I am no fan of quantitative easing, as readers may know. One aspect of the dislike comes from the one-sided view of how low interest rates benefit the economy. They do not benefit the economy, at least not as far as the following are concerned:
- Endowments spend less, as their spending rules lead to less spending when interest rates are low.
- Pensions find that their liabilities are more expensive than they thought.
- Virtually every long-term financial plan fails, because they assumed far higher return assumptions.
Does the Fed ask what entities they might be hurting through quantitative easing? They hurt any entity that has to make payments over the long term.
Now, that might change should inflation return. There is a huge psychological barrier to be overcome there. Given the willingness of almost all of the central banks to inflate, inflation will probably return. The question is when?
Aside from that, banks aren’t lending. In order for inflation to return, bank lending has to recover.
Quantitative easing requires the central bank to buy longer-duration fixed-income assets than is prudent for a central bank to buy. That crowds out other natural buyers, like endowments, pension plans, and life insurance companies. Flattening the yield curve is not costless. It affects those that need to fund long duration obligations.
Capitalism is complex. There are many nooks and crannies that central bankers ignore. They are focused on the short-term. Do central bankers realize that they are making life tough for endowments and pension plans? Do they care?
To the extent that central bankers lend long to the US government, I would tell them that they are in a long-term bad bargain, though the short run might be different.
I don’t know the future, but I favor ideas that favor effort over passivity.