How Quantitative Easing Causes Unemployment And Reduces Growth

Nov. 07, 2012 3:32 AM ET8 Comments
Julian Van Erlach profile picture
Julian Van Erlach
120 Followers

It is widely believed that TARP and the Fed, through purchases of nearly $2.5 trillion of non-performing loans, mortgages, Treasury bonds and other assets (collectively termed Quantitative Easing [QE]) prevented economic collapse and lowered the cost of debt financing by lowering interest rates. Fed Chairman Bernanke explicitly stated that the objectives of QE are a wealth effect on consumption from higher asset prices and lower interest rates intended to spur investment and indirectly increase employment. At the same time, the Fed remains committed to managing to an approximate 2% inflation target while expanding the Fed's asset purchase program at a rate of $40-$85 billion per month until the unemployment rate reaches a satisfactory level.

This article shows that the actual effect on the economy slows real wage and employment growth, thus restraining GDP growth and negates a wealth effect through the following mechanism:

  1. GDP is a return on the economy's total asset base.
  2. Wherein capital and other asset formation normally occurs in proportion to GDP growth and where growth is the required return on capital formation.
  3. The long run return on capital and labor is equivalent.
  4. QE has created an abnormal (excess) supply of new capital which necessarily lowers its available real return from GDP growth. This requires that real wage growth also stagnate because low capital returns cannot accommodate real wage growth. Stagnating real wage growth, normally equal to productivity growth, depresses real GDP growth.
  5. Worse, the 2008-09 recession should have resulted in deflation as both the non-performing assets and the associated false real wage growth were wrung out of the economy. Fiscal and monetary policy prevented price and wage deflation, leaving a wage level that cannot accommodate full employment. The consequences are impaired GDP growth and high structural unemployment and fiscal deficits.
  6. QE has caused low real yields

This article was written by

Julian Van Erlach profile picture
120 Followers
Julian has originated and co-developed a new, general, "Required Yield Theory" TM (RYT) of asset valuation encompassing stock markets, bond yields, gold and oil. RYT has been articulated in three academic papers published in major journals, and has been granted two patents (the only patents ever issued for an entirely new valuation mechanism). RYT valuation models are superior to all other extant public domain models including CAPM, MPT, APT. Content relating to RYT, consulting and intellectual property licensing services may be found at RequiredYieldTheory.com.

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