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The Problem Explained In 110 Words

It took the Fed 7 years, countless white papers, Congressional testimonies, economist reports, and goalseeked narratives explaining why QE should work, before the St. Louis Fed finally realized and admitted one month ago that QE, in fact, does not work (which is almost as ironic as the Davos World Economic folks explaining "Why we shouldn’t borrow money from the future"... which is great if only it hadn't come some $200 trillion too late). It took the Fed only $4.5 trillion in balance sheet assets, and making the rich richer beyond their wildest dreams, to admit what we said all along.

And yet, there are still those who say keep kicking the can: if QE3 didn't work and a rate hike is now off the table, just do QE4, or NIRP, or both, or even better: just paradrop the money in - someone has to inflate the above mentioned $200 trillion in debt. Surely that will work, even if it means the beginning of the end of the "status quo" financial system and the cargo cult of neo-Keynesian economics.

Well, here is the biggest problem - or the central bankers' paradox if one wishes to call it that - and it is explained so simply even a 5 year old, aka the intellectual equivalent of a tenured economist, will get it.

... the challenge is that ongoing flow of QEs prevents rationalization of excess capacity (in turn created through the process of preceding three decades of leveraging) whilst also precluding acceleration of demand (both household and corporate), as private sector visibility declines. Hence declining velocity of money requires an ever rising level of monetary stimulus, which further depresses velocity of money, and requiring even further QEs. Also as countries compete in a diminishing pool by discounting currencies, global demand compresses, as current account surpluses in these countries rise not because of exports growing faster than imports but because imports decline faster than exports. This implies less demand for the global economy.

Incidentally, Yellen now gets it, and the moment her epiphany struck is shown on the photo below.

Source: Macquarie Research: "Equities – irrational exuberance"