What is quantitative easing, and what will it mean to you?


The Federal Reserve (The Fed) initiated another phase of a policy called quantitative easing (QE) yesterday (on 9/13/12).  This has prompted a number of news segments concerning the action, the general state of the economy, and the potential effect this policy will have on the U.S. economy.  It has also prompted a number of us to ask what exactly is quantitative easing, and how will it affect us in my daily lives?

Quantitative Easing is basically the printing of money.  It involves buying bonds from big banks to drive down interest rates, it involves purchasing other assets, and it involves using other policy tools to attempt to achieve what Federal Reserve Chairman Ben Bernanke calls price stability.

As anyone that has taken Econ 101 knows, when you print more money than is generally needed in the economy you devalue the dollar by increasing the supply of it.  When the dollar is devalued in such a manner, what you are able to purchase for one dollar today may cost you $1.25, $1.50, or even $2.00 in the coming weeks and months.  Your wage would remain the same, but the cost of the products you buy will go up according to the supply of the dollar in the economy.  Every collector knows when they have a product that is short in supply its value is increased in that product’s market. Quantitative easing is an emergency policy that a Fed Chairman arguably doesn’t take lightly.  It’s a policy that is being put in place when, arguably, everything else has been tried.  The argument that conservatives would make is that the only reason we’ve reached this state of emergency where a quantitative easing policy may arguably be necessary is based on the failure of an economic agenda, namely President Barack Obama’s agenda, which Vice-Presidential candidate Paul Ryan says has failed “not because it was stopped, but because it was passed.”{1}

QE3 is a policy that conservatives are saying that is being put in place in time to assist Democrats (specifically a struggling incumbent president) during the last two months of their campaigns.  The timing is simply too convenient, say conservatives.  Conservatives are saying that Bernanke folded under the pressure Charles Schumer and others have put forth publicly, and most likely privately.  QE3 may provide enough of an economic bump to get Barack Obama re-elected, but what of the long-term, economic consequences put on the nation, on the dollar, and in the economies that are affected throughout the world?

Brazil’s Finance Minister Guido Mantega has labeled the Fed’s latest stimulus effort “selfish”. 

“Advanced countries cannot count on exporting their way out of the crisis at the expense of emerging market economies,” Mantega told the IMF’s governing panel. “Brazil, for one, will take whatever measures it deems necessary to avoid the detrimental effects of these spillovers.”

“Everything is getting done, from my perspective, blindly, without regard to the consequences it could have,” Russian Finance Minister Anton Siluanov told reporters in Tokyo.{2}

The reason this current quantitative easing policy is called QE3 is that QE1 and QE2 have already been tried, and by most measures they were unsuccessful.  Unsuccessful is a relative term according to some.  Those who state that QE1 and QE2 were successful, state that we would be in a much worse situation that we’re in right now if it weren’t for those actions by the Federal Reserve (The Fed), but conservatives say that can’t be quantified.  Quantitative easing supporters also state that one of the primary reasons the Dow Jones Industrial rate hovers around 13,500 today is based on these QE1 and QE2 actions, and most hold that the Dow is the primary indicator of the state of the economy.  Naysayers state that QE3 wouldn’t be necessary if QE1 and QE2 were as successful as supporters have stated.  Naysayers also state that based on the previous precedents set by QE1 and QE2, quantitative easings do little to raise the real gross domestic product, and it only results in the reduced value of the dollar.

On the subject of the Dow Jones Industrial rate, NY Post columnist Charles Gasparino states: “Yes, the stock market loves (QE3) — the Dow Jones Industrial Average rose 200 points yesterday (and 53 points today). But that’s only because Bernanke also signaled yesterday that he’ll continue to keep short-term interest at just about 0 percent — which keeps bond returns so low that investors are almost forced to buy stocks.”{3}

To back up Gasparino’s statement, a Nationally Recognized Statistical Rating Organization called Egan-Jones lowered its credit rating on the U.S. government from AA to AA-.  They specifically cited QE3 as the reason for their downgrade, stating:

“Issuing more currency and depressing interest rates through purchasing mortgage-backed securities does little to raise the U.S.’s real gross domestic product, but reduces the value of the dollar,” the firm said.{4}

