QE was a Fed policy to help rescue and then grow the economy. Once the interest rate weapon had been exhausted – running at near zero and then zero – QE was the only remaining weapon left in the bag. It was desgined to put money back into economy. By flooding the market with money, and zero interest rates, presumably capital investment by private industry would swoon, production increase, and wages would be improved. This has not happened. Capital investment has remained meager, production growth has not taken place and wages have remained all but flat; in some cases even down in real terms. So where has all that cash gone too?
With hindsight we can see several places where excess money has surfaced:
- The investor class
- Private sector balance sheets
And from these two prime sources we now see secondary sources that have recieved benefits:
- A massive bull-run in the US stock market
- Record breaking stock buy-backs, which increases EPS, that pays higher rewards to CEOs and boards, without actually leading to more competitive or successful businesses
- Record breaking mergers and acquisitions that in some cases have led to re-ordering of industries.
In the US print edition of the Financial Times Sunday there was an article called, “Record Year in Sight After Week’s $50bn in M&A Deals“. In a nut shell there has been a lot of M&A, funded by cash and debt, itself funded by QE and low interest rates. Due to the significant amount of money sloshing around in the system you would expect that such prices for M&A are abnormally high. If not, presumably companies that were not really in deep trouble are being snapped up. So the normal cycle of creative disruption is itself being distupted.
Bottom line: QE has not worked as the Fed expected – see “The Printing Press Rolls…” It has not worked either in EMEA, or elsehwere, for that matter. Though other countries continue to be enamoured with the idea- See “Japan: The Great QE Experiment Fails“. We are now stuck with a whole load of cash at the bottom (actualy, at the top, if you know what I mean) of the economy. If inflation ever did get going, it might actually be hard to slow it down with normal interest rates recovery The next phase of the expriment is about to be joined. What happens when QE becomes quantitative tightening but that tightening takes two years to complete?