Is QE Insane? These 3 Simple Charts Show Why

May 3, 2021

Is QE Insane? These 3 Simple Charts Show Why

Apocryphal Einstein Quote The definition of insanity is doing the same thing over and over again, and expecting different results

Inflation is a big deal in the media these days.

To be fair, inflation has been a big deal in the media after each iteration of QE by the Fed dating back to the Great Financial Crisis in 2008-2009.

The same thing happened when the ECB followed suit not long after, and interestingly, the same thing occurred when the Bank of Japan pioneered QE all the way back in 2001!

Odd isn’t it, that the same policy has been tried in three of the world’s largest economies for at least a decade, and yet measures of inflation tracked by these 3 central banks have not improved enough for the term “Quantitative Easing” to fade gently into the sunset.

We now know that because reserves are not involved in the money creation process, i.e. they are not lent out in the way everyone assumes they are, QE is not a policy that will increase money supply in the broader economy.

Naturally this also means that QE will not generate the kind of inflation that policymakers want it to, i.e. the good kind of inflation.

Eurozone HICP has trended lower even as bank reserves have exploded higher

Chart showing how PCE continues to trend down even as bank reserves explode higher

CPI in Japan remains very low even as 2 decades of QE and increasing bank reserves

From the charts, both the Fed and the ECB have struggled to get inflation consistently at or above 2%, even after pumping mind-bogglingly large amounts of reserves into their respective banking systems over the last 10 years.

Japan, the pioneer of QE, embarked on the grand monetary experiment in 2001.

That’s 20 years of on and off again QE, with the Bank of Japan’s assets ballooning to epic proportions along the way.

What do they have to show for it?

Inflation that seems magnetically drawn towards 0% as opposed to 2%.

That’s 20 years of QE, plus more extreme measures like QQE and buying equity ETFs, only for 2% to remain as elusive as it has been since the bursting of the baburu keiki (bubble economy) in 1989.

What’s the definition of insanity again?

Considering how money is really created, monetary policymakers need to seriously consider turning their focus to encouraging domestic banks to meaningfully increase the amount of new loans they are originating at home.

Moreover, they need to do this in a way that gets credit to businesses and individuals who need it, and not just those who already have easy access to capital.

Of course, this brings up a whole host of other issues and questions, not least of which is the introduction of new risks into the banking system from increasing loans when economic growth is already meager.

But isn’t a new path that is focused on how the system actually works a more positive solution than sticking with QE which demonstrably has not worked?