After the Great Recession, the Fed began the use of Quantitative Easing (QE) in an attempt to put the economy back on track. With short-term interest rates already near zero, the Fed began purchasing unconventional, longer-term assets in order to bring down long-term interest rates. And much of the world followed suit. Since the Great Recession, the Federal Reserve, ECB, Bank of England, and Bank of Japan have injected more than $4 trillion of additional liquidity into the world economy. Looking at the results of this “easy money” policy, QE seems to have been beneficial. Indeed, more QE, coupled with the elimination of the Zero-Lower-Bound, would likely have made America’s long economic recovery much faster and much less painful.
According to a study by McKinsey, low interest rates brought about by QE have saved the federal governments of the USA and European countries over $1.6 trillion since 2007. This savings on debt-interest payments has allowed governments to achieve higher levels of spending and reduced levels of economic austerity (at least in some places). The private sector has also benefited, with non-financial corporations saving over $700 billion in interest payments in the last five years. This savings has helped boost profits for US corporations over 5% in a time when the economy was struggling, helping to contribute to a reduced unemployment rate (even though this recovery has been very slow and painful).
Nevertheless, as is commonplace in economics, what benefits the greater economy does not usually benefit individuals. Take a recession, for example. During an economic downturn, individuals benefit from increased savings. Increased savings allows individuals to tolerate a slump better, ensuring adequate income at a time of economic uncertainty. Increased savings, however, is bad for the economy. The aggregate economy requires increased levels of spending to boost aggregate demand and help pull the economy out of its slump. In this way, we can see that the micro-level and macro-level goals do not necessarily align in economics.
Unfortunately, this goal divergence applies to QE as well. I have already pointed out that QE greatly benefited the aggregate economy by lowering interest rates and making it easier for governments and corporations to spend. For individuals, however, these low interest rates have had a devastating effect. Most notably, low interest rates have wreaked havoc on the cash flows of retired, fixed-income investors. Indeed, household in the USA and EU have lost over $600 billion in net interest income since the introduction of QE. For those in retirement relying on cash payments from interest-bearing assets, this typically means a reduction in income and a reduced quality of retirement.
In this way, it seems that QE has benefited the aggregate economy at the expense of individuals. It is true that those relying on increased wages have benefited from QE as unemployment falls. But more senior individuals, who rely on fixed-income assets as their main source of cash, have greatly suffered from lower interest rates. I do not mean to say that QE is a bad policy. Indeed, I believe QE, like negative interest rates, is a necessary policy to help control our bleeding economy’s pain. But the effect of QE on individuals points out that in economics, there is rarely a win-win situation. Whether it is QE, taxation, subsidies, trade barriers, or any other type of economic policy, there is almost always a loser.