Excellent article by Eric Parnell sets out the negative impacts of quantitative easing (QE):
- …the Fed has dramatically expanded its policy scope into areas that are normally the territory of fiscal policy. This has included specifically targeting selected areas of the economy such as the U.S. housing market including the aggressive purchase of mortgage backed securities (MBS)…
- ….the Federal Reserve has elected to provide direct and generous support to financial institutions and risk takers, some of which directly contributed to the cause of the crisis. Unfortunately, this subsidy is being funded by effectively taxing the income generating capability of the millions of Americans who are either retired or living on a fixed income…
- [QE] has forced Americans who had planned their lives and retirements around the ability to generate high quality and safe rates of return to now take on extraordinary risks to achieve these same goals.
- By flooding financial markets with liquidity, it has completely distorted the true price setting mechanism across all asset classes.
- It has forced many investors across all different philosophies and disciplines to significantly shorten their time horizons and holding periods associated with their investments.
- The daily direction of financial markets is no longer driven by economic or market fundamentals…..Instead, investment markets are now almost entirely at the mercy of what Chairman Bernanke or his associates on the Federal Reserve might say or not say on any given trading day.
- Lastly and even more broadly than investment market forces, QE has the detrimental effect of not allowing the economy to cleanse itself…… misses the very important point that recessions are actually good for an economy. This is due to the fact that it forces an economy that has become sloppy with the excesses from the previous expansion to work these excesses off and reallocate capital more efficiently.
But writing an article such as this is the same as writing 7 Good Reasons Why People Hate Chemotherapy. We all dislike QE. QE is not something that central banks apply through choice. QE is something — like chemotherapy — they apply when they have no choice. QE is the lesser of two evils — the greater evil being a deflationary spiral like the Great Depression of the 1930s.
The important lesson to take from this is: How to Avoid QE. Manage credit growth and the monetary base more conservatively during the good times. Remove the punch bowl just as the party gets going — so we don’t end up with a massive hangover when it’s over.
Read more at The 7 Reasons Why People Hate QE – Seeking Alpha.