‘Print Money’ Patch Architect Turns Into QE Critic

Last year, as the severity of the pandemic threat became evident, major central banks – which still had quantitative easing programs underway – aggressively extended them alongside unprecedented levels of measures. stimulus from their governments in response to what was a more conventional threat. of a severe economic recession, although it emerged from an unconventional source.

Even the RBA, which had avoided resorting to QE during the financial crisis and was somewhat skeptical of its effectiveness, was forced to follow suit because, by lowering their interest rates and flooding their systems From ultra-cheap funds, the big central banks have threatened to force the currencies of countries with higher interest rates to rise sharply, exaggerating the depressive impact of the pandemic.

Quantitative easing has done little, if anything, for investment and growth rates.

The House of Lords committee concluded that the UK’s QE in 2009 had been effective in preventing a recurrence of the Great Depression and stabilizing financial markets, but had been “an imperfect political tool” which had had limited impact. on economic growth and demand over the past decade.

There was, he concluded, limited evidence that he had increased bank lending, investment or spending by asset holders, but he had artificially inflated asset prices, disproportionately benefiting those who owned them and exacerbating wealth inequalities.

What was once seen as unconventional is now seen, he said, as the BoE’s primary tool in addressing a range of economic issues, even though the issues were now very different from those of 2009.

This year, economists and central bankers discussed at length the soaring inflation rates in developed economies and their transitory nature – driven by supply chain disruptions and other pandemic-related influences – or entrenched, and therefore whether expansive monetary parameters remain necessary or risk contributing to a surge in inflation.

As the severity of the pandemic threat became evident, the major central banks – which still had quantitative easing programs underway – aggressively extended them alongside unprecedented levels of fiscal stimulus from their countries. governments.Credit:Bloomberg

The BoE’s view, like the Fed’s, is that the surge in inflation – 2.5% last month in the UK, 5.4% in the US – is transitory, but the committee British asked its central bank to justify its point of view in more detail. , clarifies what he means by “transitory inflation”, shares his analyzes and shows that he had a plan to control inflation.

He saw the pursuit of QE not only as an inflationary threat but a risk to public finances, with a one percentage point increase in the cost of public debt adding around £ 21bn, or 0.8% of the GDP, at government interest costs in 2025-2026. .

He was also concerned that the coincidence of UK QE with the UK government’s fiscal response to the pandemic – the BoE’s purchases have been closely aligned with the UK government’s issuance of debt to finance its deficit from the UK Treasury – would generate losses. claims of deficit financing and undermine the credibility of the central bank and its ability to control inflation and maintain financial stability.

He pointed out that no central bank has so far been able to reverse QE over an extended period, exacerbating the challenge of unwinding policy without triggering panic in financial markets and recommended that the BoE d ‘develop a plan to restore the policy to “sustainable” levels. .

Markets are uncertain whether the inflationary threat is transient or real, but the shift in the policies of major central banks – from preventing inflation to responding to it – means that if it is real, rates d interest should be increased quite aggressively. , with obvious negative implications for real economies, financial markets, and the finances of governments, businesses and households that are as reliant on debt as committee chairman Lord Michael Forsyth said central banks are at QE.

With the obvious caveat that the pandemic and coronavirus mutations pose a continuing threat, the committee’s skepticism is justified.

Even before the pandemic, it was highly doubtful whether the continuation of major quantitative easing programs would benefit anyone other than financial market participants whose threats of crises and another financial crisis forced banks to maintain their programs. Quantitative easing has done little, if anything, for investment and growth rates.

With growth spurred by extraordinary levels of government spending, household savings in developed economies inflated by a combination of consumer responses to the pandemic and the generosity of government relief plans and rekindled inflation, it is a valid question of whether central banks should start supporting peaks in their quantitative easing programs as soon as possible.


Of course, there are many who believe that if central banks had looked at the markets and started cutting back on their purchases once it became clear that the global financial system and their banks had been stabilized, we would all be better off. situation today. , with less distortions in savings decisions, better (certain?) risk pricing and more sustainable / less vulnerable economic and financial frameworks.

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