Sunday, November 03, 2013

For QE To "Work", It Needs Asset Price Bubbles

Often, advocates of "quantitative easing", reason in "Underpants gnomes" fashion:

QE-advocates version of this business plan is:

Phase 1: Central Banks purchase bonds.
Phase 2: ?
Phase 3: Higher growth!

So what could phase 2 be about, really? One possibility is exchange rates, but as noted before, exchange rates are a zero sum game, some countries  depreciation will be others' appreciation. Another possibility is to make sure the rich become even richer, or to create a "wealth effect" as central banks call it, by inflating asset prices. The fact that this increases the inequality that leftists claim they're opposed to, or that it creates potential bubbles is something that QE-supporters completely ignores.


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