One month ago we presented to readers that in the first official “serious” mention of “Helicopter Money” as the next (and final) form of monetary stimulus, Australia’s Macquarie Bank said that there is now about 12-18 months before this “unorthodox” policy is implemented. We also predicted that now that the seal has been broken, other banks would quickly jump on board with an idea that is the only possible endgame to 8 years of monetary lunacy, and sure enough, both Citigroup and Deutsche Bank within days brought up the Fed’s monetary paradrop as the up and coming form of monetary policy.

So while the rest of the street is undergoing revulsion therapy, as it cracks its “the Fed will hike rates any minute” cognitive dissonance and is finally asking, as Morgan Stanley did last week, whether the Fed will first do QE4 or NIRP (something we have said since January), here is what is really coming down the line, with the heretic thought experiment of the endgame once again coming from an unexpected, if increasingly credibly source, Australia’s Macquarie bank.

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Would more QE make a difference? Have to move to different types of QE or allow nature to take its course

It seems that over the last week investor consensus swung from expecting Fed tightening and some form of normalization of monetary policy to delaying expectation of any tightening until 2016 and possibly beyond whilst discussion of a possibility of QE4 has gone mainstream.

Although “QE forever” and no tightening has been our base case for at least the last 12-18 months, we also tend to emphasize the diminishing impact of conventional QE policies. As the latest Fed paper (San Francisco) highlighted, “There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed-inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation”.

Whilst one could apply the same for BoJ and ECB QE policies, the above quote perhaps underestimates what could have happened to inflation if there was no QE. In other words, whilst it is true that both real GDP and inflation rates are undershooting CBs’ targets and have been lower than consensus expectations, would the global economies have undergone a severe case of deflation in the absence of QE? The answer is probably in the affirmative.

However, 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.