An Elegant Proof That Quantitative Easing Worked

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What was the point of QE? To get people to move out along the risk curve, thereby lowering long term interest rates.

What would be a sign of QE having worked? That corporates have borrowed much more as people moving out along the risk curve were willing to finance them in the pursuit of yield – thereby lowering long term interest rates.

What do we see? Corporate debt at record levels. QE worked therefore, QED:

Thus QE Worked
We should go back to the basic idea of quantitative easing, QE, in the first place. Those Keynesian animal spirits of businessmen were low, uncertainty was high. That most variable of GDP components, business investment, was down in the dumps, and no one really saw it rising much. So, what to do? Artificially lower the return to safe assets like Treasuries, that’s what. Do so by inventing some money and going out and buying a lot of them. Which is what the Fed did; it created a few trillion dollars in the basement and used them to build out the balance sheet to $4 trillion and change. Much of which was buying those safe Treasuries – some corporates, MBS as well – so as to raise their price and lower their yield. The effect of this was to push investors out along the risk curve in search of yield. Or, the flip side of the same aim, we wanted corporates to borrow a lot of money to invest so that this would pull us out of the recession. Corporates did borrow a lot, we’re out of the recession, and the policy worked.

Economics isn’t difficult, it’s just complicated.

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timworstallQuentin Vole Recent comment authors
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Quentin Vole
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Quentin Vole

Nice last line. Yours? (I may well steal it, anyway.)

timworstall
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timworstall

Yes, that’s me