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QE is risky and carries long-term costs
By Nouriel Roubini |
March 6, 2013, Wednesday
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Print Edition
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MOST observers regard unconventional monetary policies such as quantitative easing (QE) as necessary to jump-start growth in today's anemic economies. But questions about the effectiveness and risks of QE have begun to multiply as well. In particular, 10 potential costs associated with such policies merit attention.
First, while a purely "Austrian" response (that is, austerity) to bursting asset and credit bubbles may lead to a depression, QE policies that postpone the necessary private- and public-sector deleveraging for too long may create an army of zombies: zombie financial institutions, zombie households and firms, and, in the end, zombie governments.
Second, repeated QE may become ineffective over time as the channels of transmission to real economic activity become clogged.
Third, the foreign-exchange channel of QE transmission is ineffective if several major central banks pursue QE at the same time.
Fourth, QE in advanced economies leads to excessive capital flows to emerging markets, which face a difficult policy challenge.
Fifth, persistent QE can lead to asset bubbles both where it is implemented and in countries where it spills over.
Sixth, QE can create moral-hazard problems by weakening governments' incentive to pursue needed economic reforms. It may also delay needed fiscal austerity if large deficits are monetized, and, by keeping rates too low, prevent the market from imposing discipline.
Tricky exit
Seventh, exiting QE is tricky. If exit occurs too slowly and too late, inflation and/or asset/credit bubbles could result.
Eighth, an extended period of negative real interest rates implies a redistribution of income and wealth from creditors and savers toward debtors and borrowers. Of all the forms of adjustment that can lead to deleveraging (growth, savings, orderly debt restructuring, or taxation of wealth), debt monetization (and eventually higher inflation) is the least democratic, and it seriously damages savers and creditors, including pensioners and pension funds.
Ninth, QE and other unconventional monetary policies can have serious unintended consequences. Eventually, excessive inflation may erupt, or credit growth may slow, rather than accelerate, if banks decide that risk relative to reward is insufficient.
Finally, there is a risk of losing sight of any road back to conventional monetary policies. Some countries are ditching their inflation-targeting regime and moving into uncharted territory. The US has moved from QE1 to QE2 and now to QE3, which is potentially unlimited and linked to an unemployment target.
To be sure, QE and other unconventional monetary policies do have important short-term benefits.
But if such policies remain in place for too long, their side effects could be severe - and the longer-term costs very high.
Nouriel Roubini is chairman of Roubini Global Economics and professor of economics at NYU's Stern School of Business. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
First, while a purely "Austrian" response (that is, austerity) to bursting asset and credit bubbles may lead to a depression, QE policies that postpone the necessary private- and public-sector deleveraging for too long may create an army of zombies: zombie financial institutions, zombie households and firms, and, in the end, zombie governments.
Second, repeated QE may become ineffective over time as the channels of transmission to real economic activity become clogged.
Third, the foreign-exchange channel of QE transmission is ineffective if several major central banks pursue QE at the same time.
Fourth, QE in advanced economies leads to excessive capital flows to emerging markets, which face a difficult policy challenge.
Fifth, persistent QE can lead to asset bubbles both where it is implemented and in countries where it spills over.
Sixth, QE can create moral-hazard problems by weakening governments' incentive to pursue needed economic reforms. It may also delay needed fiscal austerity if large deficits are monetized, and, by keeping rates too low, prevent the market from imposing discipline.
Tricky exit
Seventh, exiting QE is tricky. If exit occurs too slowly and too late, inflation and/or asset/credit bubbles could result.
Eighth, an extended period of negative real interest rates implies a redistribution of income and wealth from creditors and savers toward debtors and borrowers. Of all the forms of adjustment that can lead to deleveraging (growth, savings, orderly debt restructuring, or taxation of wealth), debt monetization (and eventually higher inflation) is the least democratic, and it seriously damages savers and creditors, including pensioners and pension funds.
Ninth, QE and other unconventional monetary policies can have serious unintended consequences. Eventually, excessive inflation may erupt, or credit growth may slow, rather than accelerate, if banks decide that risk relative to reward is insufficient.
Finally, there is a risk of losing sight of any road back to conventional monetary policies. Some countries are ditching their inflation-targeting regime and moving into uncharted territory. The US has moved from QE1 to QE2 and now to QE3, which is potentially unlimited and linked to an unemployment target.
To be sure, QE and other unconventional monetary policies do have important short-term benefits.
But if such policies remain in place for too long, their side effects could be severe - and the longer-term costs very high.
Nouriel Roubini is chairman of Roubini Global Economics and professor of economics at NYU's Stern School of Business. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
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