Quantitative Easing Risks


I’ve discussed in previous posts about several aspects of Quantitative Easing, focusing on the possible effects on inflation as well as on whether QE has been successful or not. Here, the focus is on the potential risks associated to quantitative easing.

Some of the risks were already outline in the previous posts on the success of QE. As John Doukas underlined, quantitative easing can lead to capital flight. Some casual evidence, as reported in this Bloomberg article, seems to support this thesis. As one of the interviewed managers noticed, “The Fed has no control over how that liquidity is used”.

Another major concern is related to one of the essential features of Quantitative Easing. By buying assets like bonds, the FED achieves a lower yield for the government bonds which is not drive by the markets. This has however some perverse effects since it might directly affects those who have invested in bonds, among them the pension funds.

One other concern is, of course, that of inflation. Although many expected that QE will lead in the end to more inflation (if not to hyperinflation), the time has proven that these expectations were wrong. Feldstein has an explanation on why Quantitative Easing did not lead to inflation (so far).

Probable a more subtle effect of QE is that of income and wealth redistribution. The logic is quite simple: since QE artificially raises the value of the stocks, it will lead to an increase in the wealth of the stock holders. However, only a minor share of the households holds most of the stocks. This assertion is backed by recent studies run by the Bank of England (which implemented QE too…), see here.

Not at last the, the QE implemented in the developed economies has raised concerns in the fast emerging economies, like the BRIC ones, which perceived this monetary policy as a de facto competitive devaluation (since the currencies of the countries that implemented Quantitative Easing are weakened).

As FED (and probably, the other major central banks will follow it soon) prepares itself to abandon QE, some of the concerns might be become futile, but ironically, it might be post-QE that we could find and experience some unpleasant things.

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