QE? Why the FED Failed
QE has indeed failed us three times over: economic recovery, if we can call it that, is the slowest one of all; unemployment has remained painfully high and stubborn. Helicopter Ben has been running the printing presses 24 x 7, to no avail. OK, that is not exactly how it works: all he does is add a few zeroes to a special cell in a spreadsheet.
Wha' happened? Where's the earth-shattering, economic ka-boom?
SHADES OF THE WEIMAR REPUBLIC?
The HeadFed did what Germany did in the aftermath of WWI, where the result was hyperinflation: a typical joke is that if you had a wheelbarrow full of Papiermarks, a thief would dump out the currency and take the wheelbarrow. There was great fear and loathing that the same would happen here in the US in the aftermath of the banking meltdown in 2008 from whence Helicopter Ben earned his nickname.
OK, THEN WHAT HAPPENED?
Well, actually, nothing. I mean absolutely nothing. No robust recovery, no inflation, nothing. In fact, GDP went red a couple of times, and there was actually fear of deflation. Even the Eurozone tried something different, and were no more successful. It is clear that economic theory, not to mention the textbooks, are gonna need a rewrite.
I was listening to a radio talk show (Kudlow) about this subject, when the above phrase was mentioned, but without elaboration. This piqued my curiosity, so I looked it up. Sure enough, there are two related but different economic concepts. Being a business writer, I figured he meant the recent one: savings accounts, mortgages, bonds, money market funds, and debt instruments including derivatives. I am guessing that, by taking bonds and debt out of circulation and injecting cash, ole Helicopter figured there would be so much currency sloshing around that it would encourage banks and financial institutions to lend to business, which leads to the older definition of capital formation. That is acquiring buildings, machinery, and raw goods to increase production and therefore GDP and the economy.
EXCEPT FOR ONE SLIGHT PROBLEM
All the extra cash did not circulate, but was put on ice at the central bank by various commercial banks, especially the 'too big to fail' variety. This stash of more than $1 trillion is being used as 'tier 1 capital' to strengthen their balance sheets, as required by Basel III and Frank-Dodd.
I dunno. The old rules no longer seem to apply. 'Your guess is as good as mine'. Yes, I know: Helicopter just breathed the word 'tapering' and sent bonds and Treasury paper into a tailspin, pushing up interest rates. My head hurts.