You’ve probably heard the term quantitative easing. You might even have read news or blog articles about what it means. I’ve always thought all that blah-blah-blah about the Federal Reserve buying Treasury Bonds sounded a lot like printing money. How else do you explain a government essentially buying it’s own bonds? Think about it…
Don’t believe me? Well, let’s have Ben Bernanke explain it himself. Once while covering his butt, and once when it was okay to tell the truth. Via The Daily Show:
Hey, maybe it’ll turn out to be a good idea, but at least tell us the truth. Increasing the money supply is as you said Ben, “effectively” printing money.
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Except … what’s being printed isn’t money. It’s what we use for currency but when the government uses these methods, it devalues the currency so much that you can’t call it money anymore. Gold is money. Always has been, always will be. Gold retains its inherent value over time and cannot be “quantitatively eased” any more than a thousand tons of it can be made to suddenly appear in a vault in neatly stacked golden bricks.
Thanks for the link! Jon does a great job of explaining the truth. Does have to make you wonder what our dollars will be worth and the rise in the metals. What a mess!!! The government needs to stop meddling in the markets.
Regular monetary policy is printing money. Even when the fed is tightening monetary policy (i.e. raising interest rates), they’re still printing money — they just slow down the rate of printing.
It’s easy to confuse the Fed with the government, but the Fed is not part of the government (there are good reasons for this — study after study has shown that the more independent a country’s central bank, the more stable their economy and inflation are). Since the Fed is not part of the government, it’s kind of silly to say the government is “buying its own bonds”. The Fed is buying the government’s bonds. The reason they do that is because it’s a huge, very liquid market. But they could buy anything — stocks, houses, pizzas… it wouldn’t matter. The point of expansionary monetary policy is to increase the money supply and lower interest rates. Heck, they are buying other stuff — they’ve been buying mortgage backed securities to help de-frost that market. They did the same with some corporate bonds for the same reason at the height of the credit crisis.
The point I’m making is that QE is no different from regular monetary policy — the Fed is simply buying longer term treasury bonds instead of the usual short-term bonds. That’s because short term interest rates are already ~0, and the economy still needs a bit more help.
Nobody has ever said the Fed doesn’t print money… that’s part of their day job.
The Fed is trying to increase the money supply (print money) in hopes that the extra money will spark inflation AND growth, the jury is still out on how much inflation and growth cause one another, but the current Fed board certainly believes they are connected.
Greg is totally right, and I would go one step further and say I would rather the Fed buy bonds instead of private commodities because the Fed is still quasi-governmental and “government ownership of the means of production” is the definition of socialism. Still, many believe the Fed’s moves are unnecessary, including my favorite economist, Brian Wesbury. But, in reality, it probably won’t have much effect besides forcing the Fed’s to raise rates higher in the future and stifling the economy a little bit down the road.
QE probably isn’t going to do much now, because the banks who receive that new money are largely still sitting on it. They know as soon as the economy starts cooking that money is going to be taken back fast so there’s no point putting it to use. If the banks aren’t using it, the money’s not getting into the economy, and if the money isn’t sloshing around it’s like it hasn’t been printed in the first place, effectively.
I think this cartoon animation is a funnier way to explain quantitative easing: http://www.youtube.com/watch?v=PTUY16CkS-k
i understand your frustration. QE definitely does hurt savers like the author of the blog and his readership. I mean, what’s the point of scrounging for $100 here and there, for credit card bonuses, etc, when others are getting rich by speculating with lots of other people’s money. When was the last time American society rewarded good fiscal behavior?
Gina & Bill, Japan stayed out of the market in the 90s… in the 30s, the Fed stayed out of the market here (the money supply actually shrunk — no printing money back then!)… it didn’t work out so well. The market can be really screwed up for a really long time. I’m not OK with 10%+ unemployment and spiraling deflation for the next 10+ years.
@MikeH, that’s exactly why the Fed buys treasuries and not pizzas or stocks. They’d have to pick a pizzeria… or a company. That would be even less popular than QE2.
I agree with Bill, get the government out of the market.
The fed can buy all the long term bonds it wants to in an effort to prevent a deflationary spiral. But if that money only sits in banks’ reserves and does not get into public circulation thru lending, then it is only `virtual money’ – it may as well not exist. So the deflationary spiral may be out of the feds hands – or the government generally, in which case we are all royally screwed. More likely, those funds will find their way into the public’s hands eventually and be leveraged even beyond that – in which case we will have huge inflationary pressures to deal with – in which case we will be only screwed.
That clip is priceless (get it)! Best explanation for the “just print more money” comments out there.
Devaluing our dollar is one way to attempt to increase our exports. Goods become cheaper to people holding other currencies as the value of the dollar goes down. Inflation is not an immediate concern because people aren’t buying things. There are some prices that will go up though, namely oil. Oil is priced in dollars by OPEC. They will just demand more dollars as the value decreases and this will cause gas prices to spike.
The real problems from this will be years down the road when recovery actually starts to happen. LOTS of dollars chasing after few goods will lead to major inflation. Right now though, in a down economy, inflation is less of a concern.
Someone also explained to me that this easing is in response to China not allowing the value of their currency to increase. They keep it pegged. This keeps the price of their goods artificially low. If they were to allow the value of their currency to float, it would increase. Since they won’t do it, we have taken on a strategy of decreasing the value of our currency in attempt to level the field. This is all economic warfare.
