The story of QE and the recovery

There were two interesting developments in the world economy last week that some have called a sea change. First, the US Federal Reserve bank ended its programme of what is called ‘quantitative easing’ (QE). This is the purchase by the central banks of government, corporate and real estate bonds paid for by ‘printing money’, or more precisely creating reserves of money in banks.


This ‘unconventional’ monetary stimulus was adopted by the Fed and other banks after they had cut their interest rates for lending to commercial banks (the ‘policy rate’) to zero and the major economies were still struggling to get out of the Great Recession. The argument was that once interest rates were ‘zero-bound’, further stimulus to the economy would have to be ‘quantitative’, based on more money quantity rather than just being cheaper to borrow (lower interest rate).

Well, at its meeting last week, the Fed announced that its QE programme had finally ended and there would be no more further purchases of bonds paid for by printing money. Just a couple of days later, the Bank of Japan announced the opposite in a surprise move (the vote to do so was just 5-4). The BoJ is going to expand its current QE programme by increasing the annual rate of purchases of government bonds and other private sector bonds.

Why the different policies? Well, the Fed thinks that the US economy and, in particular, its labour market, is recovering sufficiently to manage on its own and any further stimulus might even be inflationary. On the other hand, the Japanese economy is still on its knees and may even slip back into recession (see my post,
So the BoJ is trying to get the economy out of its mire with an extra injection of QE in 2015.

But has QE worked and will it work in getting capitalist economies back to levels of real growth achieved before the Great Recession hit in 2008? The answer is clear: no.

Since the end of the Great Recession in mid-2009 and the use of QE since 2010 by various central banks, the Fed, the BoE, the BoJ and to some extent, the ECB, global growth has remained weak and below trend and the recovery in employment and investment has been poor.

In Japan and the Eurozone, recession and deflation (not inflation) are spectres haunting their economies. Indeed, there is talk currently in mainstream economics of ‘secular stagnation’ taking over in the major economies (see my post, and the major economies will never ‘return to normal’ (see my post,

Now the argument against this might be that, at least in the US and the UK, where QE has been employed the most, there has been an economic recovery. Well, I have discussed the frail and imbalanced nature on the UK economic recovery in various posts (see And if we consider the US, average real GDP growth since the end of the Great Recession has been only about half the rate than before (graphs from Doug Short’s site).


The gap between where US real GDP per head should have been (red line in graph) and where it is now after the Great Recession (blue line) is widening, not narrowing.

GDP per cap

Also last week, the latest (advanced) figure for US real GDP growth for the third quarter of 2014 was released. It showed a rise of 3.5% qoq after a rise of 4.6% qoq in Q2, after a fall of 2.1% qoq in the ‘winter’ Q1 (see my post, That looks good, until you consider the underlying data.

In Q3, year-on-year growth was still more or less where it has been for years, at 2.3%.  And it seems that in Q3, growth was supported mainly by more government spending and better trade figures. US domestic private sector growth actually slowed.  The contribution to the growth figure from private consumption fell from 1.75% pts to 1.22% pts, or from 38% of total growth in Q2 to 35% in Q3. The contribution from business investment fell from 1.45% pts to 0.74% pts, or from 32% of total growth to just 21%. What kept growth going was extra defence spending, where the contribution to growth nearly tripled; and a huge rise in the contribution of trade overseas, as oil imports plummeted in both price and volume, and so provided a boost to domestic gross product.

GDP contributions

Most important, business investment (as a share of GDP) has still not returned to levels seen before the Great Recession after six years.  US businesses have used the sharp recovery in the mass of profit from the end of 2008 mainly to hoard cash abroad, or to pay larger dividends to shareholders or buy up their own shares to boost the market value of the company. Investment in new technology or plants to employ people has come last. And now there are just some signs that corporate profits may have peaked and, as profits lead investment, investment growth could slow sharply or even reverse next year (see my post,

So what has been the effect of QE? Well, the theorists of the quantity theory of money, the 20th century exponent of which was the right-wing economist Milton Friedman, argue that by a judicious control of the right amount of money in the economy by a central bank, an economy can be kept on an even keel and grow steadily (as long as, of course, governments and trade unions don’t interfere with markets).

Former Fed Chair Ben Bernanke has been a lifetime supporter of Friedman’s monetarist solution. In a speech in 2012, Bernanke reiterated his longstanding claim that “purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero”. Bernanke reminded us that “Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan’s deflationary trap.” (see my post,

The famous monetarist formula is MV=PT, where M is the total money in circulation, V is the velocity or rate of turnover of that money (changing hands) and P is the level of prices in an economy and T is the level of transactions (activity or sales) in an economy. The monetarist argument is that an injection of more M (with V steady) will either raise prices (inflation) or boost the real economy (transactions).

Well, there certainly has been a huge injection of M. In the US, the Fed has increase the monetary base from 3% of GDP to 15% and the BoJ has raised it to over 30%.

monetary base growth

But real economic growth has not responded. And we can see why when we look at the ‘money multiplier’, the ratio of the amount of money printed by the Fed and the amount of money flowing into the wider economy.

money multiplier

During the Great Recession, the money multiplier plummeted as the economy shrank and the quantity of money out there fell accordingly. But the injection of more money by the Fed has done nothing to reverse that since the end of the slump. To use the famous phrase, the Fed has been pushing on string and the other end of the string (the wider economy) has not moved.

The quantity theory of money and its policy instrument, QE, has been shown to be unrealistic and a failure. In the monetarist formula, M has been increased hugely but P (prices) has hardly moved up and T (transactions) has also stagnated. What has happened is that V (velocity or the turnover) of money has dropped accordingly.

The reason is because the quantity theory is back to front (see my post,
An endogenous theory of money (of which Marx was an early exponent) would start the other way round: it’s demand for credit or money that drives the supply of money, not supply creating demand. And the demand for money has been weak because economic activity is weak. To use another cliché: you can bring a horse to water, but you cannot make it drink.

QE has not worked in raising rates of economic growth back to pre-crisis levels. So where has all the money gone? It has gone into the banking system to shore up their balance sheets and restore their profits. And it has engendered a massive bubble in financial assets; and the prices of government and corporate bonds and most of all, stock prices, have rallied over 73 months to record highs.

As I write, the US stock index has hit a new high (after the short ‘correction’ in early October – see my post,
Despite the end of QE by the Fed, the decision of the BoJ to expand QE and the possibility that the ECB will soon follow has fuelled another leg up in the stock markets.

A Keynesian economist, Robert Farmer, wrote some books a few years ago, arguing that the best way to kick-start the economy was for the Fed to buy stocks and shares directly as part of a QE programme. Farmer reckoned this would restore ‘animal spirits’ and business ‘confidence’ and get businesses to invest more (see my post, Well, the experience of the last few years has refuted that idea. The real economies of world remain in the doldrums while stock markets reach rocket highs. The only beneficiaries are the top 1% everywhere, who own the bulk of financial assets, rather than homes, like the middle classes.

assets stocks

The latest BoJ expansion, contrary to the expressed views of the mainstream economists (Bernanke, Krugman etc), won’t get Japan out of its stagnation (see my post, The US and the UK appear to gaining some traction, but if profits stop rising next year, that could turn round. And the rest of the major economies globally have been slowing down significantly. Forecasts for global growth next year have been consistently lowered by the major international agencies (see my posts,
That means continued unemployment for millions and stagnant real incomes in many major economies.

And the risk is that if the Fed has now ended its QE programme and does implement a hike in interest rates in 2015, then the financial boom will also collapse and profits will begin to fall, increasing the risk of a new slump (see my post,

10 thoughts on “The story of QE and the recovery

  1. Michael,

    You write,

    “And now there are just some signs that corporate profits may have peaked and, as profits lead investment, investment growth could slow sharply or even reverse next year”.

    But, there is no reason to believe this to be the case. On the contrary, it is frequently the case, as Marx describes, for the rate and mass of profit to be rising during a period of stagnation – for one thing during such periods, there is downward pressure on wages, raising the rate of surplus value, and on input costs, reducing the price of constant capital, and thereby raising the rate of profit – but without that causing any rise in productive investment. Instead, the realised profits increase the supply of potential money-capital reducing interest rates and stimulating speculation.

    By the same token, even where the rate of profit may be falling, investment may be rising, and as Marx describes this is common during the boom phase of the cycle, which follows the prosperity phase. It causes the demand for money-capital to rise relative to its supply causing interest rates to rise towards their average level.

    The idea that investment only increases in response to an increase in profitability was put forward by Ricardo rather than Marx. Marx criticises that approach in dismissing Ricardo’s use of that argument in relation to his theory of rent. Marx writes,

    “Finally, the extension of cultivation to larger areas — aside from the case just mentioned, in which recourse must be had to soil inferior than that cultivated hitherto — to the various kinds of soil from A to D, thus, for instance, the cultivation of larger tracts of B and C does not by any means presuppose a previous rise in grain prices any more than the preceding annual expansion of cotton spinning, for instance, requires a constant rise in yarn prices. Although considerable rise or fall in market-prices affects the volume of production, regardless of it there is in agriculture (just as in all other capitalistically operated lines of production) nevertheless a continuous relative over-production, in itself identical with accumulation, even at those average prices whose level has neither a retarding nor exceptionally stimulating effect on production. Under other modes of production this relative overproduction is effected directly by the population increase, and in colonies by steady immigration. The demand increases constantly, and, in anticipation of this new capital is continually invested in new land, although this varies with the circumstances for different agricultural products. It is the formation of new capitals which in itself brings this about. But so far as the individual capitalist is concerned, he measures the volume of his production by that of his available capital, to the extent that he can still control it himself. His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors. The individual capitalist may expand his production by appropriating a larger aliquot share of the existing market or by expanding the market itself.”

    (Capital III, Chapter 39)

    In other words, the determining factor for whether such productive investment occurs is not the rate of profit, but whether individual capitals believe there is a sufficient market for their output at prices that enable them to achieve a greater mass of profit, and even where that is not the case, the response may well be to invest rather than refrain from investing, where it is considered that such investment is the means to to gain competitive advantage or to increase the size of the market.

  2. Michael,

    You say,

    “The famous monetarist formula is MV=PT, where M is the total money in circulation, V is the velocity or rate of turnover of that money (changing hands) and P is the level of prices in an economy and T is the level of transactions (activity or sales) in an economy.”

    Its not just the monetarist formula. Marx uses exactly the same formula to set out his theory of money in “A Contribution To The Critique of Political Economy”.

    Moreover, you write,

    “An endogenous theory of money (of which Marx was an early exponent) would start the other way round: it’s demand for credit or money that drives the supply of money, not supply creating demand. And the demand for money has been weak because economic activity is weak. To use another cliché: you can bring a horse to water, but you cannot make it drink.”

    But, as Marx again sets out in A Contribution, that is fine where what is being discussed is money in the form of a money commodity such as gold. But, Marx goes on, things are completely different when instead what we are discussing is money tokens, be they coins or paper money etc. Here Marx makes clear things are stood on their head. To quote Marx money circulates because it has value, whereas paper has value because it circulates!

    The quantity of a money commodity such as gold that can circulate depends on its value, and the demand for it as means of circulation. Where more is put into circulation than required, the gold is hoarded, and eventually expelled from circulation, as its melted down into bullion. But paper cannot be so expelled, because it has no value other than in circulation. As Marx makes clear, therefore, apart from adjustments due to changes in the velocity of circulation of this paper, the more of this paper that circulates compared to the amount of money required, the lower the value of these money tokens, leading to inflation.

    You repeat the myth put forward by the Keynesians that inflation is not caused by this excess currency in circulation, and that the proof of this is that inflation has been low despite huge money printing. But, its not true that inflation has been low. Firstly, money prices are a result of two values, the value of the commodity on the one hand, and the value of money on the other. The huge rise in productivity over the last 30 years witnessed by the astronomical increase in the quantity of use values thrown into circulation in the global economy, resulted in a massive reduction in the value of those commodity units. Had there not been such huge money printing there would have been a significant reduction in global commodity prices, something which is anathema to monopolistic production, and which central banks were created to prevent.

    Secondly, the dollar acts as a global currency, and the huge rise in its circulation led to significant rises in prices in economies such as China, but has also been witnessed in the quadrupling of global prices of many traded commodities such as copper, a ten fold increase in the price of oil, and so on.

    But, also as you say yourself there has been a hyper inflation of asset prices. The Dow Jones rose by 1300% between 1982 and 2000, 7 times as much as US GDP growth during the period. property prices are at astronomical levels, never seen before in history not just in the UK, and US, but in many other economies such as China, Hong Kong, Singapore, Malaysia and so on, and even economies that have not previously had property price inflation, like Germany, are now suffering from it.

    As I wrote recently, both of these two factors represent a significant increase in the value of labour-power not reflected in wages. The 17 fold increase in share prices means that workers need to put 17 times as much money into their pension funds to buy the same number of shares as in 1982, in order to obtain the same amount of income from dividends to fund their pension income. It means capitalists who already own those shares find it easier to hold on to them, and workers find it harder to buy them from them. The other side of this increase in the price of those shares, is the fall in the dividend yield, hitting workers with a double whammy in trying to provide for their pensions. This is the real reason for the black holes in pension funds, not workers daring to live longer.

    The huge rise in property prices has the same effect, making it harder for workers to buy decent shelter, and simultaneously causing rents to rise. If this rise in the value of labour-power was reflected accordingly in higher wages, or even if these costs, which are excluded from calculations of inflation were included, the real situation in relation to the rise in inflation would become apparent.

  3. 1) OTOH, Marx’s reliance on Tooke, and thus the quantity theory of money, is something contemporary Marxists should dispense with;

    2) OTOH, the concept of the money commodity is to be adhered to in all cases. There is no value difference in essence between money in the form of a lump of purified gold with a State imprimatur that says “I am money”; a piece of paper manufactured so as to secure against counterfeiting (as the natural properties of gold is its own security), but also stamped by the State, “I am money”; and finally electronic money that requires a complex technical process to form into digital data that can be recognized (like gold!) and secured as money. All three require the expenditure of labor power to arrive at the state of money, therefore all three are commodity money. We can therefore dispense with the distinction between “real” and ‘token” or “fiat” money as an artifice, and with it not only a whole load of libertarian fundamentalist rubbish, but also the MMTers and Keynesians in the bargain more generally on the basic theory of money. Under capitalism, what acts as the universal equivalent is ALWAYS ipso facto the money commodity. It is only that in the case of gold, most of the labor power is expended in simply producing the money medium, the metal itself, and hence gold can be used for more than just toilet paper, whereas with paper and especially electronic money most of the labor power is expended “on the front end”, that is, forming and securing the medium with the use values that will make it money. The cliches about Bernanke “making money with the tap of a keyboard” is a canard, there is a whole technical apparatus behind that keyboard. Of course, money unit production costs have fallen dramatically as money has transitioned across media. This should not be surprising from a Marxist perspective: The progress of the production of the money commodity has followed the course of relative surplus value extraction, bar none, well outstripping every other branch of industry. Hence the production of money itself is the avatar and exemplar of precisely this law that Marx identified with “mature” capitalism.

    3) The final issue raised in connection with inflation in basic commodities and house rents, and wages, involves the limitations of Marx’s theory of rent. As a reminder, Marx labeled this the theory of “the transformation of surplus profits into ground rent”, but never considered the case where these surplus profits were NOT transformed into rents. Marx also never got around to digging more deeply into the case of mining rents (yuk,yuk); I think these need a different treatment from agricultural rents due to the different way in which differential rents are formed, though the fundamentals are the same. Then there is the vast area of what might be generally called “urban rent”, including commercial and residential landed property, that Marx never really got around to in any systematic detail.

    But the point that QE has gone towards inflating the prices of pseudo-commodities such as land, or derivative commodities such as stocks, is correct. That is because private property in such things is inevitable under capitalism and, as a result there is an uneven distribution of surplus value towards the owners of such non-productive instruments. When the counter-parties to those owners have been capitalists, such as in the U.S., they’ve usually had the market leverage to keep rents well-regulated, or even to get out of paying rent altogether by becoming owners themselves – the case Marx never addressed, but it was the historic case of the U.S. – thereby pocketing the untransformed surplus profits as “profits of enterprise”. But if they are workers, they have little market leverage and end up with high rents.

    1. “OTOH, Marx’s reliance on Tooke, and thus the quantity theory of money, is something contemporary Marxists should dispense with;”

      Except, Marx thoroughly dismantled the ideas of Tooke, and of Currency School theorists, and bankers like Overstone.

      I think your comments about the value of gold, paper, and electronic money tokens are fundamentally wrong. It is based on a wrong conception of the nature of money as the universal equivalent form of value. What that really means if that every commodity can be expressed, as a given quantity of abstract social labour-time, and in its historic development that could only find physical representation in an actual use value, be it gold, silver or cattle.

      The reality of that is described by Marx in “The Contribution” and in Capital I, Chapter III, where he demonstrates that gold coins frequently acted as currency even though there own value was less than their face value, i.e. the value of the quantity of gold they represented, because of wear, clipping, lightweight coins being minted and so on. This demonstrated that these coins circulated only as money tokens, not as the actual amount of value/socially necessary labour-time implied by their face value.

      If these cons could circulate as tokens representing such value, so could coins made from more base metals, or even paper notes, provided they had state backing and were only issued with a face value, equal to the amount of value/labour-time time they represented, and only in the same quantity as required for the purpose of circulation, i.e. as means of exchange, and means of payment.

      What was wrong with the Currency School was that they confused gold for money, and so via the 1844 Bank Act attempted to limit the currency circulation in accordance with the quantity of gold held in reserves, rather than in accordance with the amount of money that needed to be put into circulation to effect the necessary circulation of commodities and capital. That is why the Bank Act led to the financial crises of 1847 and 1857, via an unneccessary restriction of the money supply causing a credit crunch.

      As Marx points out they also misunderstood the difference between credit, and loan capital.

      Your comment,

      “Marx labeled this the theory of “the transformation of surplus profits into ground rent”, but never considered the case where these surplus profits were NOT transformed into rents.”,

      also indicates a misconception in relation to the term rent. When Marx uses this term in the context of capitalist rent, it does not refer to a specific payment of an amount of rent, in the way someone pays their house rent to a landlord, for example. The term rent here is synonymous with surplus profit, wherever there is surplus profit, there is rent. Rent here refers to a source of revenue. If that revenue/surplus profit is appropriated by a landlord, it may take the form of such an identifiable payment, but it can equally be appropriated by the productive-capitalist themselves. It may even be appropriated as tax by the state, or even by consumers, where the particular producer, uses the surplus profit as a means of reducing their market price, for example to gain additional market share.

      The surplus profit, and the rent are simply an indication that in a particular instance, the individual commodity value is lower than the market value.

      I think there are indeed problems with the theory of rent, and in the next few months I will be addressing them, in line with Marx’s own theories.

      Your comment,

      “Marx never addressed, but it was the historic case of the U.S. – thereby pocketing the untransformed surplus profits as “profits of enterprise”.”

      also reflects a fundamental misconception. The term profit of enterprise refers to the revenue going to the functioning capitalist, be they the owner of the business or an entrepreneur operating with loaned money capital. It is the portion of surplus value left after the deduction of interest, rent and taxes.

  4. if 50% less people are required to produce the same volume of goods of 25 years ago, added with all the subcontracting and non-union work, then capitalism doesn’t have a market to sell its overproduction to. Hence by printing money it thinks it can bypass the laws of value and allege as it has done for years that there is no hyperinflation.

    This is what Boffy argued previously that there is no inflation, there is minimal unemployment and that millions of new migrants who arrived in the UK did not affect either wages, or the supply/use of public services. In other words all the laws of economics had been suspended as he wanted to prove capitalism can grow in perpetuity and that QE is just another form of debt. It isn’t as its the global equivalent of German money printing in the 1920’s.

    Now most of the BRICS have worked it out they are offloading their dollar holdings as fast as they can. The only way the USA can survive is if it disconnects Russia from the world markets ie shoots the EU in the ‘left’ foot in the hope that the USA can stand on its ‘right’ foot…

    1. Any data that the BRICS are offloading their dollar holdings “as fast as they can”? Would be nice to see a comparison, or just something that has some material basis to it.

      1. I’ll save you the effort: Between Aug 2013 and Aug 2014:
        China’s holdings of US Treasury instruments essentially unchanged, having risen from Aug 13-Nov 13, then declined back to the Aug 13 level.

        Brazil, holdings increased about 3.6% in the same period;
        India’s increased 40%;
        Mexico’s increased 25%
        Turkey’s increased 26%

        Only Russia’s declined significantly in that period, due I would imagine to that little thing called sanctions, limiting trade and investment, and coincidentally driving the rouble down so that the central bank has sold some its holdings in an attempt to bolster the currency.

        So the BICs haven’t unloaded. Only the R has, because of special circumstances.

  5. China has made $5b investments in Greece they are building a port to rival Hamburg and Rotterdam, the Russians wanted to buy the railways but the Yanks didn’t let them. Going on a global spending spree whilst keeping US Treasuries implies they aint being increased. Russia and China agreed to do trade without using the Dollar.
    So the figures below aint happened?

    So Sartesian who not long ago stated there was no hyperinflation in the London property market now alleges countries aint dumping the dollar! Or that QE doesn’t have an impact in economies an unlimited amount of money printing, movement in capital and labour across continents has no effect whatsoever in his neo-liberal head.
    So why is oil dropping so fast? To hit Russia of course which is leading this process as they are wannabe financial capitalists and want a seat at the top table but will never get one. So in a downward spiral they will be forced to bring down the USA…

  6. I was wrong Boffy was right. I have to admit publically

    Germany is booming once more increased its fake GDP figures by 0.1%. The EU will be able to house and feed the planet once more. Millions of idle hands are required. Asia must relocate to Europe and Europe must relocate to Asia. Without manufacturing and with almost complete deindustrialisation Britain produces brilliant new jobs (1 in 40 are full time) and the whole economy relies on state subsidies: housing, council tax benefits, tax credits, zero corporate taxes etc so the multinationals can employ millions on part time garbage work This is the boom I missed out on. Bring it on. Instead of 5 million workers on mimimum pay put all 25million create ‘double’ or ‘treble’ jobs ie expand the labour force to 75million and we will have a boom well into the next century not just this one…

    We have arrived at a capitalist nirvana and just not realised…

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