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Was QE worth it?

Published

3 days ago

June 25, 2024

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When they undertook quantitative easing, central banks created billions of dollars, euros, pounds and other currencies. They used the money to buy assets and are now divesting them at a significant loss. The big question is: was it worth it?

Last week, I examined some of the institutional and accounting features of QE, which make the subject so difficult. To recap, the main effect of the stimulus programme was to shorten the effective maturity of consolidated public sector debt, swapping long-dated bonds into the equivalent of perpetual debt remunerated at the overnight central bank policy rate.

This was profitable when rates were low, but now borrowing costs have risen, it makes a loss for the public sector. These are real losses, borne by taxpayers with people or institutions in the private sector gaining.

Countries account for these losses in all sorts of ways, with the UK being transparent and taking them upfront while the US, Eurozone and some others tend to delay putting them into their public accounts.

Today, I will examine how much this matters and whether it should affect our assessment of QE.

How big are the losses?

This is a difficult question. QE is not over and the scale of losses is extremely sensitive to the level of short-term interest rates, so we cannot give a clear answer here. But that does not mean nothing can be said.

In the US, for example, the Congressional Budget Office just last week updated its assessment of income it expects the Federal Reserve to pay to the Treasury in coming years, remembering that the US brushes QE losses under a large rug labelled “tomorrow’s problem”.

As the chart below shows, the Fed has stopped paying money to the US Treasury until it repairs its own losses. It was paying around 0.4 per cent of GDP each year until 2022 and now it pays zero.

The CBO projects that it will not get back to 0.4 per cent until 2033, much later than it previously expected because interest rates have stayed higher for longer, increasing the Fed’s losses. On my calculations, the cumulative lost revenue, and hence extra debt, for US taxpayers is 3.2 per cent of GDP, or $900bn.

Of course, I am including neither past profits from QE nor the benefits of asset purchases to the economy, so it is a very crude measure and not a cost-benefit analysis of QE.

Using the UK’s Office for Budget Responsibility’s projections, a similar calculation for UK losses arrives at a figure of about 8 per cent of GDP, more than twice as high and definitively very large. Net of previous profits, it would still come out at more than £100bn or about 4 per cent of GDP.

Why has the UK lost more?

This is entirely in line with most other research, which estimates losses much higher in the UK than in the US and Eurozone — and these are higher than in smaller economies that did less QE.

Michael Saunders, a former BoE MPC member now at Oxford Economics, estimates that the mark-to-market capital losses in late 2023 for the UK were 23 per cent, compared with 13 per cent for the Fed and Eurozone and 11 per cent in Canada.

Stephen Cecchetti and Jens Hilscher estimate the peak losses are about 1.5 per cent of GDP in one year in the UK, compared with 0.5 per cent in the US and 0.4 per cent in the Eurozone.

Since QE is a maturity transformation of overnight interest-bearing debt swapped for longer-dated bonds, higher losses arise when more QE is undertaken, when policy interest rate rises further and when the maturity of bonds purchased is longer, since their value falls more when interest rates rise.

As the table below shows, the UK was on the wrong end of all of those parameters. It was particularly exposed due to the fact the government issues extremely long-dated debt compared with other countries.

This would normally insulate a country against interest rate risk, but not if you have in effect swapped it for debt paying interest at the overnight rate. You might, therefore, more accurately say that the UK lost its advantage in issuing much longer-dated bonds.

In addition, the country has not undertaken cost mitigations, such as limiting the amount of debt on which the central bank pays interest, unlike the ECB (although the Eurozone actions here should be noted are minimal).

Who gains?

Private sector banks are gaining from being remunerated at the policy rate risk free, for doing not very much. Of course, they have not chosen to hold these deposits, which have been created as a result of QE, but it is easy money for them at present. Private individuals gain to the extent that banks pass on this interest to customers in the form of higher interest rates on savings and lower borrowing costs.

Another group seeing gains, it appears, is foreign central banks. Since the BoE started actively selling its portfolio of long-dated debt, IMF data in the chart below shows that the foreign official sector has increased the share of UK debt it holds.

