Nomura's chief economist blasts the failures of quantitative easing

There has been an ongoing debate in financial circles regarding the effectiveness of quantitative easing (QE) on the global economy since the advent of the controversial Federal Reserve program in the wake of the 2007-2008 crisis. We've explored this topic in the past, but a new study written by Richard Koo, Nomura Research's chief economist, provides some illuminating insights into the Fed policy. 

The thrust of Koo's argument is that, because consumer households are actively engaging in a mixture of savings and debt reduction, there is too little demand for credit for QE to have a significant impact on economic growth. Additionally, companies are too frightened to expand in a volatile business climate that does not offer much in terms of sales prospects or income generation. As the entire focus of monetary easing is to spur lending, these resources are effectively being wasted.

"In acts of desperation, central banks in the developed world have flooded the financial system with liquidity in a policy known as quantitative easing or QE. In spite of massive injection of liquidity, however, credit growths in all of these countries, the key indicator of the amount of funds that was able to leave the financial system and enter the real economy, have been absolutely dismal," Koo wrote.

The only seemingly positive outcome of the Fed program has been that much of the money pumped into the economy is being pushed into real estate purchases by institutional investors. While this has provided a much-needed lift to home prices and, by consequence, household equity, unemployment levels remain stubbornly high. The Fed's action may, in Koo's eyes, be viewed as a failure as this is part of the central bank's dual mandate.

With QE continuing at a pace of $85 billion per month, investors can continue to expect these developments to continue. As such, individuals may want to consider protecting themselves against potential losses by purchasing income-generating assets like cash flow real estate