21st July 2020

Quantitative easing: the oft-ignored long-term effects

Aykut Efe, Economist at BCEE Asset Management, discusses the potential impacts of quantitative easing on the real economy in the long term.

The financial markets have always responded enthusiastically to central banks’ highly accommodative policies of keeping rates very low and supplying astronomical, if not unlimited, amounts of liquidity to governments and businesses.

The central banks played a critical role in the market recovery after the Great Financial Crisis and during the coronavirus crisis: keeping short- and long-term sovereign rates at very low, if not negative, levels limited investors’ asset class choices, which led to higher prices on the equity markets.

Despite this short-term optimism, it might be useful to take a more nuanced look at this analysis and examine the long-term impacts of these policies on the real economy.

The zombification of the real economy

The concept of “zombie” companies is often used to criticise the Chinese economic model, which is based in part on publicly owned corporations that suffer from inefficiency. These companies, which the OECD defines as being more than 10 years old and having an interest coverage ratio of less than 1,

survive on the preferential financing and subsidies granted by state-owned banks on orders from the public authorities. But, in a purely competitive credit market, these companies would be forced to obtain financing at much higher rates, which would threaten their survival.

In more simple terms, these companies do not generate enough income to repay the interest on their debt.

This type of firm is also proliferating in liberal economies. According to Deutsche Bank’s estimates, one in five US companies is a zombie firm.[1] In OECD countries as a whole, this figure rose from 1% in 1990 to 12% in 2015 (Source: BIS).


So, as long as the low rate environment persists and the central banks buy up public and private debt, these companies will be able to borrow to preserve their existence.

Creative destruction in jeopardy

The principle of creative destruction developed by Austrian economist Joseph Schumpeter holds that companies that are less efficient (in their management, production, innovation, financing, etc.) lose market share to more dynamic and efficient companies. Productivity gains are thus generated through product or process innovations, resulting in higher income for companies and employees.

This economic dynamism could be undermined by low rates: a company able to survive on infinite borrowing will not necessarily be incentivised to look for new ways to increase its profits. Ultimately, there is a real possibility that productivity gains will stagnate at the macroeconomic level.[2]


Central bank support for governments, households and businesses can, of course, be justified during a major crisis. The Great Crisis and the pandemic may warrant the significant resources made available, but it would be a shame if the cost were a loss of efficiency at the macroeconomic level.

In addition, these firms’ survival leads to a sub-optimal allocation of scare resources such as capital, labour and commodities. The disappearance of these inefficient companies would therefore push these factors towards more successful companies and increase productivity across the entire economy.

So what about capitalism’s ability to reinvent itself, to make way for more efficient, more innovative companies? Will these firms on life support be encouraged to innovate in order to achieve the productivity gains needed to sustain the improvements in standards of living the liberal economies are famous for?



[2] Banerjee, Ryan, and Boris Hofmann. "The rise of zombie firms: causes and consequences." BIS Quarterly Review Spetember (2018).