These institutions have paid a fair market price and have limited the amount of UK debt the private sector has had to absorb, so the UK can be thankful they have been willing to purchase its debt. It was particularly welcome for the country in the 2022 “Trussonomics” disaster when UK debt was distressed.

Of course, if UK government bond yields fall sharply as interest rate expectations decline, these other central banks will make a tidy sum.

So, was QE worth it?

There was a time when the cost-benefit analysis of QE was quite simple. On the benefits side, there were profits made from lower-cost public borrowing and improved macroeconomic outcomes. On the cost side was a sense that lower interest rates had artificially inflated asset prices and pushed them out of the reach of the young and poor. At the time, central bankers could sit back, pause, and with some justification say the following:

These calculations are very difficult
What was the alternative? No one else was stepping up to provide stimulus and the economy needed it
The side-effects on asset prices were a necessary price to pay for avoiding the much worse consequences for the young and poor of a prolonged economic slump

Now we know that the exit from QE has involved significant losses to taxpayers, the balance of the cost-benefit analysis is worse than we used to think.

Would these taxpayer costs have been better spent through fiscal stimulus? Should central banks have put in place better mechanisms to limit losses?

For what it is worth, outside the UK I don’t think central bank losses change the balance of argument that much. Although the numbers are large, they are not large enough to change the calculation. This is now something that is worth greater research.

In the UK things are, however, a bit different. There is absolutely no evidence that UK QE was more effective than that in the Eurozone and the US, but it cost two to three times as much. At some point the BoE will need to answer questions on why its version of QE was so expensive and why cost mitigations were not introduced.

What I’ve been reading and watching

The Bank of England performed a U-turn on data dependence last week. Its willingness to set policy according to service-sector inflation and wage growth applied, it appears, only if the data was behaving as officials expected. What seems to be a majority on the committee (we do not know for certain), now thinks the data is a blip in an underlying successful disinflation strategy and the BoE is set to cut rates in August, rather as the ECB did in June. I said the BoE should “be more ECB”. In a welcome move, the central bank may have taken my advice
Oh my! Bob Zoellick, former World Bank president, has broken the unwritten rule that officials and former officials don’t criticise each other. He accuses Jay Powell and Christine Lagarde of being data dependent because they “don’t know what to do”, accuses them of being unable to carry the respect of others on their policymaking committees and, in Powell’s case, being politically motivated
Mohamed El-Erian says the Fed needs to get on with cutting rates and might have to cut more if it delays too much. His argument does not reflect the recent US data that suggests the Fed has more time to decide than its critics believe
Brazil is testing the independence of its central bank, with senior figures in President Luiz Inácio Lula da Silva’s ruling party filing a lawsuit against central bank governor Roberto Campos Neto. They want him banned from making political statements, but what they really want is lower interest rates. Last week the Banco Central do Brasil held its interest rate at 10.5 per cent after a unanimous vote, citing the need for “greater caution” in the current economic environment when it raised its inflation forecast. This will not repair relationships

Charts that matter

More than one chart this week, because it is necessary to look at the effect of French politics on the ECB. Clearly, snap parliamentary elections might fundamentally alter French politics, its fiscal policy and its relationship with the rest of Europe, as Gideon Rachman explains here.

Will it trigger a new euro crisis? That is a possibility but there is no sign of it yet and the market moves have been modest. The scary chart below is the normal one you see, showing a big surge in the spread between French and German borrowing costs.

It looks bad but if you click on the chart, you will see the blip is smaller than a similar event before France’s 2017 elections and much smaller than the surge in Italian spreads after the election of the populist government in 2018.

More to the point, it is often good to look at levels rather than spreads. The main market move to date has been to cut German borrowing costs rather than to raise French ones. There has been something of a flight to safety rather than punishing France so far.

In these circumstances, there is no doubt that the ECB would do nothing. Fiscal profligacy is something first for France to deal with and then for the European Commission.