Egan-Jones’ Vice President and co-manager of the ratings’ desk Bill Hassiepen goes onto say, “We are not receiving QE3 positively.”  He said, he views the current fiscal situation as a nightmare.  He said that the Fed’s attempt to stimulate growth will in fact cause “sluggish to stagnant economic growth” through its “massive monetization.”  He expects growth to become stagnant within six months as a result of the Fed’s policy.  He concluded with: “The United States’ financial flexibility is almost gone given $16 trillion in debt, which is 104% of GDP, and there is no real plan to put the fiscal house under control.”{5}

Rush Limbaugh states that “if the Fed didn’t (enact QE3) it would be double dip recession time.  (QE3) is a Band-Aid to stave off the financial implosion that is coming if this administration’s policies don’t change, and there is no policy change coming.  The theory is the same as the previous two (Quantitative Easings), and that is to put more money in the hands of lenders.  The theory is to put more money in banks, so that they will loan money to small businesses so that those small businesses will invest in themselves, and it’s not going to happen because the businesses that have enough credit to borrow money are afraid of what to expect if this guy (Obama) gets re-elected. They’re afraid of Taxamageddon, they’re afraid of Obamacare, they’re afraid of what’s going to happen if he gets re-elected. 

“What’s going to have to happen at some point, however, is that Bernanke is going to have to do the opposite (of QE).  At some point, he’s going to have to reduce the money supply, interest rates are going to have to go up, inflation is going to have to go up.  This is an effort to help Obama, but it’s also an attempt to stop a financial collapse that is imminent, and they think they can stop it even though the first two QEs had no effect whatsoever.”{6}    

Gasparino adds to Limbaugh’s warnings of Bernanke being forced to do the opposite saying: “When Bernanke does (do the opposite), the “wealth effect” of a rising stock market will evaporate, and so will the rest of the economy.”{7}

One thing that both supporters and naysayers of the quantitative easing policies can agree on is that these actions are a temporary stop gap measure used to hold up the economy, until the economy gets moving again.  As Bill Hassiepen says “growth may become stagnant in six months”, but that may provide enough time to get Obama re-elected.  It may also provide us some time to stave off an economic collapse.   The question that has to be asked is how long will these measures stave off the inevitable, and will they only make the inevitable worse when it finally comes crashing down around us?  QE3 may kick the can down the road for a little while, but when the last tool in Bernanke’s arsenal is expended what do we do after that?  The U.S. economy has become an economy that’s built on a foundation of stimulus package, quantitative easing, and bailout Band Aids, and we’ve starting to believe that we’re never going to have to face what some have called a preventable financial disaster.  As anyone who has personally faced a financial such a crisis knows there are things that you can do to stave off facing your own financial disaster: You can borrow money, you can exist on credit for a while, and you can ignore your creditors for a time, but sooner or later your chickens will come home…to roost.

{1}http://www.politico.com/news/stories/0912/81222.html#ixzz26TzKWKxt

{2}http://www.reuters.com/article/2012/10/14/us-usa-fed-bernanke-idUSBRE89D01C20121014

{3}http://www.nypost.com/p/news/opinion/opedcolumnists/bernanke_bad_news_fUiLLK5oa6jH1osPvrkWjL#ixzz26TaC02sk {4} http://www.cnbc.com/id/49037337

{5}http://www.forexlive.com/blog/2012/09/13/egan-jones-analyst-hints-at-us-rating-downgrade-post-qe3/

{6}http://www.rushlimbaugh.com/daily/2012/09/14/bernanke_sees_the_coming_collapse

{7}http://www.nypost.com/p/news/opinion/opedcolumnists/bernanke_bad_news_fUiLLK5oa6jH1osPvrkWjL

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2 thoughts on “What is quantitative easing, and what will it mean to you?

  1. This Keynesian-monetarist scheme of hiding inflation behind acceptable term misleads both the public and most professional economists. Thank you for exposing the real color of quantitative easing and that it is nothing but increasing the money supply.

    Like

  2. Pingback: Quantitative Distressing | Studies in Economics

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