Did QE Work? “Well, the problem with QE is it works in practice, but it doesn’t work in theory.” Ben Bernanke (Brookings Institution, Jan 2014)
When the US Federal Reserve meet this month it is extremely likely that Chairperson Yellen will announce the end of large-scale asset purchases, otherwise known as Quantitative Easing (QE). Since the global financial crisis in 2008 / 2009, the Federal Reserve has bought $4,000 BILLION of securities issued by the US Government or Government-sponsored agencies under the auspices of QE. These purchases have had the desired effect of reducing the yield and thereby pushing up the prices of financial assets. Furthermore, it seems (to date) to have occurred without any inflationary consequences (at least in terms of reported inflation). Presumably therefore can we confidently describe QE as a success?
Unfortunately, as this is a real world experiment we do not have a ‘control’ economy that did not ‘benefit’ from QE to see how it might have fared. Certainly the Federal Reserve stoked up animal spirits and got the asset price inflation that they desired. Unfortunately, this does not seem to have had any material positive impact on the real economy: earnings growth is lacklustre, employment continues to remain at low levels (especially when taking into account the participation rate) and in general consumers do not feel like the recovery is benefitting them. The problem is that the transmission mechanism from QE-driven asset-price inflation to a self-sustaining economic recovery was always the weakest part of the academic argument for QE. There was talk from the previous chairman of the Federal Reserve, Ben Bernanke, of a trickle-down effect as the wealthy; who are by far the biggest beneficiaries of rising asset prices as they own the bulk of financial assets, spent some of this additional wealth and this spending would ‘trickle’ down through the economy benefiting everyone.
I think we can safely say this has not occurred to any great extent and QE has turned out to be fantastic for the top 1% (and the banks that were in intensive care when QE was first announced) and pretty poor for the other 99%. What is clear is that unless a large proportion of the 99% feel some significant benefit, there will not be a self-sustaining economic recovery in an economy that is largely driven by consumption. Moderate GDP growth, earnings growth and employment growth would seem to be the most likely outcome for the US. Elsewhere, this is probably the best that can be hoped for with the Eurozone looking sclerotic, China slowing sharply (and having built up a lot of debt that is financing unproductive assets) and emerging markets generally suffering from both the China slowdown and weak currencies - a consequence of tighter monetary conditions in the US.