Things would have to get a lot worse with market moves threatening to spill over to other Eurozone countries or a wider systemic debt crisis before the ECB starts using the powerful tools to buy debt at its disposal. In fact the very existence of these tools is likely to limit the chance of having to use them. This is not 2011 (yet).

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Psychiatrist Bessel van der Kolk: ‘When trauma becomes your identity, that’s a dangerous thing’

Published

7 hours ago

June 28, 2024

Press Room

Psychiatrist Bessel van der Kolk: ‘When trauma becomes your identity, that’s a dangerous thing’

The sound of piano music floats among the white-linened tables of the Red Lion Inn’s dining room as Bessel van der Kolk declares the end of humanity.

“We are doomed as a species!” says the 80-year-old psychiatrist, perhaps the most influential of the 21st century, leaning towards me across a half-empty glass of Sauvignon Blanc.

“We can’t do it! We can’t use our rational brains,” he continues, with the vigour of a much younger man. “Climate change. It’s very serious stuff! . . . Are you still flying?”

He jabs a finger in my direction. I confess that I am.

“You know you shouldn’t!” he says in a thick Dutch accent, his bearded face creasing with affable frustration.

Over the past few hours in this corner of rural Massachusetts, I’ve learnt that the energetic octogenarian is not short on strong views. We have already touched on the militant group Hamas (“What the hell were you doing?”), and will later get on to Sigmund Freud (“a bit of an egomaniac”) and Brexit (“You guys fucked that one up!”).

But van der Kolk has built a storied career on stubbornly staking out contentious positions. One of the first researchers to study post-traumatic stress disorder in Vietnam war veterans in the 1980s, he spent the ensuing decades fighting a tide of indifference in the academic community over the psychological impact of the worst horrors that can befall human beings.

In recent years, his 2014 masterwork The Body Keeps the Score has become an improbable sensation. Buoyed by a groundswell of popular interest in trauma and psychology in the wake of the pandemic, the dense, scientifically rigorous text has become a latent, runaway success, spending nearly 300 weeks on the New York Times bestseller list.

“It feels odd,” he says of his elevation to the internet’s favourite therapist. “Because it’s a sort of external persona that you become, but of course I am unchanged. I’m still the same old flawed creature I’ve always been.”

The 18th-century Red Lion Inn is a curiously tranquil place to be meeting this archaeologist of nightmares. As I await van der Kolk’s arrival earlier that afternoon, the faint smell of potpourri wafts from among chintz armchairs in the lobby beyond. Above my head, I notice absent-mindedly, the ceiling beams host an impressive collection of antique teapots.

“You flew all the way here from London?” he says a few minutes later, settling into his chair and scrutinising me through wire-rimmed glasses. “This had better be a good lunch!”

The thesis of van der Kolk’s book, and indeed much of his life’s work, is that horrifying experiences leave an imprint on the mind and body that prevents them from being properly consigned to the past. As a result, traumatised people become stuck, like mosquitoes in amber, frozen in the moment of catastrophe.

“You and I, what will we remember of this lunch a year from now?” he says as we each order a glass of white wine and look out over the thick forest carpeting the surrounding Berkshire mountains. “Maybe what we ate. Maybe something else. But we won’t have nightmares about it.

“But if something terrible were to happen from now on, sitting at a table like this may become a trigger for me,” he continues. “Somebody who looks like you. The sensation becomes the trigger for the emotional experience.”

The book describes case studies of unthinkable horrors. A woman wakes up during surgery to feel a scalpel lacerating her abdominal organs; a married couple miraculously survive an 87-car pile-up on a Canadian highway.

But while these extraordinary events are edge cases, van der Kolk argues that it is “extremely common” to experience trauma. “I’m about as privileged as you get, and my life is still hard,” he says, in a whispery intonation that frequently reminds me of David Attenborough. “We all have people die on us, people disappear on us. It’s challenging.”

A waiter arrives with a goat’s cheese salad for me, adorned with candied walnuts. Van der Kolk, who has declined a starter, sips his wine contentedly as I chomp hastily through pear and radicchio.

