A reader asked me to comment on a video from the Big Picture conference of Jim Bianco commenting on the so-called wealth effect of quantitative easing. In the video, Jim takes the position that the Fed cannot create permanent wealth though QE. It can only create (temporary) “loss reduction”. Jim noted that we have had record stock mutual fund outflows in the United States, and that this had not changed even after the Fed began QE3. And he believes this is emblematic of the Fed’s inability to create permanent wealth through quantitative easing and that QE is going to produce the worst possible outcome for the Fed, producing – in the best of cases – a (temporary) wealth pickup for the wealthy and nothing for the rest. I agree wholeheartedly.
Let’s look at why QE won’t lead to permanent wealth creation.
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