The greatest danger I can see in QE is as Noung has put it: eventually its beneficiaries have to learn to stand on their own two feet. The problem is that QE makes that much more difficult. The use of a crutch is always in danger of atrophying the parts of the body that the crutch helps to support. Within a single human body, this can be acceptable if age or pain or prior damage makes going without the crutch too much of a burden. Individuals eventually die, and the atrophy caused by their crutches never grows into a problem for the human race, the nation, or even the village or family.
A national economy, however, only dies because it fails to maintain the strength that enabled its existence in the first place. I began this writeup because this difference is important to me, and I think it should be important to everyone.
I Google'd quantitative easing crutch to see if others recognize the same thing that I do. Here's one that describes the specific manifestation of atrophy wherein the government eventually becomes the economy, from http://cij.inspiriting.com/?tag=quantitative-easing: In reality, what government interventions did was to put the economy on a crutch. The longer the economy leans on the government crutch, the more dependent it will be on the government. Eventually, the government will become the economy.
Even though it champions QE, I think this one is important because it shows that even its proponents recognize that it is a crutch, from http://www.metro.co.uk/money/807746-200m-quantitative-easing-slowly-taking-effect: Give QE credit: The Bank of England's quantitative easing crutch is helping to put the economy on a sure footing
Here is a comment to an article by Paul Krugman, recent winner of a Nobel prize in economics, that proposes a question that needs to be asked. There is a growing push to Audit the Federal Reserve (see http://www.auditthefed.com) because this question never gets adequately addressed. This is from Rich888 at http://www.metro.co.uk/money/807746-200m-quantitative-easing-slowly-taking-effect: A more interesting question is the ability of the central bank to sell its credit holdings, particularly mortgages. There are few complaints when the Fed subsidizes an industry, but will there be an outcry when that support is removed? Will they be able to withstand the pressure from realtors, homebuilders and mortgage bankers, to say nothing of the big bond funds, to continue to provide the crutch? Only when this question is answered will they have any hope of retaining the perception of “independence” they have guarded so zealously over many decades.
If you followed one of the links to crutch, you'll find my writeup on atrophy, which is one of the important hidden dangers that authorities never seem to address. I did a search on quantitative easing atrophy and found this, from http://www.rense.com/general88/bern.htm: Now Bernanke is expected to carry on where his former boss left off, using all the tools at his disposal to offset the atrophy that's endemic to mature capitalist economies.
What atrophy are they talking about? My understanding of the atrophy is based on legal tender laws. A legal tender law places an unjustified value on a particular good - that it be accepted as payment in lieu of any and all debts. In this case, "mature capitalist economies" means economies that have suffered from such a law for at least a few generations.
Why does this cause atrophy? This causes atrophy because those who wish to obtain capital goods are able to borrow the extra unjustified value without such value ever being produced. This is even more widespread when the good that is made legal tender is the product of a monopoly. In this way, the economy expands unjustifiably, failing to match its growth with the strength it ought to have to justify new investment. Fiat currency costs very little to produce, and legal tender laws vastly increase its value. QE is a mechanism through which fiat currency is made to look less like counterfeit money than illegally printed counterfeit bills. As Nuong points out: If you imagine quantitative easing as being a process whereby the central bank throws money out the window to the people below to stimulate spending and hence the economy, you won't be far from the truth.
I know why counterfeiting is illegal, but how common is that knowledge? I did a search for "counterfeit illegal" and found a reference to a German WWII plan called Operation Bernhard. Here it is, from http://en.wikipedia.org/wiki/Operation_Bernhard: Operation Bernhard was the codename of a secret German plan devised during the Second World War by the RSHA and the SS to destabilise the British economy by flooding the country with forged Bank of England £5, £10, £20, and £50 notes.
It seems to me that this plan is no longer secret and no longer illegal. It has been renamed and the short-term benefits are now being used to hide it. Someday, perhaps, youngsters will get real educations, and such programs will cease to be acceptable.