November 3, 2014

Government Intervention & The End of QE

October wraps up the Federal Reserve bond-buying program known as quantitative easing (QE). For all of you definition hungry readers, QE is when the Fed buys mortgage backed securities and US Treasury bonds. As the prices for these two components rise, the interest rates drop and also reduces the accessibility of these bonds in the market. Therefore, with fewer bonds available, investing focus turns to alternative assets, like corporate bonds. When investors buy corporate bonds, they are in lending money to businesses, and in turn encouraging economic activity. In other words, QE was a last ditch effort response by the Fed in the face of the financial crisis. So, did government intervention in the form of QE work in rescuing the United States out of the depths of the rescission?
As we know from Mises and the like, one of the cardinal sins of economic policy is government intervention in the form of printing money since it ultimately leads to hyperinflation. In order to answer the above question lets look at the facts we know. Because of QE, interest rates at near zero percent, which has caused checking, savings and CD accounts to become stagnant, in other words, it cost money to hold money so regular Americans are being punished for being risk averse. The trend of increased risk in the market appears more global then local given the rise of almost reckless investing of junk bunds or emerging markets. This tendency to take risk forces us to ask if QE has paved the way for a future financial crisis, likely one where inflation is rampant. If this is the case, then it’s safe to say that QE was a failure, and it further proves that government intervention is the worse form of intervention. But what if we took the idea of success or failure in regards to QE a step further and instead asked, would QE work for any other country facing a financial crisis?
The long and short answer seems to be no. A quick Google search will prove that when the European Union tried similar QE efforts, they quickly found out they were not the US and as such US monetary policies did not fit their fiscal needs. Then again, QE may only work because of the first mover advantage (first to market gains control of resources that can’t be matched by others), which in this case is the US, and now other central banks can’t match its effectiveness. Or maybe the success of QE hinges on a collective psychological acceptance as a functional policy measure rather then dangerous government intervention. QE is less then a decade old, even though the bond buying has ended the future effects of the policy are still largely unknown.

Proponents of QE will argue that the policy was a success, and further cite that because of QE the US financial market is on the rebound with stock market hitting record highs, unemployment falling below six percent and maintained state of low inflation. Mises argued and proved that unregulated printing of money will lead to hyperinflation, yet he never put a time frame on when this event would happen, thus it is possible that tomorrow, next month or next year prices maybe skyrocket. Therefore, to answer the question if quantitative easing and government intervention worked yields the answer that it is still to early to tell.

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