Quantitative Easing, Why it Does Not Work

Since normal macroeconomic policy, or theory, started to fail, we have seen a number of unconventional policies, like quantitative easing (QE) emerge. However, QE has failed to jumpstart inflation or even growth. In fact there are still signs of fiscal austerity in the United States, Japan and England.

What is going on? To put it simply, today’s world is one of too much supply and little demand. This gives us disinflationary pressures up and until deflationary (as in the Eurozone). These pressures are constant and persistent.

Another reason why we have not seen inflation, during the post-2008 global economic recession, is that economic recovery has been anemic. We have also seen a large buildup of public and private debt, causing deleveraging. There are other factors here, working against inflation such as an output gap with corporations and factories who face limited pricing power. There are also many unemployed who want jobs, job openings that are few and far between.

Rising Income Inequality is a New Problem

We are seeing more and more inequality when it comes to income. This is coming from a movement of salaries from those who spend to those who want to save. We are also seeing property market booms which busted and new bubbles forming in other markets adding to the risk. We are also seeing weaker commodity prices. Especially with crude oil and the slowdown with China’s own economy affecting metal prices. These prices are increasing the case for deflation especially, as China’s exports slow, causing a glut in manufactured goods. There is also an oversupply of industrial goods.

QE Works to Devalue a Currency to Halt Deflation

These new unconventional economic measures, like QE, devalue a currency which, in turn, is supposed to weaken the underlying domestic currency. This is supposed to kick start the country’s exports. However, here rises the problem as this only exports the deflationary problems to other countries. In order to be effective, monetary stimulus needs an added, but temporary, fiscal stimulus package. This is lacking. We cannot find this in any of the main Western economies. We are seeing countries like England, the Eurozone, Japan and even the United States implementing various austerity programs and consolidating debt.

What does all this mean?

Continued anemic economic growth, stagnation leading to disinflation. In some cases deflationary pressures mount. People are not spending and saving more and more. Saving rates have gone from twenty percent, pre 2008 to around 40 percent now. It is all about the math. It is hard to spur the economy to grow. This is why we now have a world that is seeing continued and never ending QE. This means interest rates that will stay low for a very, very long time.