I’ve spent a huge amount of time and effort (see here) trying to show how QE is really nothing more than an asset swap that exchanges reserves for bonds and ultimately has very little impact on the private sector since it doesn’t alter net financial assets and has only a marginal impact on interest rates. But the message has been largely lost in the mix of sexier ideas like “money printing”, conspiracies, debt monetization and wealth effects. But maybe, just maybe someone is starting to get it. Lord Turner, chairman of the Financial Services Authority says in a recent interview (via the FT):
“There are some dangers that QE, if the only policy deployed, might suffer from diminishing returns, with the economy facing a liquidity trap in which replacing private sector holdings of bonds with private sector holdings of money has little impact on behaviour and thus on demand,” (emphasis added)
That sounds an awful lot like my concept of QE being nothing more than a simple “asset swap”. Could it be that the people who matter are finally starting to understand that QE isn’t the silver bullet that so many think it is? Probably not, but one can dream, right?
* Thanks to reader Ross Thomas for forwarding this on!
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.