Quantitative easing is now pointless

A couple of years ago an ugly term, hitherto condemned to abstruse economics textbooks, was suddenly all over the media – quantitative easing. This term describes the creation by Central Banks of new money which is then pumped into the economy. The idea is that the Bank uses this money to buy assets such as government bonds, thereby driving down their yield (the effective cost of government borrowing). If the cost of government borrowing falls, then so too should the cost of loans for consumers and businesses. This then should encourage consumption and investment, helping the economy to recover. Or at least that is the theory.

Quantitative Easing – or QE – was first tried in Japan during their decade long slump with apparently few positive effects. But when the West was hit by the mammoth credit crunch in 2007/8 it became extremely difficult for people to borrow money despite low base rates. So Central Banks turned to QE as a potential solution. It may well be that, along with the massive bailouts of banks, it did help to alleviate the credit crunch and thereby help prevent worldwide economic catastrophe (although it is still too early to tell for sure).

Now the US has just restarted QE and Central Banks stand ready to restart it in the UK and Europe should the recovery falter. But its highly likely that a further bout of QE now would be at best pointless, and at worst, actually harmful.

Continue reading “Quantitative easing is now pointless”