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To Prove That QE Is Working



Leave aside, for a moment, all those maunderings about how quantitative easing is just Modern Monetary Theory as done by those who would impose austerity. Think, instead, about the actual aim and purpose of QE.

Which is that the central banks usually has a pretty secure hold on short term interest rates. But it’s the market which controls long term ones. The central bank can influence those longer term rates, sure it can. But only by being a market participant.

So, we identify a time when we think that real interest rates are “too high” for objective economic conditions. Yes, there’s an appalling amount of hubris wrapped up in those definitions of high, objective and even economic. And yet there we are. The decision is that we think that interest rates should be lower.

The why being that “too high” means not enough investment. We think that more investment is a good idea in general. We also think that the market is going to identify good investments better than the critical theory graduates who are the government. Finally, we note that business investment is the most variable of the components of the national economy. It falling is oft a precursor to a recession, its rising is what – often, again – pulls us out of one.

So, lower interest rates, more people will borrow to invest, we’re grand.

So, QE. We don’t want to just invent money and go spend it. Because the people doing the spending at the critical studies graduates who will splash said cash on statues to Foucalt all over the country. We think we’d prefer to gain something useful instead, like a nice car maybe. Or a car production line. So, we print new money, buy government bonds with it. This lowers long term interest rates as one – and only one – determinant of long term interest rates is the yield on government bonds.

This all works at the margin but if people want to have an income from their investments – which, given that pensions a largeish chunk of household wealth seems likely – then less income on gilts will mean people moving out along the risk curve to gain such an income. This is the same statement as longer term interest rates fall as more people investing does lower the required rate of return – supply and demand, d’ye see?

So, how would we know if this worked?

The market for junk bonds issued by British companies is growing at its second-fastest rate in a decade as the nation’s riskier companies scramble for capital — just months after fear paralysed the entire industry.

Corporate debt issuers with below investment grade credit ratings have raised a combined $29.1 billion in the high-yield bond market since the beginning of the year, according to figures compiled for The Times by Refinitiv, the financial data group.

It represents the largest issuance of junk bonds for seven years and the fastest growth since 2017, when the high-yield market sprang back to life after shutting the previous year in the wake of the Brexit vote. Companies raised just $15.66 billion last year, figures from Refinitiv show.

The splurge in high-yield debt deals also marks a sharp recovery since February and March, when high-yield markets temporarily crashed on fears of a wave of corporate debt defaults due to Covid-19 before central bank intervention triggered a dramatic rally.

People investing further out on the risk curve in order to gain income is pretty good evidence that our plan of getting people to move out along the risk curve in search of income is working.

QE works and not a fraction, quibble nor Snippa of Modern Monetary Theory in sight.



  1. A whiff of sophistry here. When we think investment we think factories, machines, recruiting teams of geeks, doing stuff with coloured liquids in laboratories. In fact the cash borrowed cheaply via QE goes straight into the stock and housing markets, with few of those stocks and houses being IPOs or new builds.


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