As a result the demand for (broad) money rose alongside its rising supply – “velocity” declined, if you prefer – and the rate of M4 growth consistent with on-target inflation was significantly higher than 2%. These were deposits accumulated not as a “medium of exchange” but as a “store of wealth”. What those years also demonstrate is that commercial banks can supply and create such deposits with any commensurate growth in the balance sheet of the central bank. QE is neither necessary nor sufficient for broad money to expand. To take a more recent example, it’s not clear that the jump in household deposits during the pandemic was the direct and inevitable result of the central bank’s asset purchases at that time. If that were true one would presumably have expected to see something similar after every other previous episode of asset purchases. That’s not the case. For me, the more plausible cause is the combined impact of severe restrictions on spending and, thanks in part to fiscal support (in the shape of the furlough scheme), continuing growth in household income. At least in the first instance the resulting jump in saving had nowhere to go but into household deposits. More generally I think it’s better to understand the impact of QE through the lens of asset prices – what it does to bond yields – than quantities (still less as “printing money”). As with commercial banks, the demand for central bank money can change (sometimes very abruptly).
This is reflected, for example, in the fact that the credit spreads, that is the difference between the interest rates on corporate bonds and the interest rates on government bonds, have returned to the levels that applied before Lehman Brothers filed for bankruptcy protection. The difference between interbank rates and the expected policy rate has also decreased (see Figure 15). The credit markets are also steadily improving. Companies that just a few months  BIS Review 105/2009  7  ago found it difficult to issue bonds now have access to the market again. Companies with a good credit rating can now borrow at a lower cost, at longer maturities and with lower collateral requirements than before the summer. It thus appears that the situation on the financial markets is beginning to ease and that confidence is slowly returning. This is in turn a precondition for the continuation of the recovery of the real economy. Global monetary and fiscal policy is still highly expansionary and there is plenty of spare capacity in most countries. It is not unreasonable to assume that a rapid recovery of the financial markets can also facilitate a more rapid recovery in the real economy. There are thus several reasons why it is reasonable to be cautiously optimistic. We must also remember, however, that we are still emerging from a severe recession and it may therefore take time before global demand recovers completely.