Often you hear people speak about how the Fed has created a fake economy, or one that is propped up with their support, and that they have artificially raised asset prices. What does this exactly mean? How as QE created a fake economy?

  • $\begingroup$ Welcome to Econ.SE! Please add references to your question. Who said this? Debunking a straw man's opinion might not be very helpful. $\endgroup$
    – luchonacho
    Jul 15 '17 at 6:52

As a comment noted, without a reference, it is difficult to give a definitive answer. However, I have often run into similar phrasing in financial market commentary, so I will offer an initial guess as to what you read. This answer is just giving an initial idea as to what topics you could search for to get more information.

This phrasing is often used by members of the Austrian school of thought in economics. (The name "Austrian" refers to the fact that many of the founding members of the school of thought came from Austria.)

The Austrian school is very free markets oriented, and highly critical of government interference in the economy. The Austrian Business Cycle Theory - which I am not an expert on - argues that interest rates are important for planning in the private sector. If the central bank sets the interest rate away from the "correct" level (I am unsure how they phrase this technically), this leads to distortions in private sector activity (away from where the private sector would have naturally been). This leads to imbalances and eventually a crisis/recession. Since the economic activity is not "natural", it is often referred to as "fake." (Since interest rates are determined by the price of bonds, this is the link to asset prices and QE.)

The Mises Institute link to website would be probably the best site to learn about Austrian economics.

However, the Austrian school is not well-represented in academia at present. Most other economic schools of thought currently do not take the Austrian criticisms very seriously. Austrian thinking has not changed much over the past decades, and most non-Austrians view them as having been debunked a long time ago. As a result, it would be difficult to find recent authoritative criticisms of Austrian business cycle theory. In other words, it would be probably be hard to find criticisms of the idea that QE has led to a "fake economy." For example, from the post-Keynesian perspective, it is unclear how we can even define "fake" in this context.

I believe that if you wanted to pursue this, you would need to look further into Austrian theory, and ask a narrow question about a particular topic.


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