How I Love to Hate QE – A Guest Post by Benjamin Cole

And more are popping up on the Internet every day:

  1. QE is inflationary and, soon (as in any minute), hyperinflationary.
  2. Worse, QE is inert and thus a waste of time. The Fed swaps interest paying reserves for bonds, and banks sit on the reserves.
  3. QE is inert and hyperinflationary, but in the meantime will do nothing to stimulate the general economy, but will cause bubbles in specific sectors (efficient market theory notwithstanding).
  4. The Fed ends up with a big balance sheet. You might say, “So what?” But have you thought about it? The world might be ravenous for safe assets, but you think the Fed can sell safe assets?
  5. QE causes “unquantifiable financial risks.” This one is an ace, carte blanche to stop QE. I just keep hoping someone somewhere says QE causes “unforeseeable but potentially catastrophic financial imbalances and dangers.”
  6. QE is actually contractionary, locking up cash in bank reserves, where the banks sit on it when it could be out there working in the economy. By this measure, QE fights inflation. (But wait—I am supposed to be against inflation…also does this mean we can pay off national debt and reduce inflation at the same time? Is this why inflation has drifted down while the Fed has deployed QE?)
  7. QE causes jobless recoveries, because labor does not lower its price, but capital costs go down, and this leads to business buying labor-saving equipment and throwing workers out on to the street.

You might think I would be daunted in my quest for the ultimate anti-QE story, a bit like Don Quixote. After all, I seem to be going down a rabbit hole, while QE seems to have stabilized and even improved the US economy and especially property and equities markets. And Japan is doing better too, an in aggressive QE regime.

Read the whole article here.

Read all post from Marcus Nunes’ blog here.

About the Author

Marcus Nunes
João Marcus Marinho Nunes is a partner of Phynance Estratégias Quantitativas e Investimentos and a professor of Economics at Fundação Getúlio Vargas in São Paulo, Brazil. He also blogs here: http://thefaintofheart.wordpress.com/

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