Now that the Fed has ended QE3, people are starting to evaluate the results. The economist has a roundup of academic studies. Positive findings about QE are generally the “could have been worse” variety. The various studies claim:
- QE generated some inflation, but not enough
- It did not generate hyperinflation
- It did not contribute (much) to inequality
- The “reach for yield” was justified
The quotation below pretty much sums up Jeremiah’s opinion. We cited hyperinflation as a risk, early on, but the real concern is trillions of new dollars sloshing around equity markets and not creating jobs. Applying the coefficient from a British study, the Fed’s $4 trillion intervention should have generated a roughly 6% gain in output. It didn’t.
QE’s detractors point out that central banks have expanded their balance-sheets by trillions of dollars, yet are still nurturing lackluster recoveries.
The results on inequality and low yields are equivocal at best. People holding financial assets have enjoyed 150% gains, thanks to QE (see chart). But, say the apologists, low yields have also helped people pay their debts. The reach for yield, which has pension funds investing in junk bonds, is justified if it prevents a “catastrophic” breakup of the Euro.
Overall, the collection of studies provides weak justification for such an extreme policy. The Fed has expanded its balance sheet fivefold, and the academics need a microscope to find the upside – plus, a raft of counterfactuals about how terrible sound money would have been.
We find The Economist’s title, “Early Retirement,” especially cynical. In the real world, our kids can’t find jobs, and the grandparents cannot retire. They will work until they die, because QE destroyed their savings.
See also: Of Flat Lines and Derp
Update: Here is a nice, impartial summary of the arguments for and against QE, with the current status. It is too basic for Jeremiah readers, but something to share with the kids. One editorial point – the author says “three problems,” and then lists four. The fifth would be that people with saving accounts are now enemies of the public good. German “strafzins” is best translated as penalty rate.