QE is becoming a narcotic

Central banks traditionally stimulate demand by lowering real interest rates, but this approach faces significant constraints near the zero lower bound (ZLB).

Future policy should prioritize wage policies, wealth taxes, and public alternatives to private debt.

The Zero Lower Bound Constraint and Unconventional Responses

The effective lower bound for nominal interest rates typically rests around -1%, as demonstrated by the most radical negative rate experiments (Brunnermeier & Koby, 2018). Even with 2% inflation targets, this creates a practical limit of approximately -3% for real interest rates (r = i - π). During severe crises like 2008, the U.S. economy required substantially more stimulus than this constraint permitted (Bernanke, 2020). This limitation forced the Federal Reserve to develop unconventional tools: QE and forward guidance.

Quantitative Easing: Mechanics, Evolution and Distortions

QE fundamentally operates by suppressing interest rates across risk asset classes to stimulate debt production. Central banks have increasingly ventured into purchasing risky assets, including:

• The European Central Bank's corporate sector purchase program (€341 billion as of 2023) including fallen angel bonds (ECB, 2023)

• The Bank of Japan's ETF purchases (¥37 trillion portfolio) propping up equity valuations (BOJ, 2023)

• The Federal Reserve's 2020 intervention in junk bond markets through secondary market corporate credit facilities (Powell, 2021)

This approach has created significant market distortions:

1. Balance Sheet Dependency: Corporate debt/GDP ratio reached 84% in 2020 (S&P Global, 2021)

2. Transmission Breakdown: Bank credit channels weakened (loan growth <2% in 2020-21) (FDIC, 2022)

3. Wealth Inequality: Effects concentrated among top 10% (holding 89% of financial assets) (Bricker et al., 2020)

Structural Roots of Financial Fragility

The limitations of QE reveal deeper systemic issues in debt-based demand systems. Rising inequality has created a dual dynamic:

1. The top 1% increased their savings rate from 9% (1980) to 24% (2022) (Bricker et al., 2023)

2. Bottom 90% households now spend 22% of income on debt service (up from 15% in 2000) (Fed Survey of Consumer Finances, 2022)

This manifests in dangerous trends:

• 30-year mortgage terms becoming standard (versus 15-year in 1970s)

• Student debt reaching $1.77 trillion (90% held by bottom 50% earners) (NY Fed, 2023)

• Zombie firm prevalence rose from 2% (1980s) to 15% of public firms (Banerjee & Hofmann, 2020)

Alternative Policy Frameworks

Progressive rebalancing through wage-profit realignment could break this cycle. Historical precedents show:

• 1947-1979: When wages grew 2.1% annually versus profits at 1.4%, debt/GDP remained stable at ~150% (Piketty & Saez, 2003)

• Post-1980: As profit growth (3.2%) outpaced wages (1.1%), debt/GDP tripled to 350% (EPI, 2023)

Policy tools for systemic reform include:

1. Wage-led growth policies

   • Sectoral bargaining systems (Germany's 2015 Minimum Wage Act)

   • Profit-sharing mandates (French "intéressement" system)

2. Wealth taxation

   • Progressive land value taxes (Hong Kong model)

   • Financial transaction taxes (EU proposed 0.2% equity tax)

3. Public alternatives to private debt

   • Free higher education (Germany's tuition-free model)

   • Public option mortgages (Singapore's HDB system)

Conclusion

The evolution of QE from crisis tool to permanent market support mechanism reveals fundamental flaws in debt-dependent growth models. The solution lies not in perpetual balance sheet expansion but in addressing the structural inequality that necessitates debt-based demand. Future policy should rebalance economic power through wage policies, wealth taxes, and public alternatives to private debt.

References

• Banerjee, R., & Hofmann, B. (2020). The rise of zombie firms: Causes and consequences. BIS Quarterly Review.

• Bernanke, B. S. (2020). The new tools of monetary policy. American Economic Review, 110(4), 943-983.

• Bricker, J., et al. (2023). Wealth and income concentration in the SCF: 1989-2022. Federal Reserve Bulletin.

• Eggertsson, G. B., & Woodford, M. (2003). The zero bound on interest rates and optimal monetary policy. Brookings Papers.

• Piketty, T., & Saez, E. (2003). Income inequality in the United States, 1913-1998. Quarterly Journal of Economics, 118(1), 1-39.