Five years after the initiation of the largest money printing campaign the world has ever seen, the Fed is finally coming to the same conclusion that many Americans reached years ago—pumping trillions of dollars of freshly printed money into the financial system does not create lasting economic growth. As we’ve argued on this site and in our monthly strategy reports regularly, quantitative easing does little for the real economy. It does unduly inflate stock prices and encourage manipulation, mispricing, and misallocation, but as far as creating economic growth? There is very little evidence to support such a claim.
It took them awhile, but apparently some of the Fed’s own economists have finally come to a similar conclusion. According to the latest research on quantitative easing from the Fed’s San Francisco branch, QE2, a $600 billion money printing campaign added 0.13% to economic growth in late 2010. In a $16 trillion economy, that is the equivalent of about $20 billion dollars of economic activity. Doesn’t sound like much bang for the buck. It gets worse though. When the authors adjust for the stimulative impact of the Fed’s promise to keep short-term interest rates at zero well into the future, quantitative easing is found to add only 0.04 percentage points to growth—we are talking rounding errors here.
One can only hope that this recent research will influence future Fed policy before perpetual money printing further impairs the structural integrity of the U.S. economy.
Jeremy Jones, CFA
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