One of the goals of QE is that by making yields artificially low investors will be forced to start a new business venture or expand an existing one that can earn a decent yield. This would (in theory) expand the economy and create jobs. This is wrong because when the economy suffers from a lack of demand then adding additional capacity will not result in more sales for a new business and thus not result in more ways to earn yield. Instead adding additional unneeded capacity would create further depressed conditions when the unneeded facility was finally shut down. The more affluent someone is the more likely they are to be aware of the dangers of being manipulated into buying unneeded things that are offered with an artificially low rate of interest. This is especially true for business buyers. I can’t imagine a business expanding solely because they got a low interest loan. The first order for a business is to seek assurance that there will adequate demand for a product or service, so they will refuse to accept low rate loans as a reason to expand. Investors should use financial planning services and not simply seek investment advice so that they can better cope with these risks.
The people most likely to expand consumption because of artificially low rates are those who are the most naïve and they are also the poorest. The low income borrowers will not qualify for very much debt so they can’t significantly change consumption because of low rates. Thus they won’t have much economic impact.
The exception to the above matters would be in the area of mortgages is an affluent buyer can get a 30 year fixed arte with artificially low interest rate that might be a good idea, except that when he tries to buy something there is the risk that his interest rate savings were wasted by overpaying for and over consuming a personal residence. In the case of home buying people are tempted to buy more than they need which doesn’t add to the productive capacity for the economy. This merely creates a temporary fake unsustainable recovery.
It has been well documented in the news media that QE doesn’t work but it does cause financial distortions. See the FT article “Side-effects that should call time on the QE medicine” by John Authers. QE damages financial institutions when rates are at near zero. Insurance companies and banks can’t earn enough from their bond and loan portfolio so they need to charge more. Investors are forced to take on excessive risk with high yield junk bonds in the hopes of earning decent yield. Hedge funds that do short term speculations borrow margin money at very low rates and then create bubbles by buying stocks just to get the yield. Mortgage REIT’s lever up 5 to one using low rate margin loans creating the risk of a sudden crash.
QE is supposed to create a “wealth effect”. It did make people feel more prosperous in terms of net worth, but the wealth effect doesn’t result in greater spending. People spend according to the lifetime income theory and not because their stocks went up. Besides stock prices merely matched their previous highs on an inflation-adjusted basis and stockholders suffered from huge, scary crashes to merely break even. The total return on stocks adjusted for inflation was about 1% a year since the top of 2007, so an intelligent consumer should not feel any emotional thrill from the wealth effect that would make the consumer become uninhibited about consumption. Instead the consumer looks at his stagnant employment income and declining yields on bonds and savings and concludes that he can’t afford to increase consumption. Of course those skilled people in the top 10% have gotten some raises in excess of inflation in recent years but they are also looking at increased taxes.
Since the main reason for QE is to create jobs and most of the unemployed are concentrated in groups of people with the least amount of skills and who qualify for lucrative tax free welfare benefits then the problem of unemployment has been misdiagnosed. The hard core unemployed are too influenced with a conflict of interest from lucrative welfare benefits to sincerely seek work thus it is impossible accurately assess their true state of joblessness. The country shouldn’t be forced into financial contortions and bubbles that rob retired people who live off of bonds in order to conduct a radical experiment with QE. The scary 2007-09 crash resulted in a real GDP drop of 4.5%, which has now healed. If the recession was only a 4.5% decline and it has now healed then can’t the unemployment find work? Is it possible that unemployment has been solved and the welfare clientele are creating a false data point? For college graduates and married people those groups are already at full employment levels of 4%.
I wrote a sarcastic article “Quantitative Easing does work”.
Investors should seek independent financial research or independent investment advisor which is best delivered by a fee-only financial advisor.