Quantitative easing has cost hundreds of billions of dollars
global financial crisis, rich-world central banks have bought trillions of dollars’ worth of bonds in an attempt to stimulate their economies. Now the bill is coming due. At the last count America’s Federal Reserve had a paper loss of $911bn on its $8.2trn securities portfolio.
On July 25th the Bank of England said that, under reasonable assumptions, the Treasury will have to transfer about £275bn ($353bn) between 2023 and 2033 to cover the bank’s cash outflows. On July 28th the Bank of Japan surprised markets by lifting its cap on long-term bond yields, from 0.5% to 1%. For every 0.25-percentage-point rise in the yields of Japanese bonds across all maturities, we calculate, the central bank’s vast bondholdings will fall in value by about $58bn—an amount worth 1.5% of Japanese GDP.
Central banks can create money and so cannot go bust. But letting them bleed cash is inflationary unless taxpayers cover the losses. The rising costs of fulfilling this obligation make it important to determine whether quantitative easing (QE) has been worth the expense—and whether such mass bond-buying should be used the next time the economy needs stimulus.
To carry out QE, central banks created money in the form of reserves in the banking system and used them to buy long-term bonds, with the intention of lowering their yields. The immediate problem is that as central banks have raised interest rates to fight inflation, they have had to pay out more on those reserves. The coupon payments they receive on the bonds, however, have remained fixed.
Selling the bonds to stop the outflow would not help, because they would fetch much less than they cost. Paper losses would crystallise. Instead policymakers are doing their best to gloss over the
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