Does quantitative easing work?

OPINION:

CENTRAL banks in Japan, the US and the UK are pursuing quantitative easing, an ungainly term for an unconventional weapon.

Quantitative easing is not money printing, which is tied to fiscal policy because it's about giving money to the public, even if it has a similar effect.

The distinction reveals the political advantage quantitative easing offers policymakers - it makes available large amounts of money for productive use without adding to government deficits.

The aim of quantitative easing is to give banks more money to lend while reducing long-term interest rates for consumers and business.

Critics warn such asset-buying fosters risky investment, over inflates asset prices, triggers inflation and is an ineffective stimulus as it fails to boost demand in the way targeted fiscal stimulus does.

Banks can sit on the fresh money rather than lend it. Central banks can lose money for their governments if the value of the new securities plunges.

Doubts persist about how easily these programs can be unwound. The fact that these programs have an intended end can be self-defeating. Even if they do any good, these programs face diminishing returns.

For all its risks and marginal worth, quantitative easing remains the only viable stimulus option for policymakers because it is the only politically acceptable weapon when interest rates can no longer be cut and fiscal stimulus is demonised. Expect more episodes, even if such steps lack bite.

Rick Rutten is an authorised representative of RI Advice Group P/L. This editorial is general advice only



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