Is Quantitative Easing Working? New York Times columnist Paul Krugman takes a stab at answering that:
If QE really is working through stocks and the dollar, are there further implications? I’m not sure — in a highly indebted society, you might hesitate at policies that would increase private debt further, but if stocks are driving the story, the consumers now spending more aren’t the same people who are in debt trouble — so that’s actually OK. And as for the weaker dollar, if the Chinese and the Brazilians don’t like it, they are free to let their currencies appreciate.
Anyway, that’s my casual take on what has happened. I would say that if it’s right, it’s far from clear that the recovery will prove self-sustaining.
We want to think about both what we would have predicted before and the evidence that we have seen.
When I was pushing for greater Fed stimulus I had two primary mechanisms in mind.
- The decline of the dollar
- A decline in corporate cash holdings
As Krugman notes, we see that the dollar has declined and that net exports have been a major contributor to the recovery – as one would predict. Indeed, in the days after QE was floated at Jackson Hole, we saw the dollar declining and here at Modeled Behavior cheered that on as a sign recovery was on the way.
I should note that this is not because I wanted the US to grow at the expense of foreign nations. It was because I was convinced that the majority of the Industrialized world was not going to give up on its contractionary monetary policy and so this would be the channel. We would like to see surging growth everywhere, but the ECB and Bank of Japan had already pre-committed to gouging their economies to the greatest extent possible.
Now what about corporate cash? The data from the flow of funds report isn’t fresh enough to tell. The last report in October of 2010, had corporate cash still rising:
(Click charts to expand)
What about other proxies for the release of corporate cash? Below is the year-over-year change in new orders for Capital Expenditures Excluding Aircraft.
Nothing that we could call a QE2 surge. Indeed a bit of a drop off.
How about wage and salary disbursements?
A rise but again nothing we could call a QE2 surge.
Lastly, we might want to look at nonfinancial commercial paper outstanding. Perhaps, cash heavy companies are lending more heavily to cash poor ones. That in and of itself should be supportive of growth.
Here we see a bit of a burst since the onset of QE2 but nothing like what I would have expected.
At this point it looks like the corporate cash channel is not moving.
On the other hand, US asset prices do seem to be rising. As Krugman mentions this is a plausible channel. Indeed, I think Scott Sumner focused a lot on this channel. It is not, however, a channel that I had previously considered important.
I am also not sure it is consistent with my view of the macro-economy. Yes, consumer spending should rise if asset prices rise, however, both should be a response to higher expected future profits. So what’s causing higher expected future profits? It can’t simply be higher spending because that’s circular.
It could be that be that a cheaper dollar implies both more sales and higher value sales of US exports, which in turn implies higher profits, which in turn juices consumer spending. In that way the asset effect is like a multiplier. Perhaps, but just off the cuff, the rise in consumer spending seems too large to make sense through that channel.
On balance I would say the evidence suggests that much of the boost in consumer spending is not through channels consistent with my theory of monetary policy and quantitative easing.
While I would like to claim victory in the intellectual battle over QE, at most the export story is in my favor. The rest is not.