More a thought experiment than a fully worked out theory, as the channels are complex.
1. QE increasing the lending power of banks, but not necessarily investment, this we know, its stacked up in balance sheets and company share buy backs.
2. QE is funnelled towards assets as ‘safe assets’ because of chronic low aggregate demand caused by austerity and deleveraging.
3. But firms that produce assets are also boosted – such as shale oil – or housebuilders, if asset prices are high they will also receive a boost to investment, even if overall investment is low.
4. These asset producers received a boom to credit growth, even though credit growth overall is restrained.
5. This impacts on overall economy, through the multiplier/accelerator, it gives the impression monetary policy is working.
6. New assets come on stream, we have a glut – a Homer Hoyt type glut
7. Because banks now have a healthy lending power (supply of potential credit) following QE they can fund the risk premium on high risk loans themselves rather than through external funding, hence QE lowers risk premiums and lead to higher risk lending to ponzi borrowers.
8. This leads to asset oversupply
9. This is deflationary
10. The deflation, exacerbated by competitive currency devaluations, leads to loans which were low risk and repayable becoming unpayable
11. Minksy Moment- Banks and Bad Banks like Heta last week go bust
12. Asset price and Asset Producing firms bubble goes bust, this time new rules require bale ins – especially in Europe
13. This leads to a recession – but because of the bale ins it leads to a global liquidity shortage and, unlike in the aftermath of 2007, the lack of an NGDP boost leads to mass unemployment.
How does this end happily? Only with a coordinated return to fiscal policy, with helicopter drops and similarly coordinated exchange rate policy.