Why is quantitative easing not working

The problem with that excess dirt is the consequences of excessive monetary policy. Those same excesses created after the financial crisis led to an unstable financial situation with which we are now dealing.

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This cookie is set by Google and stored under the name dounleclick. This cookie is installed by Google Analytics. This is QE, and it is expansionary monetary policy on steroids. Following the global financial crisis, deflation and low demand for credit had already brought interest rates close to zero. Banks were constrained in lending money due to bad debts.

Hence more radical measures had to be adopted by the bigger developed economies US and UK than just ordinary expansionary monetary policy. Has it worked? It is too early to say. The good news is that the US economy is growing strongly, inflation is not a problem, and unemployment is at its lowest level in five years.

However this is a simplistic view, as earnings growth has kept pace with the market movement. The Fed will have to tread carefully so as not to derail the recovery that has taken some 5 years to engender. In Japan QE has been tried at least twice. An attempt in early was unsuccessful as banks, facing few lending opportunities, just sat on the excess liquidity or purchased financial assets. Not to be deterred, Japan embarked on another round of QE in The Bank of Japan is committed to addressing persistent deflation through QE, and is also seeking to improve export competitiveness by lowering the value of the Yen.

Again, it is too early to say if this will work. It appears the Japanese are once again not spending all those Yen. Some commentators have linked the sell-off in emerging markets in January to a withdrawal of this liquidity. As the Great Recession set in, the Fed dropped its interest rate target to close to zero, and then was forced to use unconventional monetary policy tools including quantitative easing. It is important to realize that QE was an emergency measure used to stimulate the economy and prevent it from tumbling into a deflationary spiral.

When financial institutions collapse and there is a high degree of economic uncertainty, people and businesses choose to hoard their money rather than risk investment and potential loss.

When money is hoarded, it is not spent and so producers are forced to lower prices in order to clear their inventories. But why would somebody spend a dollar today when they expect that prices will be lower—and their dollar can buy effectively more—tomorrow? The result is that hoarding continues, prices keep falling, and the economy grinds to a halt. The first reason, then, why QE did not lead to hyperinflation is because the state of the economy was already deflationary when it began.

After QE1, the fed underwent a second round of quantitative easing, QE2. Here the central bank undertook open market operations where it purchased assets from banks in return for dollars. People won't risk investment losses when there is great uncertainty and, instead, will hoard their money.

It is true the monetary base spiked during these initial rounds of QE, but the second reason QE didn't lead to hyperinflation is we live under a fractional reserve banking system whereby the money supply is more than just the amount of physical coins, paper money, and bank deposits in the system. The monetary base, or M0, is what most people think about when it comes to the amount of money in circulation, but banks are in the business of making loans with the deposits on hand.

The money from those loans are then deposited back into the banking system and re-loaned, over and over again. This is the so-called money multiplier effect. The M2 measure of the money supply, which includes the effects of fractional reserve banking and credit, was actually quite stable during this period. Below are graphs of the M0 and M2 money supply measures. So where did all the M0 money go if it wasn't multiplied through the credit system?

The answer is that banks and financial institutions hoarded the money in order to shore up their own balance sheets and regain profitability. Banks still had bad loans and toxic assets on their balance sheets as a result of the housing bubble burst and its aftershocks.

The extra cash on hand made their financial picture look a whole lot better. As the economy has recovered and the fed has begun tapering its interventions, the money being held by banks is being returned to the Fed slowly in the form of interest payments on the debts purchased during QE. Meanwhile, the U.