Teaching activity

Is QE a Magic Money Tree?

Penny Brooks

30th January 2018

I think that many A level students would agree that QE can be quite hard to get their heads around. It's a help when they realise that it is not a process of 'printing money', as many journalists have described it since 2009. So is it a help to see it as a Magic Money Tree?

This article by BBC journalist Michael Robinson might actually prove very helpful, and be used as the basis for a discussion about whether QE achieved the objective of the Bank of England, and other central banks using the process to boost their shrinking economies in 2009. It explains, briefly, the process of electronic creation of funds to buy gilts from institutional investors such as pension funds, leaving them with cash instead. 

The hope was that they would use that cash to recirculate it around the economy, to create more real GDP and therefore jobs. Instead, what happened in most cases was that the institutions needed to dreplace the cash flow they were previously receiving as income on the gilts, with income on other investments instead, so they used it to buy company shares or commercial property, pushing those asset prices higher, but without actually creating any more economic activity and GDP growth. So the owners of those assets benefitted - and may have created a wealth effect which would boost Consumption and hence AD - but left behind those who did not own assets, widening the wealth gap. 

On the other hand, we cannot know how much worse the recession would have been without QE. Andy Haldane, Chief Economist at the Bank of England, estimates that, had the Bank not embarked on the policy of creating QE money, growth would have been 4-5% lower and around 750,000 additional people would have been unemployed - perhaps far more. So although the young may be left behind in the housing market, at least they have a job. 

Can we assess whether it achieved its objective? How would you judge it? There is a half-hour radio investigation which might be worth listening to in class, to help with the analysis and evaluation. 

Penny Brooks

Formerly Head of Business and Economics and now Economics teacher, Business and Economics blogger and presenter for Tutor2u, and private tutor

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