“QE’s effect on raising aggregate demand and prices was often limited” (Ugai, 2006)

  • QE has been shown to have had little to no impact in the U.K.  (also see here).
  • While QE worked to ease the strains in the credit markets in 2008 and also improved bank balance sheets there was no change in interest rates during the entirety of the program in the USA and borrowing has remained very weak.
  • Because the US has a demand side problem and not a supply side problem QE is unlikely to result in higher aggregate demand and revenues (see here).
  • QE is likely to negatively impact corporate margins as investors falsely interpret QE as “money printing” and seek the safety of hard assets (see here).
  • The “wealth effect” of QE is likely to fail.  Attempts to keep asset prices “higher than they otherwise would be” will always fail (see here).
  • Since QE has been shown to have no discernible long-term impact on interest rates or aggregate demand there is no fundamental reason for stocks to move higher due to the program (see here).

All of my work regarding QE has me wondering why the Fed would implement such a policy when the evidence appears to point to little to no gain in economic growth?  The only logical answer is that QE2 is really just another case of the Federal Reserve proving that this is a country centered around the bankers, by the bankers and for the bankers. Before you brush me off as some conspiracy theorist please consider the evidence.

The problem with a policy like QE is that it does not actually add net new financial assets to the private sector.  This is ultimately the primary misconception regarding QE. The expansion of the monetary base is not net new money in your pockets.  Thus, it will not help finance new spending or investment, it will not create jobs, it will not increase aggregate demand, etc.  Therefore, any policy effectiveness is based on a shuffling of assets and hopes for a sustained psychological change.  A sitting member of the FOMC has (finally) admitted that QE is unlikely to do anything for the economy: