Quantitative easing has been promoted as a tool to boost economic recovery in the U.S. and elsewhere, but it's really just a back-door way to finance government spending, according to
The Telegraph.
Jeremy Warner, a financial commentator and editor at the U.K. newspaper, said QE may even be illegal in Europe, if not in the U.S.
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“Quantitative easing has had a reverse Robin Hood-type effect by robbing from the poor and giving to the rich,” he wrote.
At central banks in the U.S. and the U.K., he said QE has “significantly assisted governments in financing burgeoning fiscal deficits.”
According to Warner, there is no conclusive evidence QE has restored any nation’s economy, but it definitely has bailed out big debtors.
“The biggest of these debtors were governments, particularly the British, U.S. and Japanese governments. All of them were able to borrow more cheaply than otherwise and, with the central bank mopping up supply, were able to raise a great deal more money. Central banks became enablers of continued deficit spending.
“Remove the disciplines of the market, which is in effect what QE does, and governments will spend, if not with outright abandon, certainly with less concern than they would otherwise. Both in Britain and the U.S., much of the urgency of deficit reduction has been removed by QE.”
Warner pointed to new analysis on the subject from professors Andrew Johnstone and Trevor Pugh of the Sheffield Institute of Corporate and Commercial Law. Johnstone and Pugh argue in a new scholarly paper that “in substance, the quantitative easing programs introduced by central banks around the world amount to monetary financing of government deficits.”
They maintain QE is probably illegal in the European Union, apparently on grounds it was not approved in its charter laws, although they expressed doubt the monetary practice will be stopped.
“The continued absence of debate is likely only to reinforce the view that central bank decision-making is outside the rule of law,” they wrote.
Economist Cullen Roche, founder of the
Pragmatic Capitalism blog, said it is unclear whether QE is just a ruse to enable government deficit spending in the United States.
“In the USA one could argue that QE is an indirect financing of the government’s spending because the Fed is using the primary dealers as a conduit through which it can purchase U.S. government bonds. In this sense, QE very much looks like a backdoor financing operation,” Roche wrote. “Then again, that’s how monetary policy is primarily implemented, by having the central bank purchase bonds to alter the private sector’s balance sheet. QE is just a big-time version of what the Fed has always done.”
David Kotok, chief investment officer at
Cumberland Securities, said that if the Federal Reserve stops its massive monthly asset purchases in October as planned, no one can foresee the outcome on the U.S. economy or financial markets. At that point, issuance of U.S. government securities at a rate of somewhere close to $400 billion annualized will continue, according to Kotok, but Fed absorption of that debt will be at zero as the government will once again rely on private investors to buy its debt as it did before QE.
“The Fed will continue to replace its maturities, but that practice will not add duration or supply any stimulus,” he said. “The effect of Fed policy on U.S.-denominated assets has been to create a continued upward bias in the prices of those assets. Stocks, bonds, real estate, collectibles, and any asset that is sensitive to interest rates have had the benefit of this extraordinary policy for five or six years.”
Since no one can predict the outcome when the easy money tap is turned off, Kotok said Cumberland is converting to a cash position in some of its investment accounts as a precaution.
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