I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper).
Here are the 5 channels:
1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further reduce short term rates (zero lower bound)
2. The Tobin’s q channel whereby some of the liquidity is directed to the stock market, increasing stock prices and investment in turn
3. A wealth effect that increases consumption brought about by higher bond and equity prices
4. Expected inflation brings forward consumption and investment spending as households and firms purchase in the present rather than in the future when money is expected to lose real purchasing power (increased velocity of money due to inflation)
5. Increased net exports whereby some of the liquidity is used to purchase foreign reserves, decreasing the exchange rate and devaluing the dollar
I'll leave it up to you to research whether or not these 5 channels have been effectively manipulated as Keynesians would have predicted through QE. But I have a feeling you already know the answer...Bonus points if you can answer this question: Why did channel #2 work so well, and why haven't we seen the supposed wealth effect (#3) predicted under a burgeoning stock market?
Not an economist but let me try to see if I really have as good a handle on all this macro-economic stuff as I like to think I do.
Ok. My guess is that QE goes directly to banks. Banks should start lending. QE is inflationary so the economy artificially grows and exports are helped cuz the $ gets cheaper but imports are hurt. This is not so bad for the $ because it is the world's reserve currency and a lot of commodities are traded in it.
Anyway, for some reason, the institutions don't lend the QE money into the real economy they buy portfolios of stocks because the return is greater and the risk is lower. That's my guess. I suppose for proper bonus points I need to be able to say why the stock market seems like a better bet than the real economy. And maybe #3 hasn't panned out because companies aren't paying dividends like they ought to.
In Silicon Valley it would be like a company that is raising record amounts of money at mind-boggling valuations but whose revenue isn't growing at the same pace.
One of the major question marks has been wage growth during the recovery. Stock markets have been skyrocketing, but wages have generally remained stagnant.
Similarly, labor participation (i.e. of the people who could work, how many are actively looking/employed) has remained worryingly low. While the US unemployment rate is very low (~5.1%), that isn't a direct inverse of those who are employed. There is a huge group of people who have simply given up trying to find work and others who are working but less than they would like (e.g. part-time, have one job but would like to work another/overtime, etc.)
We see that effect on inflation, which is no where near the 2% level that the Fed would like. Inflation crudely correlates with real growth because it encourages spending; if the money I have will be worth less in the future, I'm more likely to spend it today.
So in effect, we look at the S&P and think "Awesome! We're at all time highs!" But then we look at the economic fundamentals for people and it looks less sketchy.
Don't you mean "more sketchy", as in we look at the S&P and think "Yay" But we are getting dubious signals from the so-called real economy that do not correlate with the signals we are getting from the stock market. Hence, "more sketchy", no?
I'd venture to say that our wage and labor problems have less to do with the economy itself and more to do with a shift in global demand and specialization. All of those manufacturing jobs are going to China (whether we like it or not, China's labor costs are probably always going to be more cost effective for business), and the US labor market is demanding more skilled labor. We have an enormous oversupply of unskilled labor that isn't meeting the shift in labor demand.
Instead of using politics and complex tax systems to try and gain back those manufacturing jobs, I wish our government would focus more on helping our workforce adapt to the things where our country can have a competitive advantage in the world: education, technology, engineering, etc.
I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper).
Here are the 5 channels:
1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further reduce short term rates (zero lower bound)
2. The Tobin’s q channel whereby some of the liquidity is directed to the stock market, increasing stock prices and investment in turn
3. A wealth effect that increases consumption brought about by higher bond and equity prices
4. Expected inflation brings forward consumption and investment spending as households and firms purchase in the present rather than in the future when money is expected to lose real purchasing power (increased velocity of money due to inflation)
5. Increased net exports whereby some of the liquidity is used to purchase foreign reserves, decreasing the exchange rate and devaluing the dollar
I'll leave it up to you to research whether or not these 5 channels have been effectively manipulated as Keynesians would have predicted through QE. But I have a feeling you already know the answer...Bonus points if you can answer this question: Why did channel #2 work so well, and why haven't we seen the supposed wealth effect (#3) predicted under a burgeoning stock market?