Stephen S. Roach writes: \u00a0QE may have been a resounding success in some ways \u2013 namely, arresting the riskiest phase of the crisis. But it did little to revive household consumption, which accounts for about 70% of the US economy. In fact, since early 2008, annualized growth in real consumer expenditure has averaged a mere 1.3% \u2013 the most anemic period of consumption growth on record.<\/p>\n
This is corroborated by a glaring shortfall in the \u201cGDP dividend\u201d from Fed liquidity injections. Though $3.6 trillion of incremental liquidity has been added to the Fed\u2019s balance sheet since late 2008, nominal GDP was up by just $2.5 trillion from the third quarter of 2008 to the second quarter of this year. As John Maynard Keynes famously pointed out after the Great Depression, when an economy is locked in a \u201cliquidity trap,\u201d with low interest rates unable to induce investment or consumption, attempting to use monetary policy to spur demand is like pushing on a string.<\/p>\n
This approach also has serious financial-market consequences. Having more than doubled since its crisis-induced trough, the US equity market \u2013 not to mention its amply rewarded upper-income shareholders \u2013 has been the principal beneficiary of the Fed\u2019s unconventional policy gambit. The same is true for a variety of once-risky fixed-income instruments \u2013 from high-yield corporate \u201cjunk\u201d bonds to sovereign debt in crisis-torn Europe.<\/p>\n
The operative view in central-banking circles has been that the so-called \u201cwealth effect\u201d \u2013 when asset appreciation spurs real economic activity \u2013 would square the circle for a lagging post-crisis recovery. The persistently anemic recovery and its attendant headwinds in the US labor market belie this assumption.<\/p>\n
Nonetheless, the Fed remains fixated on financial-market feedback \u2013 and thus ensnared in a potentially deadly trap. Fearful of market disruptions, the Fed has embraced a slow-motion exit from QE. By splitting hairs over the meaning of the words \u201cconsiderable time\u201d in describing the expected timeline for policy normalization, Fed Chair Janet Yellen is falling into the same trap. Such a fruitless debate borrows a page from the Bernanke-Greenspan incremental norm. \u00a0QE Post Crisis<\/a><\/strong><\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" Stephen S. Roach writes: \u00a0QE may have been a resounding success in some ways \u2013 namely, arresting the riskiest phase of the crisis. But it did little to revive household consumption, which accounts for about 70% of the US economy. … Continue reading ![\"Consumers](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2014\/10\/Consumers-Must-Spend-300x232.jpg\")
<\/a><\/p>\n