The Federal Reserve Building in Washington.STELIOS VARIAS/Reuters
Remember back in November, 2008, when the U.S. Federal Reserve and a bunch of other central banks introduced quantitative easing (QE) as an emergency measure to kick-start the global economy? Well, five years and counting later, the programs are still pretty much in place and may be for a while as a way to keep the kick-start going. So it must be working – right?
Well, according to a new study by McKinsey & Co., the apparent answer to that question is "yes and no, depending on who you are."
A quick refresher: When the global economy fell and could not get up, the central banks realized that they had to do something drastic. The U.S. Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan all pushed rates to zero (as did the Bank of Canada), and then followed up with ways to keep market interest rates low. Notably, they launched QE – which involved buying up large quantities of fixed-rate assets, to the tune of $4.7-trillion. (The Bank of Canada sat out that part of the exercise, by the way.)
The idea was to keep the global economy humming through low interest rates, which as far as economic growth goes, are thought of as unambiguously a good thing – unless you are a saver, of course.
The McKinsey research looked at how the different agents in the economy fared, given that borrowers scored and lenders also did well – but recognizing that not everyone falls into those categories. Their verdict: At the end of the day, governments, non-financial corporations and U.S. banks came out ahead. But households, pension funds and life insurance companies were net losers. The latter group does borrow, but they are also net savers who need a decent return on their assets – something that is not that easy to get when the central bank is intent of keeping market rates flat.
The part of the report that interested me is the idea that households (and specifically U.S. households) lost rather than gained because interest rates were low. After all, we think of U.S. households as being rabid spenders rather than savers. But apparently not so: The McKinsey research found that U.S. households have lost $360-billion in net interest income. Then again, it was apparently the top 10 per cent of earners who got dinged the most, as they were the ones most likely to have savings.
We do not have data on whether Canadian households lost or gained from the fact that Canadian rates have gotten so low (despite the lack of quantitative easing on this side of the border), but it seems reasonable to believe that there have been losses here, too. Having said that, Canadians have no doubt managed to mitigate that damage a bit, given that they have so zealously borrowed over the past few years – in contrast to Americans, who have pretty much had the credit taps shut off.
The other thing that surprised me is McKinsey's contention that the equity markets have not actually gained by the fact that interest rates are so low. That does not make intuitive sense; if rates are low, presumably stocks are more attractive than fixed-income assets, not to mention that when companies can borrow at low rates, then presumably they are more profitable. Both of these factors should show up in equity valuations – but apparently it isn't so. McKinsey found that QE and the buzz around it has caused the markets to rally now and then, but those rallies have tended to be short-lived. By most measures, the financial markets have not performed any better than their long-term average.
McKinsey did not set out to answer whether quantitative easing has been good or bad, but it is hard not to use their findings to ask – and answer – the question. I was surprised that there have been so many losers from the exercise.
Then again, what this analysis cannot tell us is just how bad things would have been if the central banks had just left things be. It would not just have been a matter of reversing the gains and losses – rather there may have been a sharp loss of confidence that might have caused much worse damage throughout the economy.
So Happy 5th Birthday, QE – we may not exactly be glad you came, but things might have been worse if you hadn't.
Linda Nazareth is a Senior Fellow at the Macdonald-Laurier Institute. Her book Economorphics: The Trends Changing Today into Tomorrow will be published by Relentless Press in January, 2014. www.economorphics.com