|Richard Koo On The Ineffectiveness Of Monetary Expansion|
|ZeroHedge, 02/05/2013 (traduire en Français )|
Richard Koo : The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limited impact...
In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging them to consume more.
The following graph suggests that differences in the development of home prices among major nations will need to re-adjust to the mean of 1991, i.e. German prices must rise and/or the ones with current account deficits and a tradition of high rates must fall.
For example, the US monetary base grew from 100 at the time of Lehman Shock to 347 today as mentioned earlier, but the money supply grew only from 100 to 135 during the same period.
Unfortunately there was a period in economics profession, from late 1980s to early 2000s, where many noted academics tried to re-write the history by arguing that it was monetary and not fiscal policy that allowed the US economy to recover from the Great Depression. They made this argument based on the fact that the US money supply increased significantly from 1933 to 1936. However, none of these academics bothered to look at what was on the asset side of banks’ balance sheets.
The asset side of banks’ balance sheet clearly indicates that it was lending to the government that grew during this period (chart below). The lending to the private sector did not grow at all during this period because the sector was still repairing its balance sheets. And the government was borrowing because the Roosevelt Administration needed to finance its New Deal fiscal stimulus. In other words, it was Roosevelt’s fiscal stimulus that increased both the GDP and money supply after 1933...
Although deficit spending is frequently associated with crowding out and misallocation of resources, during balance sheet recessions, the opposite is true.