Shutdown: How Covid Shook the World's Economy

by Adam Tooze

The defensive answer from the central banks was that they would off-load the bonds as soon as they could do so without disturbing the market and driving up interest rates. At that point, the market maker argument converged with the second basic justification for their actions—the original argument for QE. They were buying debt to massage the interest rate, and they were entitled to do that because their basic task was to ensure price stability, which in 2020 meant that the economy must be prevented from sliding into deflation. Avoiding deflation meant stimulating demand by all means. For the central bank, that meant holding interest rates down. Once again it came down to financial markets. As far as anyone could figure out, QE worked by driving government bond prices up and yields down.65 Lower interest rates helped to encourage borrowing for investment and consumption. Lower yields also prompted asset managers to reallocate funds from Treasury markets, where prices were driven up by central bank buying, to riskier assets, like equity and corporate bonds. This boosted corporate borrowing and the stock market. It increased financial net worth and boosted demand.