Since the end of 2007, quantitative easing QE is applied by major central banks around the world. The program began with the initiation of federal reserve’s policy, followed by ECB, BoJ, BoE etc.
Federal Reserve Chairwoman Janet Yellen said before the Senate Banking Committee in her semi-annual report to Congress:
“We would hope that was a very unusual intervention and one that we would not frequently be relying on in the future,”
“We do not want to use fluctuations in our balance sheet as an active tool of monetary policy management.”
What was the Goal of this “a very unusual” intervention:
“That is, real interest rates will change asset prices in such a way as to change the willingness of banks to lend, firms to invest, or individuals to consume or invest in housing. Thus, a change in short-term real interest rates potentially influences the level of output and employment. ” Federal Reserve Bank of St. Louis Review
The total amount of money spent on monetary stimulus is daunting: $12.3 trillion, $10 trillion by buying global bonds, $654 billion through interest rate cuts since 2008.
Strangely, real economy received only very small part of the stimulus money. The prevention of deflationary cycle was the only benefit for real economy. QE and low-interest rates didn’t help to spur the economic growth.
In August 2015, Stephen Williamson, vice president of the St. Louis Federal Reserve Bank, stated in a white paper that theory behind QE “not well-developed” and that “causal evidence suggests that QE has been ineffective.“
Because of the ineffectiveness of QE, the feared high inflation didn’t occur.
QE was ineffective for real economy but had a huge effect on financial assets, financial institutions, and government debt situation:
- SP500 was 900 in Jan 2009 and has more than doubled.
- debt in major economies has increased more than 50%
- FED become the major government bondholder, almost $3trillion
- Rescuing the banks: 1) by purchasing junk bonds and 2) by expanding their balance sheet through increasing financial asset prices.
QE will never end, as long as:
The financial system remains fragile,
governments keep their addiction to debt and
The monetary system doesn’t undergo a radical change.
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