Most of us know the term “QE” as the central bank’s euphemism for creating lots of new money, but if you are not sure, I have an explanation here.
Recently, President Obama nominated Janet Yellen as the new Fed chairman. She is expected to continue or increase QE. At her confirmation hearing, she said:
I consider it imperative that we do what we can to promote a very strong recovery. It’s important not to remove support [QE], especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases [QE]. Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.
Yellen’s comments are tragic because QE cannot and does not promote economic recovery. It does the opposite. Why is that?
Jobs come from something called the division of labor. It’s the fact that people can produce more when they specialize intelligently. A “job” is really a package of specialized tasks that an employer needs someone to do because the specialist can do more for less (or can help the whole organization to do more, etc.).
The superior productivity of specialized labor comes, in turn, from something called capital.
- Productive capital is the accumulation of knowledge, tools, machines, organizations and infrastructure that enables human labor to be productively specialized.
- And financial capital is the accumulation of money (cash, shareholders’ equity, savings, etc.) that will buy or develop productive capital and direct its motions.
It is crucial to understand that not all capital is created equal. It takes work, sacrifice, talent and vision to form productive capital. Capital can be invested badly (called malinvestment, which flourishes under QE and 0% interest rates). Thus, raw investment spending levels do not matter. Financially sustainable jobs come only from the capital which has been invested well, for productive success.
QE undermines productive capital. When Obama/Bernanke/Yellen print money, they devalue money; they make it buy less than it would otherwise. So the financial capital of successful business people doesn’t go as far. QE, and 0% interest rates, also kill the return on capital: the incentive to use it very carefully (productively). Thus, QE messes up the economy’s capital, making financial capital perversely less effective for good projects and more available for bad projects, a toxic mix that injures the division of labor (the creation of economically efficient, valuable jobs). It’s as if the economy is on a narcotic and gradually getting more stupid.
The way it looks to businesses is: They thought they had some good capital, but now their capital doesn’t go as far. Everywhere they look, costs are a little higher than projected (or much higher, in the final stages of QE). Simultaneously, at 0% interest their marginal (unproductive) projects look better than those projects are. For both reasons, businesses’ capital is wasted. It somehow doesn’t go as far on their good projects – at the same time they’re tending to either idle it, or blow it on bad projects.
Businesses then need to squeeze out greater financial profits just to maintain their capital base. They do it by hiring fewer people. Some businesses seem very healthy (high-profit) after their job cutbacks. But fewer new businesses are started, and the healthy ones tend to grow by merging with (or buying out) competitors, which lowers employment. The overall economy either stops growing, or grows in unhealthy directions. The unemployed survive on government aid (which is surprisingly plentiful), while stories abound of people who ‘score’ with speculative investments, which tend to rise.
Does all that sound like the world we live in? Yes! Remember: The price of gasoline, the stock market, and the welfare/disability rolls have all roughly doubled in Obama’s reign so far. While new jobs have been far harder to come by. QE enables (at least) those disparate effects.
To be clear, QE is not the only reason Obama’s recovery has been lame. Other Obama policies also increase the cost of employing people, and other costs that businesses face. But QE doesn’t help; it adds to the economy’s burdens.
If you can think of a country that has emerged into vibrant economic recovery because of their doing large-scale QE, please post it in the comments. I haven’t been able to think of an example. And Japan, which has been doing QE since the 1990s and now faces rising costs, clearly isn’t an example. Neither will we be one.