The dramatic expansion of central bank balance sheets as a result of quantitative easing produces two extreme views. One is that it will cause hyperinflation and the other that it has had no adverse consequences. Neither of these strikes me as at all probable. Hyperinflation is not a serious risk, at least in the developed world, but it does seem likely that QE has adverse consequences. Having instituted QE, central banks are understandably unwilling to talk about its dangers and adjust their policies for them. However, it has probably increased the risks of a pickup in inflationary expectations and the dangers that this poses for the economy.
As chart one shows, we have had an upward sloping yield curve for the past 80 years, i.e. borrowing through issuing bonds has been expensive. Governments have nonetheless chosen to fund this. If this wasn’t just a stupid decision, then the added cost of funding must have produced a large benefit for the economy. I think that this benefit was real in that it helped to moderate inflationary expectations. Read more