Home > political-economy > How quantitative easing works — or doesn’t (Niall Ferguson on the Collapse of Keynesian Economics)

How quantitative easing works — or doesn’t (Niall Ferguson on the Collapse of Keynesian Economics)


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As part of this series, we offer this discussion in which Niall Ferguson explains why Keynesian stimulus no longer works. In the clip, Ferguson employs the so-called leakage hypothesis to explain the collapse of national economic policy:

…the US economy is more open than it has ever been. That means that stimulus, both monetary and fiscal is very prone to what is called leakage. We’ve had an enormous of stimulus in the US, it’s the biggest fiscal stimulus in the world, and huge unprecedented monetary stimulus. What’s been stimulated? Not jobs in Michigan. What’s been stimulated has been commodity markets and emerging markets. Because the liquidity just leaks out, and that’s why another round of stimulus would not stimulate in the promised way. It would stimulate the wrong things. And those things, commodity markets and emerging markets, are already overstimulated to the point of being nearly bubbles.

Of course, by Keynesian stimulus Ferguson means a purely national economic policy of domestic price inflation. Keynesian policy as national economic policy collapsed as production and prices became globalized.

As we have argued, there is no longer a US economy, nor is there a British economy, Chinese economy, Russian economy, etc. The actual economy is a globalized production process that straddles the entire world market.

Once this reality is grasped, it becomes obvious that the Federal Reserve’s second round of quantitative easing is not aimed at “stimulating the US economy”, but at stimulating the entire world economy.

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