"First of all, I think QE
did cause some inflation. Contrary to popular mythology, I don’t say QE does
nothing. It’s more that I just think it’s inadequate. And when we analyze the
current environment and impact of QE we have to consider the counter-factual
world without having had any QE. If the Fed hadn’t stepped in in 2008 to
bolster the banking system we likely would have had a depression in the
USA."
"The problem with QE is that it doesn’t have a transmission mechanism to substantially increase aggregate demand. When the Fed buys bonds from a bank they simply swap reserves for t-bonds. The bank has the same net worth (roughly, depending on any capital gains and as mentioned previously QE1, 2 and 3 have had diminishing returns here) and the reserves sit in the interbank market (and no, they don’t get “lent out”, that’s not how banking works). The bank might feel inclined to shift its portfolio holdings and replace lost T-bond income so it might go buy stocks or bonds of other types, but this doesn’t guarantee sustainable capital gains because there has been nothing directly attached to this balance sheet change that necessarily justifies an increase in share prices."
