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

Beware: inflation is starting to stir in the US
Inflation

Beware: inflation is starting to stir in the US

With US consumer prices up by 1.4% in the last year, concern about inflation is now everywhere.
22 Jan 2021
Inflation looks likely to take off this year – but there’s one key risk
Inflation

Inflation looks likely to take off this year – but there’s one key risk

With the world’s governments spending money hand over fist, inflation looks certain to take off at some point. But China could change all that. John S…
19 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Will America’s “healthy reflation” end in inflation?
US stockmarkets

Will America’s “healthy reflation” end in inflation?

Democratic control of the US Congress would give Joe Biden huge scope to stimulate the economy. But willie mean a “healthy reflation” for the economy …
8 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
The world’s fund managers are getting very bullish – be careful out there
Stockmarkets

The world’s fund managers are getting very bullish – be careful out there

The latest survey of fund managers shows them to be extremely bullish on all the same things. And that, says John Stepek, means the market is in dange…
21 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021