage points of return, in a QE world you found yourself buying long-dated AAA-rated corporate debt or something for the same return.
Those who blame the Fed for all of the post-crisis economic challenges the globe has faced and for the wealth inequality that defines the global economy today often view QE as a program aimed at manipulating equity markets higher, as an explicit wealth transfer, and as the most sinister of all Fed policies.
For many Fed critics, QE is the true mark of the central bank’s incompetence and corruption.
But really, “QE” is no longer about QE at all.
Invoking QE in a “I have a thought on financial markets” context is now just another way — if not the main way — to say that you are smarter than the decision makers at the Fed. Or that you think stocks will go down.
And even broader references to QE have made it clear that QE is losing its usefulness as a two-letter acronym for the most potent channel central banks have for implementing monetary policy in a post-crisis world.
QE is dead. Long live QE.
This is not QE
A few weeks ago I came across this tweet from Chamath Palihapitiya:
It’s an interesting observation. A lot of the tech companies that were developed as software solutions for businesses are now getting into the game of actually funding businesses.
There’s a conversation to be had about whether these companies are really equipped to do the vetting and balance sheet risk management involved with sponsoring new enterprises. The role post-crisis banking regulation plays in encouraging traditional banks to shy away from smaller business funding, thus leaving the tech sector to take away this part of their business and expose investors to these financial risks through non-traditional channels, is another interesting area of exploration.
But what really stood out to me is that final line in Chamath’s tweet: “The Internet’s version of quantitative easing…”
Offering companies that use your platform working capital is obviously not QE. It’s not an asset purchase. And I don’t think Chamath meant it that way.
The usage of QE in this tweet is one in which we’re clearly seeing it serve as a catch-all for: “A money thing is happening.” This crisis-era innovation in central banking — an esoteric machination of central bank action that you see lots of bad YouTube videos about — is now a business pop culture reference to “money.”
Again, I am not here to bash Chamath’s take. I think his take is fine. It’s a whole thread. You can go read it.
But if Wittgenstein said “the meaning of a word is its use in the language” then the meaning of the word(s) “quantitative easing” are not what we learned them to be many years back.
Many readers might think this just doesn’t matter. Except words do.
Because the people who actually follow the Federal Reserve and who should definitely know what QE is and what it is not are also struggling greatly with the concept right now. And this misunderstanding hurts everyone.
This is also not QE
Back in September, the Federal Reserve began purchasing Treasury bills to alleviate pressures that had arisen in overnight funding markets.
Fed chair Jay Powell said at a press conference in September that, “Funding pressures in money markets were elevated this week, and the effective federal funds rate rose above the top of its target range yesterday. While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy.”
In October, the Fed outlined that they will be consistent purchasers of Treasury bills — read: short-term Treasuries — to alleviate said pressures in the repo market. As a result of this program, the Fed’s balance sheet is expanding.
When the Fed engages in proper QE, it’s balance sheet also expands. That’s why so many folks argue that current bill purchases are QE. Even though, again, it is literally not QE.
Nevertheless, the memes disagree.
And so the practical result of the Fed’s Not QE policy is that what seems like a majority of investors and commentators who, in theory, should be well-steeped in what the Fed does and does not do have completely ignored Powell’s statement that bill purchases “have no implications for the economy or the stance of monetary policy.”
Instead, the “This is QE” folks have decided the Fed must continue outlining why a thing they aren’t doing isn’t the thing they aren’t doing.
On Wednesday, Powell held another press conference and reiterated the “technical” nature of the Fed’s involvement in the repo market.
Some were not satisfied with his discussion of the issue because in their minds the action taken by the Fed are, despite what the central bank says, definitely QE.
Powell’s answer doesn’t really take on the point, in Plain English, of explaining why their repo operations aren’t QE. Mostly because he doesn’t have to. He later said it’s “hard to say” if the Not QE is impacting the market. But, again, that’s a non-answer.
These questions’ implication is that it is on The Fed to explain why a broad (and perhaps willful) misinterpretation of their actions is being undertaken by investors.
It is, of course, actually on investors and reporters and strategists to explain why they are choosing to misinterpret the Fed’s actions, and so Powell does not take the bait. (He’s a Republican, and only Democrats take this kind of bait.)
So but that we’re to the point of the Fed chair fielding questions about why the program they are currently undertaking is being a called a thing they are not doing shows just how far gone the letters Q and E really are.
You can pick the new letters
This is the part of the argument where I advance towards a new theory of QE, offer a new acronym, a fresh framework for understanding central bank activity in financial markets.
I will instead leave that to the central bakers and economic influencers of the world.
All I’m trying to say is that we have a lot of words available to us and the ones we’re using to describe the financial world as it actually is are now falling way short of doing that. And this hurts our understanding of what really goes on in the process.
Chamath’s usage of QE to describe things like Square Capital signals, to my mind, that something untoward is happening with these programs. Recall what critics of QE think the program is: a wealth transfer propagated by the Fed and the global elite.
But the outline Chamath gives us “Internet QE” is quite positive. At least in my view.
This “Internet QE” makes it easier in many cases for businesses to secure funding and incentivizes companies like Square and Shopify to iterate their own product alongside the needs of their customers they are now literally invested in. In theory (and perhaps in practice) this leads to a sharper focus when these companies develop new tools and services.
The economic reorientation of the tech sector around financial products is a fascinating turn. We shouldn’t belittle it with the QE label.
The software industry’s move towards in-house banking operations might open future opportunities to a new set of founders, investors, and institutional capital, and it changes the ceiling on what these businesses can be. Apparently they can also now be banks.
This “Internet QE” also changes recruiting patterns, company multiples, and is, as Chamath notes in his thread, a huge challenge to both venture and traditional financial sources of capital.
But QE’s negative connotation hurts the framework under which we discuss all this.
The reason the Fed’s current repo operations are being called QE is simpler: it’s because most investors don’t actually know what the Fed is doing. This isn’t new for the Fed or for general markets commentary. The entire industry thrives in the spaces between practiced, unintentional, and true ignorance.
But remember: QE is bad. And so the Fed’s actions are ridiculed while also not being understood because of their labeling, because of the word (or, in this case, letters) we’re using when talking about these things.
And words matter.
Now, I’m not one of these grammarians who cares deeply about whether it’s “who” or “whom,” when to use “I” or “me,” and so on. But the specific ways we choose to label people, places, and theories all inform our past, current, and future understandings of those things. And these choices matter a lot more in areas that aren’t financial arcana.
All this, of course, isn’t exactly breaking news: look around for about four seconds and you’ll see someone being wrong on the internet because of some semantic hangup.
Maybe that person will be you. It’s certainly been me.
And when we see language falling short of capturing truths that are right there in plain sight I think we’re obligated to say something. Or at least ask why.