When Ben Bernanke introduced the latest batch of quantitative easing (QE2), he made it pretty clear that the plan with this round, just as with the first round, was that the flood of new money should push up asset prices and kick start the US economy via a consequent rise in confidence, and, hopefully, house prices.
The first bit seems a given. QE1 led to a huge boom in financial assets, and QE2 is heading the same way. But the second is not. QE1 clearly did nothing for house prices. And for most ordinary Americans it is the negative wealth effect of being in negative equity – or if not that, having lost 40% of their paper property wealth – that is stopping them shopping.
Whether the Chinese stock market rises 10% a year or 40% a year is neither here nor there to the man in the average Detroit street. What matters to him is the value of his house and the level of his cost of living. And this is where QE and the ultra low interest rates it temporarily guarantees is not helping him, but hurting him.
How? By pushing down the value of the dollar and pushing up the price of the things he has to buy to survive – food and energy. And by ensuring that if he has any cash savings, he is – just like UK savers – not getting any interest on them at all.
Add that to static or falling real wages and consistently high unemployment and it is hard to see how QE can really ever have the end affect Bernanke needs it to have. It’s tough to repair your household balance sheet when your costs are rising and neither your perceived wealth nor your wages are rising. And it is tough to be a confident spender when your household balance sheet remains in utter disarray.
Bernanke must know all this. But if he does, then why is he persisting with QE, particularly when recent data from the US, while not exactly bullish, has been mildly encouraging. It could be a matter of hope over expectation. Or it could be worse. Conspiracy theorists will enjoy this post on zerohedge which suggests that QE isn’t about house prices and it isn’t about encouraging businesses to invest.
Instead it is just about keeping interest rates very very low in an attempt to stop the derivative positions of America’s biggest banks from bringing them – and the rest of us – to the brink. Again.