Americans who don’t like QE2 not because whether QE2 will in fact help to regenerate growth in America, but they simply don’t like things they have no control over – especially things done undemocratically.
The World hates QE2 because it’s literally because US is doing it based on their selfish economic interests on the expense of the rest of the world. A good portion of these “free money” will not be lent to American entrepreneurs for their new businesses – but going to all the emerging markets for their own version of housing and commodity bubbles.
Hyperinflation here we come! Weeeeeeeeeeeeee!
This QE has nothing to do with helping our economy. It’s simply to devalue the massive debt we have. We are so far over our heads, and so broke, that the Federal Government is taking the easy way out and printing money. That way our debt looks a lot better than it actually is. Except it really pisses off our debtors (China) b/c we’ve given them the royal screwjob…along with the American people.
Noble Drusus:
I 100% disagree with your assertion that “gold is money”. Gold only has value because people BELIEVE it has value. It has no practical use except to look pretty in jewelry, and it has a small industrial usage in electronics… that’s it. So why is gold so valuable? History. People in ancient times believed it was valuable and we are slaves to that thinking today. So explain to me how is that any different than paper dollars? Paper dollars only have value because people believe it has value. No different than gold.
You can’t eat gold. Gold can’t keep you warm. Gold can’t power a generator. I suppose you can throw a bar of the stuff at an intruder to protect yourself. Can’t think of any other practical uses for the stuff. At least dollars you can burn for warmth, you can use it as TP in a pinch, and I suppose you can use it to line clothing to keep you warm.
This was funny. I saw this last night. It was interesting how Bernanke first said they are not printing money and then he threw up the video of him just 21 weeks before that saying they were printing money. The whole printing money issue with invalid dollars that are now having to be destroyed because the bills are so hard to print is pretty crazy too.
I’d like to see whatever system the Daily Show folks use to comb through footage. It’s one thing to take the Obama and Republican leadership press statements from earlier in the day and splice them together so each one is finishing the other’s sentences (which was pure comedy gold), it’s another thing to find past appearances with enough direct contradiction to be worth re-airing.
The physical act of printing money is separate from the Fed’s normal activity of expanding (or slowing the expansion of) the money supply. My values are probably a bit out of date but I looked at this a few years ago and the total base of physical paper money in circulation is only like $600 billion, which two-thirds of that cash located offshore in countries that use it as hard currency (think Russia) to store their wealth. Most of the U.S. money supply is in the form of bank deposits and broader measures of the total money supply exceed $10 trillion. The fed buys and sells bonds on the open market at all points of the cycle (Treasury bonds because they are traded in the most liquid market in the world), paying for those bonds by creating new bank reserves at member bans in the system (or eliminating them in the case of a bond sale). This is the key way they influence short term interest rates.
It is a little strange when you have the government running a big deficit at the same time the Fed is trying to keep interest rates low by buying up bonds, as is the case today, because the net result of these two independent activities is that the Fed is financing the deficit by creating new bank reserves (“printing money” known as monetizing the debt). In countries where the central bank and fiscal authorities have less credibility than ours has, bond and currency markets react very negatively to this kind of thing but we aren’t there yet. The Fed is betting they can continue to use this tool without losing credibility long enough to get our economy back on track. Specifically they are hoping to keep interest rates low to support the housing market and stimulate borrowing for business investment.
I don’t think inflation is a near term concern because the way inflation really takes hold is when people start demanding higher wages (which lead to higher goods prices and then even higher wages, an inflationary spiral), which isn’t much of a risk when unemployment is almost 10%. Yes gasoline will become more expensive, and so will some imported goods, but in general inflationary pressures will be subdued for now.
Longer term I do worry about the government’s incentive to weaken the currency and allow slightly higher inflation in order to reduce the real value of the national debt. This essentially creates a transfer of wealth from creditors to debtors and the U.S. government is currently the largest debtor in the world. There is some risk the Fed, although nominally independent, will accomodate this type of transfer in a gradual way as it is an easier, less obvious, and more politically acceptable way to correct the big imbalances in our economy than cutting entitlements and raising taxes significantly. And as someone above pointed out, given that most of your readers are probably net savers like myself, it is our savings that would be slowly eroded in this process, so it is worth thinking about.
isn’t it sickening that the federal reserve, a private organization, can simply press a few keys and instantly devalue your wages and savings? That’s precisely why we need to support a full audit of the federal reserve by the GAO and ultimately end the fed and it’s reign over our monetary policy.
Nice article. QE is going to destroy this economy. The administration should focus solely on cutting taxes and job creation. All QE is going to do is destroy the dollar. If it didn’t work the first time (with 1 trillion in purchases), why would it work now?
Unfortunately, eventually all this propping is going to hurt the average 401k investor (which most people are). They lost 50% in the 2008 crash, and they’ll lose it again when this bubble bursts.
The direct cost of oil imports is 2/3 of our trade deficit.
Oil countries are already raising prices. They are not fooled.
What decreasing the value of the US dollar does do is steal from US workers, savers and retirees to benefit bankers and government contractors who get the new money first.
Did you WORK for your dollars? Well, that’s only because you’re too stupid to play golf with reserve bank members.
I saw on CNBC that the Fed is no the single largest “external” holder of Treasury securities (with around $1 trillion), having just surpassed the Chinese, who hold around $900 billion.
http://www.cnbc.com/id/40682653
Of course the Social Security trust fund “owns” $2.5 trillion worth of Treasuries but that’s not exactly an arms-length transaction either.