I have written a couple of posts recently where Quantitative Easing (QE) has played an important role. Here, for example, is a post about why QE could end up putting a large hole in the public finances, and how this could be avoided. I also wrote recently about how QE shows us that the government can easily finance its deficits by creating money rather than selling debt, if it chose to do so. This second post illustrates why QE is qualitatively important.
One of the first posts I wrote over a decade ago involved a similar theme. QE showed us why a key idea behind austerity, that we had to reduce the government’s deficit despite being in a recession because the bond market might suddenly decide not to buy UK government debt, was nonsense. QE was a Bank of England policy of buying UK government debt to keep longer term interest rates low, so in any bond market strike the Bank would simply step in with QE. After that happened during the pandemic, I could say I told you so. At a slightly more mundane level, QE helps tell us why it is dumb to continue to teach students about the ‘money multiplier’.
However, while the existence of QE is important in many ways, just how important it has been in quantitative terms is much more questionable. Ever since QE was widely introduced by the major central banks after the Global Financial Crisis, it has occasionally attracted rather outlandish claims about how much it was doing. Some of this came from a predictable source. Those who couldn’t quite believe that the equation MV=PT was nothing more than a meaningless identity claimed post-pandemic inflation was down to additional QE during the pandemic. But a more