We turn to his childhood in the Netherlands in the aftermath of the second world war. Van der Kolk says his father, despite being jailed by the Nazis for his pacifism, was an authoritarian at home. “I said, ‘Dad, you were in a Nazi concentration camp, and here you are running a house like a concentration camp!’” he says.

The impact of “adverse childhood experiences” is a major thread of van der Kolk’s work, and explains why so many people bear the hallmarks of traumatic stress, from depression to addiction. The Body Keeps the Score argues that child abuse constitutes the “gravest and most costly public health issue in the United States”.

In a landmark 1998 US study cited in the book, more than a quarter of respondents said they had been physically abused as children. It also found that people who had four types of negative early-life experience — such as abuse, neglect or family dysfunction — were seven times more likely to become alcoholics than those who had none.

“Everybody who gets hurt at home tries to pretend it’s normal to everybody else,” says van der Kolk gravely of the child’s evolutionary impulse to protect the bond with their caregiver, even if that person is causing them harm. “You’re not going to tell your classmates that something [bad] happens to you.”

A waitress deposits a Subway-sized lobster roll in front of van der Kolk and hands me a plate of steak so large that its accompanying frites are spilling on to the table.

A few weeks before our meeting, the social psychologist Jonathan Haidt published the much-discussed The Anxious Generation, which links the recent rise in adolescent mental-health problems to the increased use of smartphones among young people.

“Very important book I think,” says van der Kolk, attacking his lobster with his knife and fork. “This huge flag that he’s raising, I don’t know what the hell we’re going to do about it.”

Like Haidt, van der Kolk argues that the rise of screen-based communication, propelled by the pandemic lockdowns, has degraded the experience of human interaction. “On a screen, you don’t work for it, you get a reward without reciprocity,” he says. “That’s huge. You don’t have the sense you’ve done anything, any sense of accomplishment. You get cheap rewards for minor actions, and it’s meaningless.”

The pandemic also accelerated a shift in the way people think about themselves, as a social-media-driven focus on identity fused with concerns about our collective mental health. The result has been a growing cultural preoccupation with trauma — a word that is invoked everywhere from university campuses to TikTok.

“Did you ever take a history course?” says van der Kolk of the popular argument that we are living in an unusually traumatic era. “Read about the French Revolution?”

For van der Kolk, there is a strange irony that the concept he worked so hard to inscribe into the academic canon has become a mainstay of online culture.

“The moment I saw trauma, it grabbed me,” he says, remembering the day in 1978 when he first encountered a Vietnam veteran with PTSD. But as he pursued the subject further, he says, “My colleagues would say, ‘What’s this trauma bullshit? After you croak, no one will ever talk about trauma again.’”

Despite the popularity of The Body Keeps the Score today, he says that the academic community remains fractured in its understanding of the mechanisms and treatment of trauma. (It has also battled institutional dysfunction: in 2018, van der Kolk was fired as medical director of the Trauma Center in Massachusetts over what was characterised as an allegation of bullying, which he denies, saying he was removed to “mitigate . . . legal liability” over the actions of another employee.)

“Maybe from the outside, you see people have adopted [the concept of trauma] . . . I don’t see it in the major academic institutions,” he says. “It’s curious how widely the book is read.”

We are meeting as the conflict between Israel and Hamas has killed more than 30,000 people, and is threatening to spill over into a broader regional war.

I ask if he views such events through the lens of trauma — of each side reacting not just to the immediate demands of warfare but also to years, even generations, of pain.

“I get both stories,” he says, referring to the fraught histories of Israel and Palestine, “and they’re both horrible trauma stories . . . [But] we all come from generations of trauma. It’s no excuse. When trauma becomes your identity, that’s really quite a dangerous thing.”

“What’s appalling to me is that ideology is trumping facts,” he says, noting that he has faced accusations of antisemitism for making public reference to the Palestinian death toll without mentioning the Israelis killed on October 7.

“It’s tearing America apart,” he says. “This may just have a disastrous result on our election.”

