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

Inflation is now at its highest since 1982 – is this the peak?
Inflation

Inflation is now at its highest since 1982 – is this the peak?

At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active a…
18 May 2022
Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
Interest-rate rises mean more pain for stocks
Stockmarkets

Interest-rate rises mean more pain for stocks

Interest rates are rising around the world as central banks try to get inflation under control. That’s hitting stockmarkets – and there is more pain t…
13 May 2022
Why Elon Musk's Twitter takeover could mark the end of the reign of the CEO
Stockmarkets

Why Elon Musk's Twitter takeover could mark the end of the reign of the CEO

The overlords of the corporate world have had their day, says Matthew Lynn. Long live the Technokings!
8 May 2022

Most Popular

The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
Despite the crypto crash, bitcoin still has a bright future
Bitcoin & crypto

Despite the crypto crash, bitcoin still has a bright future

Cryptocurrencies have crashed hard, with bitcoin down by more than 50% from its peak. But, says Dominic Frisby, bitcoin still has a future – it is the…
19 May 2022