“The final word on quantitative easing will have to wait for historians,”wrote Ambrose Evans-Pritchard this week. Now the US Federal Reserve has apparently ended QE, I’d like to take a cue from my esteemed Telegraph colleague by suggesting what future historians might say.
On Wednesday, the Fed terminated QE3 – the latest incarnation of its money-creation programme. The American version of this highly unorthodox policy began in late 2008, with the Fed creating virtual balances ex nihilo and purchasing assets such as government debt and mortgage-backed securities, often from bombed-out banks.
The US authorities originally billed QE as a $600bn exercise. By unlocking frozen interbank markets, it was supposed to spur growth, breaking the credit crunch. As meaningful recovery remained elusive, though, QE2 was launched in 2010, with its successor two years later.
In sum, the world’s most important central bank has fired $3,700bn from its monetary bazooka. America’s QE has been six times bigger than envisaged. The Fed’s balance sheet has grown more than three-fold in just over half a decade – an unprecedented monetary expansion. And it’s not just America, of course.
Launched in March 2009, British QE was presented as a £50bn program. It has since ballooned to £375bn, some 7.5 times the official prediction. The Bank of England’s balance sheet has quadrupled, with our QE focusing on gilt purchases. The Bank now holds over a third of all outstanding sovereign bonds.
Ordinarily, governments borrow from pension funds, insurance companies and other long-term investors. As UK state spending has surged over recent years, with our national debt doubling to £1,400bn since 2008, we’ve kept our public finances afloat only by effectively selling government debt back to the state, using newly-created money. If that sounds like dubious circular financing, that’s what it is. Future historians will no doubt discuss this uncomfortable reality more than we do.