Van der Kolk, who emigrated to the US in 1962 and now lives with his wife in the nearby Berkshire Hills, appears to retain a fondness for his home continent. He calls the European Union “the greatest miracle of our time”. The American healthcare system, by contrast, he describes as “a disaster”.

“There is something about this high-risk living in America that really brings out the best and the worst in people,” he says thoughtfully. “If I’d stayed in Holland, I would’ve become chronically depressed.

“In America,” he adds with a chuckle, “I’m chronically anxious.”

The dining room has thinned out and the chattering of lunchtime guests has dwindled to a low hum. A waitress removes my long-finished plate and asks if we’d like a second glass of wine as van der Kolk picks at the last of his lobster.

“I’ll get another,” he says brightly, after some consideration.

If the first half of van der Kolk’s book is concerned with the damage that our existence can inflict on us, the second proposes solutions for how we might be healed. Contentiously in this golden age of talk therapy, he is sceptical of the power of language to treat psychological injuries.

“These are habitual, visceral reactions,” he says. “Understanding why doesn’t rewrite the experience . . . Talking about why my tennis game was off is not always useful. I need to go back on the court and practise again.”

He is similarly lukewarm on mainstream pharmaceutical interventions for depression and anxiety, such as Prozac and other selective serotonin reuptake inhibitors, or SSRIs. “It’s: let me give you a pill, and stop being a pain in the ass!” he says of psychiatrists’ tendency to prescribe drugs that simply block out psychological pain.

Instead, he believes that the brain can be more durably rewired to properly integrate traumatic experiences into memory, using more experimental treatments such as MDMA-assisted therapy.

“In psychedelics, it’s as magical an exploration of the world as you can have,” he says, with evident enthusiasm. “It’s entering a territory you don’t know anything about, and stuff comes up that you didn’t know was living inside of you.

“You go there and part of you experiences it,” he continues, “and part of you observes yourself experiencing it, and the experience is very much like, ‘Oh my God, that’s what I went through.’”

He argues that the clue to healing may lie as much in the body as the mind. Yoga can produce “quite dramatic” results in traumatised people, he says, noting that he recently visited a prison that had implemented a programme for inmates based on his book.

“A goddamn healing environment in a maximum-security prison?” he says. “That’s stunning.”

Van der Kolk’s book contains frequent admissions that the mechanisms behind many trauma treatments, some of which border on the bizarre, are not fully understood. (He is particularly enthusiastic about eye movement desensitisation and reprocessing, or EMDR, in which patients move their eyes from side to side while remembering traumatic events.)

I ask if we will look back on such methods as laughably rudimentary in years to come, in the same way that we see bloodletting and lobotomies today. “I hope so! . . . It’s the nature of the beast, we always cling to stuff that to other people sounds ridiculous,” he says. “But I hope that 50 years from now we’ll be laughing at ourselves.”

As we finish the dregs of our wine, I note that van der Kolk’s continued enthusiasm for his field is impressive at an age when most people would be enjoying a quiet retirement. “What do I do?” he says incredulously. “Learn how to play golf?”

He suddenly grabs his phone in alarm. “Oh my gosh, it’s almost three o’clock. Oh boy! Who did I stand up?”

He tells me he has a patient to see. I call for the bill. We shake hands, say our goodbyes, and he’s off into the forest.

India Ross is the FT’s deputy news editor

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Is your dog ugly? Find out in this week's news quiz

Published

7 hours ago

June 28, 2024

Press Room

Is your dog ugly? Find out in this week's news quiz

Angel Reese, Justin Timberlake, Wild Thang

Andy Lyons/Getty Images; Michael Tran/AFP; Josh Edelson/AFP

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Andy Lyons/Getty Images; Michael Tran/AFP; Josh Edelson/AFP

This week, there was a debate — over whether the Las Vegas monolith was placed by aliens or humans, of course! (We’re on Team Alien.)

We found out where brain waste goes, and it’s not into a landfill with most of your recycling. And we learned what sideshows are — the non-carnival kind.

Most of that’s not on the quiz, though. So how well did you pay attention to the rest of the news? You’re about to find out.

