The Current High Level of Risk
Monetary policy in Japan, the UK and the US has become based on quantitative easing, which involves the expansion of their central banks' balance sheets through the purchase of assets. The full impact of this policy is not known and cannot be, because this is the first time that it has been pursued as a deliberate attempt to stimulate the economy. Expanding central banks' balance sheets to finance government debts produced the hyperinflations found in Germany and Hungary after World War I and more recently in Zimbabwe, but these results seem to have been accidents rather than deliberate attempts to create the catastrophes. But partly because of these examples, quantitative easing has been attacked as a route to certain disaster. I do not share this view. I see no reason why quantitative easing could not have been beneficial as a temporary measure, though in conjunction with large budget deficits it will surely lead to inflation if it is treated as a semi-permanent policy tool and it increases the risk that a sharp fall in asset prices will trigger another financial crisis.
Since we have so little experience of quantitative easing, we cannot be sure of either its efficacy or its side effects. I am particularly concerned about the latter, and this is a concern that I share with others, including Bill White and Charles Goodhart. The former has warned that it will have unintended and undesirable long-term effects.1 While Charles Goodhart warned at ...