Money doesn’t grow on trees” – not quite true anymore given the policies followed by central banks worldwide. We all know about Quantitative Easing. It is the policy wherein the Federal Reserve is buying huge quantities of bonds to infuse liquidity into the money supply. It is not just the Fed, the central banks of England, Japan and the EU are also indulging in similar programs. Bankers believe that it will solve the problems of a slowing economy by putting in more money and ensuring the creation of more credit and restarting economic activity. But does that really happen?
Even if Central Banks were to allow more money to flow into banks, there simply isn’t sufficient demand for loans in these nations. The central banks can infuse liquidity into banks, but this doesn’t suddenly create demand for loans. Most entrepreneurs are not taking loans because they think that there isn’t enough money in the system. They don’t trust the economy to take risks. Moreover, banks don’t get any returns because of low interest rates. They have no incentive to forward this money as loans. As a result, they prefer holding this money as cash in their hands.
So, what is the benefit of such a program? It merely reduces the impact of the recession as economic activity isn’t revived. It is merely sustained at a level to prevent the recession from getting more grave and sinking into a depression. Moreover, what the QE program has done is that it has artificially pulled up prices of consumer goods, which was necessary to an extent from the supply side. but it has also made reduced the real value of the savings of the people, already reduced by the 2008 crisis, further lower. Stock prices have risen without a corresponding rise in the economic activity, which means that such a program needs to be continued until economic activity really revives to prevent an apparent stock bubble from bursting. Households after 2008 would pump in the extra money into buying houses that they lost due to the bubble bursting, creating conditions resembling the housing bubble that cost the world dearly. These banks need to realise that they aren’t increasing investment, they are merely printing money. There is a difference between the two, a difference that exists fundamentally between money and capital. These policies create money but don’t guarantee capital creation They merely allow more money to enter the hands of banks, who have been guilty of financing the bonuses of their employees with the money they received as bailouts from the US government. So, what really is the net result of the QE-like monetary policies? It merely increases cash balances and keeps the lowest point of the recession at bay. It doesn’t solve the problem; it merely provides a temporary solution to buy time to think of a better way to tackle problems. Such policies came in the aftermath of the 2008-crisis, an artificially created crisis that led to real losses to the common man’s savings. These stimulus packages are artificial solutions, which may pave the way to further problems, as a result of reducing the real value of the savings of the people, creation of a stock bubble and probably even the creation of another housing bubble.