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It is not too late for Joe Biden to go

Published

14 hours ago

June 28, 2024

Press Room

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The best that can be said of Joe Biden’s stumbling debate performance was that it took place in June. If he were pressed to step down as nominee there would still be two months to go before the Democratic convention. For Biden’s loyalists, who have always moved swiftly to shut down any hint of dissent about his candidacy, Thursday night was a moment of truth. For more than a year, private conversations in Washington have been dominated by the president’s ageing. But the public omerta on that topic broadly held up. That cognitive dissonance has now collapsed. The story is now about whether Biden can be persuaded to step down.

The choice is his alone. Having crushed the Democratic nomination, Biden would be within his rights to ignore pleas to step aside. Potential alternative nominees, such as Gavin Newsom, California’s governor, and Gretchen Whitmer, Michigan’s governor, will be unlikely to speak out. The risk of being labelled a traitor and ruining their presidential chances would be too great. There is no such thing as a committee of party elders who can prevail on Biden to vacate the crown. He is the leader of the party. A tap on the shoulder from the younger Hillary Clinton, 76, or the much younger Barack Obama, 62, would risk backfiring.

Those who know Biden best say the only people who could influence him are his family, starting with the first lady, Jill Biden. Biden is a stubborn man. Most presidents are. Until Thursday night, he believed he was the only Democrat who could beat Donald Trump. Now it looks like he is on a course to defeat in November. As Biden’s mumbling, and often inaudible, performance went on, the prediction markets reacted in real time. By the end of the debate, one political betting market, PredictIt, gave Trump a 61 per cent chance of winning, having started the debate at 53 per cent. This put a number on what almost everyone was thinking.

The risk for Democrats now is two-fold. The first is that Biden simply refuses to budge. Indeed, that is still the likeliest outcome. While the debate was happening, Biden’s aides were putting it about that he was suffering from a heavy cold, which explained his hoarse delivery. By this point, everyone had forgotten Trump’s forecast that Biden would take a “shot in the ass”, or even cocaine, to enhance his performance. If Biden believes he simply had a bad night, he could eat up the precious time Democrats have to elect a replacement. The worst thing he could do is cling on for another few weeks then step down. He would need to make the announcement in the next few days.

The second risk is that Biden does decide to step aside in good time and the Democratic party descends into civil war. Another reason Biden has been so reluctant to consider quitting is the unpopularity of Kamala Harris, the vice-president. But as the first female and non-white vice-president, it would be provocative for Biden to endorse anyone else. If he did not name Harris as his heir apparent, the party could polarise along ideological lines. Anyone competing with Harris for the nomination, particularly a white male, would risk being depicted as the enemy of progress. A bitter Democratic nomination battle culminating in a divisive convention in Chicago offers too many historical echoes for comfort. The last time Democrats held their convention in that Midwestern city was in 1968. It turned into a circular firing squad.

These risks were already known. But the upsides are suddenly clearer. Many democracies can hold a general election and change their government in the timeframe between now and the Chicago convention. Indeed, Britain looks set to do so next week having declared a snap election in late May. The fact that no US party has held an open convention in recent memory should be no obstacle. Everything about America’s 2024 presidential race is unprecedented. This includes the advanced age of both candidates and the fact that one of them, Trump, has repudiated the results of the last election.

Bill Clinton once said Americans prefer “strong and wrong” to “weak and right”. On Thursday, those two options were on the debate stage. Every Democrat, including Biden, tirelessly repeats that democracy is on the ballot this November. They argue that the stakes for America are existential. The question now is whether they have the ruthlessness to act on those beliefs.

There is no shortage of Democratic talent. Nor would a noisy contest necessarily be bad for the party. Democrats would be showcasing the lively democratic process that they believe is in peril. The question that Biden, and the first lady, must now ask themselves is who Trump would fear more: Biden, or a younger opponent who could fire off the rebuttals that he failed to deliver on Thursday? To a growing number of Democrats, that question answers itself.

edward.luce@ft.com