global japanification points to QE3

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The concurrent global slowdown suggests rising risk that the present European recession may become global.

This possibility is alarming, as many nations have fiscal metrics that will become unstable if there is even a mild recession. The world needs easier monetary policy, and monetary policy is bond buying, so i judge that we have not yet seen the bottom for bond yields.

The weaker than expected US employment report has got the usual chins wagging about further Fed easing.

The WSJ’s Hilsenrath writes that that the jobs report:

is sure to sharpen a debate at the Federal Reserve about whether to take new actions to spur economic growth, but it likely doesn’t settle it

The NYT’s Appelbaum writes that the report ‘increased the odds’.

The FT’s harding hasn’t written a Fed article yet, but contributed to this piece on the current global slowdown. The article contains this nice quote:

“There’s little fundamental value here in owning 10-year Treasuries at 1.50 per cent, unless you think we are following Japan into a lost decade with deflation,” said Gerald Lucas, senior investment adviser at Deutsche Bank.


The way i see things, the SNB, BoE, ECB, Fed and BoJ are all either in the process of expanding their balance sheets, or about to announce further expansion. They mostly buy Govvies, and they want the price to be higher (as that’s how they think they can ease monetary conditions) – so that’s what’s going to happen.

Money is fungible, so even if they do not buy Aussie Bonds, the capital they displace will find its way into our market, and further reduce the yields on Australian Government bonds.

One comment

  1. QE3 may be coming, but unless the Fed says to what end (ie to boost demand), it may not do much. QE2 quickly led to higher bond yields than when it was announced because it “signaled a new Fed determination to boost AD, whatever it takes” . QE3 will not be a success if it reduces yields below where they are now.Sumner is fond of saying that “with much faster expected NGDP growth there would actually be less demand for base money in the US. How much QE would it take to get back to the old NGDP trend line? Roughly negative $1.6 trillion.”

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