So you say QE was a success - think again

Hat tip to John Hussman of the Hussman Funds for his simple graphs on monetary policy. John always does a good job of making the complex simple. 

The first graph shows the trade-off between increases in the monetary base and changes in money velocity. The Fed adds more money in the system but there are no opportunities so the result is that the money velocity will decline. The fed needs to get a better handle on the channels of lending. You can push money into the system and lower rates, but banks can choke on this extra money if there are no opportunities. Banks are levered institutions and my understanding of banking is very simple. It takes a lot of good loans to make up for one bad one. 

The second graph tells us what happens when you flood the banking system with more base money - rates fall. When money is in short supply, rates are high and when there is more of it, rates are low. We understand this but  lower rates do not always imply a proportional increase in lending. It would be nice to see a third dimension, bank loans per GDP, but the data shown fits the facts of today. Low rates  result from more money in the system which cause investors to reach for yield, but this does not lead to a corresponding increase in new lending. 

Yes, high yield issuance is up because everyone wants to lower the cost of borrowing which is positive for profits. We see the higher profit levels, but we need lending for new businesses and operations. Perhaps the delay in output is over, but the data so far does not tell a pretty story.