FT Quantitative Easing Explainer

Here’s a very simple look at the Fed’s “quantitative easing” practices. This stuff is way beyond my pay grade. I would like to have serious conversation with J P Fellowes about this.

Jim? If you’re out there…

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5 responses to “FT Quantitative Easing Explainer

  1. Very simple explanation, the Central Bank (the Fed in the US case) makes money out of thin air. It then buys stuff to try and pump up the price of what is being purchased.

    The wacky guys at the Fed are buying US Treasury bonds.

    So, Treasury issues debt and Fed buys it.

    It should be obvious that in the long run, money creation out of thin air isn’t the greatest idea.

  2. Politically the U.S. falls between a market-oriented economy and a centrally planned economy, and usually shifts toward the later under Democratic leadership, and toward the former under Republican leadership. A gold standard for currency is a tenet of a market-oriented economy. A government allocating currency as it sees needed, as the Fed does today, would be a tenet of a centrally planned economy. I think these two types of economic systems have both good and bad factors, and that a mix of the two is best, but in the case of currency I think the U.S. has picked from the wrong column. Wouldn’t you agree Mr. Fellows?

  3. The Federal Reserve is the root cause of this entire crisis. Everything that went wrong has to do with lending and borrowing. If the Fed were managed in a different fashion (an almost politically impossible outcome) it would be just fine to have paper money. The reason for “gold” is because it is a product of the market. If one wanted to drive across country, they would not look to the government to build a vehicle. Similarly, if one wanted good money, they would not ask the government to create such a system.

    Strangely, the economy works best when the price it costs to borrow money is set between borrowers and lenders without interference. The last crisis of similar magnitude happened soon after the Fed was created to prevent such a crisis. Manipulated credit markets lead to artificial booms, and then those bust.

  4. OK, I get that. To me, printing money to buy U.S. T-bonds would be like a person in the cupcake business baking a shit-ton of cupcakes and then selling them to himself and claiming that business is up.

    Is there a country that doesn’t have a Central Bank? Also, doesn’t this toxic asset plan seem like a dreadful idea? I can’t help but feel like the ubiquitous “taxpayer” is going to get screwed in this one too.

  5. Yes, it is essentially “printing money” to pay for things. But with an added roundabout way, in an effort to manipulate markets in the process.

    At present, all countries or currencies anyway, have a central bank. If given the choice, it is obvious politicians would choose to have the ability to print money. Central banks were not always the norm.

    The “toxic asset” program, it depends on what sort of scale you are grading on. Cheap leverage is what got us into all this. No way to tell if it will cost money or be “profitable” for taxpayers.

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