Instead, after recovering lost production caused by the destruction of 2008, GDP growth rates could not accelerate higher than what they were before the crisis.

As such, GDP in the United States has not returned to its prior trend, which points to some kind of long term impairment in the productive capacity of some part(s) in the economy.

Ironically, GDP growth touched its highest point at slightly above 6% in 2018, four years after reserves made their first post GFC peak (the second post GFC peak comes in Pandemic 2020).

If reserves are as important as the continued implementation of QE makes them out to be, shouldn’t GDP growth peak with reserves?

Of course, bank reserves are how the Fed pays for USTs and other bonds that it purchases from the banking system. This means that the Fed is responsible for some, but not all, of historically low interest rates.

Post GFC, US 2 year CMT* yields moved to just above 0% some time in 2011, and stayed there until 2014. It followed GDP higher (as bank reserves fell) into 2018, before falling back to 0 as Covid hit.

The fall in 2 year yields from about 5% pre-GFC to 0% soon after corresponds to the sharp rise in bank reserves from 2008 to 2014, as well as the same period of GDP growth not accelerating past its pre ’08 levels.

Therefore, if low interest rates did anything to engender more economic growth, it certainly did not do enough to get all parts of the economy firing again. 

This can be observed in the labor market, where the labor force participation rate started falling after the GFC, only halting its descent in 2014. The rate remained pretty much unchanged from then until the Covid pandemic in 2020, where it nosedived lower.

Putting this in perspective, over the same period of 10-ish years, we have had trillions in reserves added to the banking system, and interest rates moving to historic lows. Yet, all of this unprecedented, extraordinary, and emergency monetary policy has not really helped American labor as a whole.

Instead, the health of the labor market continues to deteriorate, as more and more American workers simply give up looking for work.

This is also reflected in the falling levels of money velocity in the US, as workers react to income insecurity by being more careful with what liquid assets they have.

If QE was supposed to somehow inspire confidence in consumers and get them spending en masse again, it really hasn’t.

How can consumers spend when incomes, and hence access to credit, remain so uncertain?

The chart of money velocity illustrates that this uncertainty isn’t just affecting the American worker/consumer, but the entire economy. Money velocity is plumbing all time lows, and is firmly ensconced in a sharp downtrend that stretches back to the GFC.

Money simply isn’t circulating around the economy in the way it used to be, much less in the way it needs to be, and QE/low rates have not helped.

Perhaps a rethink of what low rates represent is in order?

*CMT = Constant Maturity. More info available here.