Why QE fails to start the economic engine

I get occasional questions about the quantitative easing (QE) programs that are being perpetuated by the world’s central bankers. Will it work? When?

The idea of QE is to add some extra money-fuel to start the economic motor. This is really no different from priming an engine before you start it in cold weather. If you own a classic car or an airplane, then you may still know the art of priming the motor before starting it. But with modern cars it isn’t needed, so most people, including our central bankers, have probably forgotten how to prime an engine.

I used to sell motorized vehicles in my early 20s, so I have explained the problem of over-priming countless times. But to keep this piece short you can read all about it in this well-written article: http://www.premierflightct.com/newsletters/TrainingArticles/ColdWeatherStarting.html
The dynamics of an economic motor are really very similar. So where the article correctly states: “Engines will fail to start for 2 reasons: too much fuel and too little fuel!“, we could as well say:

Economic engines will fail to start for 2 reasons: too much money and too little money!

When the economic weather turned unusually cold, and they tried to prime the economic engine with QE1 and QE2, it made sense. But since QE3 they are basically saying: we will continue to prime this engine until it starts. And that makes no sense. Then the engine fails to start because of over-priming. Then all you get is black smoke coming out. The motor stutters along but doesn’t really catch on properly. Black economic smoke has been belching out of Europe, Japan and the USA for years, but these central bankers fail to make the proper diagnosis: they have flooded the engine. It would have been better to put a car mechanic at the head of the Fed, because it looks like universities fail to teach such basic principles in their economy classes.
The mentioned article also correctly describes the dangers of continued priming. The extra fuel-money will accumulate in certain places and risk causing an engine fire. So the stock market could catch fire (speculative mania) or commodity prices could go crazy (hyper-inflation), both very damaging for an economy. At the moment it looks like we are coming close to the first possibility.

Now, for the sake of this little exploration, let’s assume that despite repeated over-priming the economic motor catches on somehow. Some more black smoke is seen and suddenly we hear the promising noise of an engine coming up to speed. Then our grounded economic plane is still not up in the air. There are still a few other problems to tackle.
Given the weather conditions and the amount of horsepower, an economic plane can only take a certain maximum load. Three things are typically weighing down an economic engine: interest rates, taxes and regulations. The burden of interest rates has been reduced to near zero. But governments in Brussels and Washington have not stopped inventing new taxes and adding more regulations on top of the old ones. Even with zero interest rates this plane may not realistically be able to take off anymore, it is overloaded.

And to make matters even worse, what we have is that the cockpits have gradually become bigger than the rest of the plane. Champagne is being served in those cockpits, quarrels are being heard from them,… but the plane doesn’t fly, it always stalls as soon as it gains a little bit of altitude. And the mechanics are getting the blame.
That is an ugly situation.

In a second part we can explore how to unburden this plane so it can fly again.

Be well,
Danny