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Comment by roymurdock | Hacker News Reader

> At the moment, outside of wholly energy dependent countries (Middle East, Latin America, Nigeria, etc.), there does not appear to me a 2008-like financial system shutdown.

There's nothing stopping central banks from creating more liquidity through progressive rounds of QE, each of them buying in because they know their country will suffer in the short run if they do not follow suit. Of course this will lead to deflation and another recession in the long run with many losing faith in monetary policy/central banks altogether, but we're not quite there yet. We've still got another couple of years before we hit that phase.

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Could you explain how you see QE leading to deflation, when it's an explicitly inflationary policy?

Sure. QE pushes money into the supply side (banks) which goes primarily into rent seeking activities such as equity markets and real estate due to a lack of aggregate demand.

This allows the economy to stay afloat as those with assets enjoy increases in nominal wealth as long as more and more liquidity is injected into the system.

But it hurts the economy in the long run by distorting market signals (wage, unemployment, asset prices) that would take a major correction if the market was allowed to match supply and demand in these respective markets efficiently.

Short summary: QE hurts aggregate demand in the long run through the misdirection of resources and the creation of rent seeking asset bubbles. Weak aggregate demand leads to deflation, regardless of how much liquidity we have on the bank side.

So, shorter summary: QE doesn't work.

It works perfectly well in the short run, but it makes things worse in the long run, possibly necessitating (non-nuclear) war to boost aggregate demand through government spend (fiscal policy) and a reduction in the supply of excess labor.

QE works well. It's just limited in how much impact it can have because it's monetary policy. Fiscal policy is the other half of the equation and one that is much more politically charged. Bernanke did what he could with the tools at his disposal at a time when government was seized with deep partisanship. That's now coming home to roost as liquidity is removed from the system. Luckily, or appropriately, it's happening as unemployment is low and there is finally some upward wage pressure. You only have to look at many countries in Europe to understand what the US would have looked like had we not had the monetary firehose, with all of its imperfections, opened.

Which countries in Europe would that be?

QE leads to deflation?

I think at this point we're more likely to see NIRP than QE.

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