Quantitative Easing Fails to Halt Deflation Fears

Inflation remains below the 2% target of both the U.S. Federal Reserve and the Bank of England despite unprecedented monetary stimulus.

In the U.S., inflation is running at an annualized rate of only 0.8%, and in Britain, a mere 0.6%. The European Union and Japan are also grappling with stubbornly low inflation rates.

Clearly, the monetary policy of some of the world's major central banks has fallen way short of expectations.

A Bloomberg columnist argues that a new approach to monetary policy is needed. Here's an excerpt from an Aug. 18 article:

Quantitative easing's failure to quash the threat of deflation is finance's equivalent of the bump in the data that alerted physicists to the possibility of a new boson. The mismatch between economic theory and the real-world outcome of zero interest rates poses a direct challenge to the current orthodoxy that puts a 2 percent inflation target at the heart of monetary policy in most of the developed world. …

Years of pumping trillions of dollars, euros, yen and pounds into the economy by buying government debt and other securities hasn't produced the rebound in inflation that economics textbooks predicted. Record low borrowing costs haven't led to a surge in investment and spending that would lead to higher prices.

That's the kind of empirical evidence that should produce a reconsideration of what Rothschild Investment Trust Chairman Jacob Rothschild this week called 'the greatest experiment in monetary policy in the history of the world.' Neil Grossman, director of Florida-based bank C1 Financial and former chief investment officer at TKNG Capital Partners, likens the need to abandon the current economic orthodoxy with the impact of quantum physics on science in the last century. …

'There's an accumulation of evidence that monetary policy is pretty ineffective,' Nobel prize-winning economist Paul Krugman told Bloomberg Television this week. …

Just as scientists are forced to review their assumptions when the experimental evidence undermines existing theories, central bank economists should acknowledge that the world isn't responding to their guidance in either the way they expected or how they would want it to.

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