Measuring The Effects Of Quantitative Easing

Quantitative easing is most frequently blamed for the rise in commodity prices.  The monetarist perspective is that an increase in money supply through Fed treasury purchases is to blame for the rapid rise in commodity prices.

The same monetarists, of course, often forget the graph of one of their own (John Williams from ShadowStats):


This is a reconstruction of M3 — the broadest measure of money supply, discontinued in 2006 by the Fed.   Oops!  There’s actually less money in the system, and money is still contracting!

Let’s examine what really moves, say, the price of gasoline:


Answer:  Economic activity.  Economic activity led gasoline prices, which in turn led Quantitative Easing. This happened both in early 2009 and mid-2010.

Of course, quantitative easing isn’t without effect.  It has substantially lowered the cost of borrowing, as well as displaced bond managers from USTs into more risk-taking positions.

The results have been particularly confusing and incorrectly interpreted for the second round of purchases in particular.  The first round was fired into a black hole as the world threatened to teeter into a second great depression.  The second round followed a successful monetary and fiscal policy.  Check out Real Rates post-QE2 announcement:


Although some nominal rates have floated up (Investment and High Yield rates have not), Real Rates have sunk, and that is the correct measurement of the success of the Fed actions.

It would be difficult to determine what would have precisely happened if borrowing costs & liquidity were not swiftly acted upon, but the lowering of real borrowing costs (both QE & QE2) has certainly led to investment, new borrowing, economic activity and employment.  In this context, the Fed is responsible for higher gas prices — and they did exactly the right thing.

Finally, unrelated, a fantastic Youtube playlist of the symphonic works of Alexander Borodin:


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One Response to Measuring The Effects Of Quantitative Easing

  1. eradke says:

    What does gas prices look like in the late 90′s when QE was not on the tip of our tongue?

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