The verdict on American QE

The Federal Reserve has brought to a close an unprecedented monetary experiment.

An unprecedented monetary experiment came to an end last week. The US Federal Reserve ended the third round of its quantitative easing (QE), or money-printing, programme.

It injected a total of $3.7trn into the US economy by buying government and some private bonds with newly created money. The aim was to bolster lending, both directly through banks and via the reduction in bond yields, or long-term interest rates, from bond purchases.

Moreover, because the money was injected into bond markets, encouraging investors to buy other assets with the cash, rising stock and debt markets would fuel the feel-good factor, further bolstering growth or so it was hoped.

So did QE help? It's hard to disentangle its impact from other factors the US experienced a nasty fiscal squeeze during much of QE, for instance but it seems fair to conclude that while it probably averted a depression, it hasn't done much more.

The US recovery has been very weak by past standards and the economy only now seems to be reaching escape velocity', or a self-sustaining upswing.

In modern economies, money is created by commercial banks writing loans. After a banking crisis, overextended banks resort to shrinking loans to restore their balance sheets to health.

Falling lending can result in deflation and depression. QE helped temper the credit contraction by artificially boosting the money supply to make up for the decline caused by banks.

But this is damage control, not stimulus. Simply plugging a gap in the economy can't make banks boost their lending much or persuade overextended households and companies to borrow. They have to work their debt off gradually after a financial crisis.

This hangover is a multi-year affair, explaining why overall demand, and hence the overall recovery, has been subdued.

And QE has stored up potential problems for the future. It's not just that many asset markets look bubbly. Fears that all this money printing could lead to a jump in inflation may yet prove justified.

Inflation depends on how fast money moves around the economy (the velocity of money), as well as on how much there is. As demand recovers to pre-crisis levels, velocity will rise, increasing the danger of inflation. It already seems to be making a comeback in America.

Recommended

US inflation is rising – but it’s not enough to rattle markets yet
Inflation

US inflation is rising – but it’s not enough to rattle markets yet

The latest US inflation figures showed that consumer prices are rising more rapidly than expected. But markets shrugged. John Stepek asks why, and wha…
14 Apr 2021
Why all eyes will be on US inflation data this week
Inflation

Why all eyes will be on US inflation data this week

As the world comes out of lockdown and demand for goods and services rises, attention will shift to inflation and what it means for interest rates. Th…
12 Apr 2021
What will Joe Biden’s “build back better” plan mean for markets?
US Economy

What will Joe Biden’s “build back better” plan mean for markets?

Joe Biden recently proposed a $2trn “build back better” stimulus plan for America – on top of the $1.9trn he announced earlier this year. Saloni Sarda…
6 Apr 2021
What does Joe Biden’s $3trn infrastructure plan mean for your money?
US Economy

What does Joe Biden’s $3trn infrastructure plan mean for your money?

Joe Biden is set to announce a further $3trn of public stimulus in the US. Saloni Sardana looks at what’s on the table, and what effect it could have …
30 Mar 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
China owns a lot more gold than it’s letting on – and here’s why
Gold

China owns a lot more gold than it’s letting on – and here’s why

In a world awash with money-printing, a currency backed by gold would have great credibility. And China – with designs on the yuan becoming the world’…
21 Apr 2021
Why investment advice could be about to get a lot cheaper
Investment strategy

Why investment advice could be about to get a lot cheaper

Vanguard, the world’s second-biggest asset manager, is launching its own cut-price financial advice service. It’s something the industry badly needs, …
20 Apr 2021