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Your support makes all the difference.The curtain is coming down on the greatest monetary stimulus of all time. As expected, America’s central bank yesterday confirmed it will stop adding to its stock of government debt and mortgage purchases this month. With $4.5 trillion on the balance sheet – equivalent to 25 per cent of America’s GDP – the Federal Reserve has decided that the time has come to halt its quantitative easing programme.
So what have we learnt since the programme was begun in 2008? We’re certainly wiser about how economies work in the wake of massive debt bubbles. Predictions that money-printing on this scale would inevitably result in an explosive surge of inflation have not been borne out. Consumer prices in America remain quiescent. It turns out that when confidence has fallen through the floor and everyone is desperate to pay down debt the normal economic rules do not apply.
We’ve also learnt that there are limits to the invigorating powers of monetary policy. Despite QE, America’s recovery from the 2008 crash has been one of the weakest on record. This does not mean QE failed; the situation would certainly have been much worse in its absence. But it does mean that monetary policy alone is no panacea for sickly economies. Fiscal policy – government tax and spending decisions – matters too.
The big unanswered question is over QE’s financial side-effects. Asset prices around the world have – as expected – been given a tremendous boost by the programme. Will markets collapse without the Fed’s monetary support? There are good reasons to believe they won’t, but the truth is that nobody really knows.
And though America’s QE chapter is over, in other parts of the world the day of stimulus is still dawning. Japan is stepping on the monetary accelerator as Shinzo Abe’s government belatedly tries to pull the country out of its two decade-long deflationary funk. The European Central Bank says a QE programme could be adopted in the eurozone if inflation in the single currency continues to fall. Let others learn from both the triumphs and the disappointments of the great American monetary experiment.
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