When answering the question, why the quantitative easing (QE) didn’t create an inflationary fire in the developed world as expected by many in the markets, we would probably need to go back to basic. And based on basic economics, we know that the real inflation is driven by an increase in spending from the consumer side. The worry was that easy money pumped through an unconventional monetary policy tool like quantitative easing (QE) will spill over, and the over supply of money will create runaway inflation. Now based on the evidence we have seen so far, it is probably safe to assume that while QE did in fact inflate the financial assets valuation, folks on the street didn’t real see a real term increase in their savings or disposable income. And here is why, quantitative easing (QE ) was designed more or less to keep funding the governments and the financial markets, and based on all the evidence, both the governments as well as the markets did make good money from QE.
And with regards to the spill over worries related to QE. I would say, for discussion purposes, let’s just imagine a situation where the Atlantic Ocean dried up, and then in an effort to save the ocean, we try to fill it up with water, and while the filling process is ongoing there will always be those who will rightly be concerned about spilling over issue, in other words flooding related to overfilling of the Ocean but the problem is filling up an ocean isn’t as similar or as simple as filling up a swimming pool or a pond for that matter. Now let us imagine the global economy to be the Atlantic Ocean that dried up during the financial crisis, and the central bankers as various water pumping stations, and quantitative easing (QE) as the water supply ( money supply in case of the dried up global economy and markets) as a way to fill it up.
So what happens next?. You see folks on the street can only access the water ( QE in this case ) through a utility company ( intermediary or a financial intermediary in case of QE ), and these utilities ( intermediaries or financial intermediaries ) who are and were able to directly tap the water or in other words the QE money pumped by various central bankers into the ocean ( the financial economy ), needed the water i.e. the QE money for themselves first in order to treat the side effects of extreme dehydration, they have all been suffering from caused by the acute shortage of water or in other words short of liquidity in case of financial economy during the financial crisis so since QE was not designed to be a Tsunami but to simply fill up the dried up Ocean i.e. the financial economy and the market, the flooding risk was extremely limited.
And because the average folks in the real economy didn’t really get to see or experience the benefits of QE directly in terms of an improvement in their own bank balance, their disposable income as well as overall living standard, the direct impact of quantitative easing (QE) on the real economy wasn’t strong enough to create consumer driven inflation in the real economy in the developed world.