Courtesy of Mish.
Lacy Hunt at Hoisington Management emailed their 6-page fourth quarter report (not yet posted on the Hoisington Website).
As always, the report is well worth a good look. One particular section caught my eye. It's on the failure of QE to produce the expected growth. Here are a few excerpts.
In a paper presented at the Fed’s 2013 Jackson Hole Conference, Robert Hall of Stanford University and Chair of the National Bureau of Economic Research Cycle Dating Committee wrote “an expansion of reserves contracts the economy.”
Causal Mechanism Explains Counter-Productiveness of QE and Forward Guidance
This empirical data [the Jackson Hole presentation] notwithstanding, a causal explanation of why QE and forward guidance should have had negative consequences was lacking.
This void has now been addressed by “Where Did the Growth Go?” by Michael Spence (2001 recipient of the Nobel Prize in economics) and Kevin M. Warsh (former Governor of the Federal Reserve), a chapter in a new book Growing Global: Lessons for the New Enterprise, published in November 2015 by The Center for Global Enterprise.
Their line of reasoning is that the adverse impact of monetary policy on economic growth resulted from the impact on business investment in plant and equipment.
In particular, they state: “We believe the novel, long-term use of extraordinary monetary policy systematically biases decision-makers toward financial assets and away from real assets.”
Quantitative easing and zero interest rates shifted capital from the real domestic economy to financial assets at home and abroad due to four considerations:
First, financial assets can be short-lived, in the sense that share buybacks and other financial transactions can be curtailed easily and at any time. CEOs cannot be certain about the consequences of unwinding QE on the real economy. The resulting risk aversion translates to a preference for shorter-term commitments, such as financial assets.
Second, financial assets are more liquid. In a financial crisis, capital equipment and other
real assets are extremely illiquid. Financial assets can be sold if survivability is at stake, and as is often said, “illiquidity can be fatal.”
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