Citi takes a different route to get there but the result is just as paradoxical.
From ValueWalk:
Citi analyst Mark King worries that QE won't drive productive investment but will prevent unhealthy firms from going under
The European Central Bank is starting QE this month in order to fight deflation, so it must be at least a little unsettling when Citi comes out with a new report titled “Is QE Deflationary?” While Citi analyst Mark King acknowledges that US and UK wage growth, positive economic surprises in Europe, and lending growth are all encouraging, but he’s not convinced that the news is as good as it seems.
“Lower oil prices, 18 central bank easings in the past three months, and record lows in bond yields. It all ought to prove highly stimulative. Yet we doubt that the sixth trillion of QE will succeed where the first five have failed,” he writes.
QE doesn’t deal with overcapacity...MORE
If companies are turning deciding not to make productive investments because financing is too expensive, then pulling down that cost should lead directly to higher capex. But if companies don’t see anything attractive to do with their cash, record low interest rates won’t make any difference. Companies will still make use of the low rates for refinancing old debt, stock buybacks, and the like, but cheap credit can’t make interesting projects suddenly appear.
King takes this argument a step further. If the world is under deflationary pressure caused by overcapacity, then allowing weak companies that would normal go bust to refinance and scrape by actually makes the problem worse. As investors get ever more desperate for yield, risky companies find it easier to issue new debt. You can also see the effect of oversupply in commodities prices, which have been falling for the last two years even if you ignore headline-stealing oil prices....
*August 11, 2011
When a government bond becomes a Giffen good
Re-ref'd in 2013's
Is QE deflationary or not?
We first proposed the idea that QE could be (but wasn’t necessarily) deflationary a couple of years ago. It was dubbed a counter-intuitive idea by Tyler Cowen.Also Aug. 2012:
More recently, a similar proposition has been made by Stephen Williamson — though this time using models and proper math. His view is a little different to ours because it’s less focused on the safe asset squeeze and more on the conditions that generate a preference for cash over yielding paper in the first place. Hint: you have to think the purchasing power of cash will go up regardless....
The unintended consequences of QE: not what you think
And our series picking on the commenters at Marginal Revolution linked in:
Marginal Revolution's Tyler Cowen: "...Kaminska Wins"
