Quantitative easing

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Quantitative Easing is the controversial technique used by a nation's central bank to shift a portion its portfolio of assets from overnight and short term loans to holding more long-term bonds. Ordinarily, a central bank increases the money supply by lowering short-term interest rates. When the bank lowers the rate to zero percent interest, a different step must be taken to further increase the short term money supply.

It is an economic monetary policy in which the total money supply is increased by the central bank buying long-term bonds. In the United States, the Federal Reserve buys Treasury bonds. The goal is to encourage private bank to lend more and help reduce the effects of an economic recession and avoid deflation. Quantitative easing was first used by Japan in 2000 to fight a deflationary economy. A side-effect of quantitative easing is that the currency becomes devalued versus other currencies, which affects international trade. For this reason, the central banks of economically developed countries try to use quantitative easing in cooperation with other nations.

This policy of creating additional money to give to banks so that they lend more is highly questionable. The banks were largely responsible for the Great Recession and the increased money for banks have failed to produce the desired effect even after the Central Bank's $1.7 trillion purchase. The short term economic gains are minimal and in the long term, the central bank will lose money if the market value of the bonds drop before the bank can sell them. If a quantitative easing policy is in place too long, it can eventually lead to higher prices and inflation or even hyper-inflation.[1]

For example, in response to a weakening economy, the Federal Reserve announced on September 13, 2012 that:[2]

The Fed initially disappointed some investors on Thursday when it said it would buy $40 billion of mortgage-backed securities each month. That is far less than the $75 billion a month it bought in its second round of bond-buying, or the more than $100 billion monthly tab for its first round.

But this time, the Fed has promised that "if the outlook for the labor market does not improve substantially," it won't stop buying and could ramp up its spending further.

In general, the Federal Reserve tries to stimulate the economy by lowering short-term interest rates. However, when short-term interest rates are lowered to zero, the Federal Reserve turns to other less frequently used actions to with a goal of stimulating the economy. The Federal Reserve calls these "quantitative easing." Basically, these involve the Federal Reserve purchasing longer-term bonds to lower the medium and long-term interest rates.

There is no free lunch, so "quantitative easing" is always at someone's expense. In general, although the some individuals in the economy may benefit from quantitative easing, the people who rely on bond interest income are harmed by their reduced income. On the whole, however, quantitative easing harms the economy as it reduces predictability. Instead of the market determining the value and quantity of money, it is the determined by the caprice of the Federal Reserve Board who may act in a very unwise manner unconstrained by market forces and guided by antiquated economic liberal theories such as Keynesian economics. In addition, quantitative easing is not equitable in its policy and unjustly enriches the wealthier members of society.[3] For example, the elderly who wish to receive income from low risk bonds and bank deposits are hurt by arbitrary and artificial measures to lower interest rates dictated by unelected elitist bankers rather than market forces.[4]

Michael Snyder wrote concerning Ben Bernanke who was chairman of the Federal Reserve at the time:

You can't accuse Federal Reserve Chairman Ben Bernanke of not living up to his nickname. Back in 2002, Bernanke delivered a speech entitled "Deflation: Making Sure 'It' Doesn’t Happen Here" in which he referenced a statement by economist Milton Friedman about fighting deflation by dropping money from a helicopter. Well, it might be time for a new nickname for Bernanke because what he did today was a lot more than drop money from a helicopter. Today the Federal Reserve announced that QE3 will begin on Friday, but it is going to be much different from QE1 and QE2. Both of those rounds of quantitative easing were of limited duration. This time, the quantitative easing is going to be open-ended. The Fed is going to buy 40 billion dollars worth of mortgage-backed securities per month until they have decided that the economy is in good enough shape to stop. For those that get confused by terms like "quantitative easing" and "mortgage-backed securities", what the Federal Reserve is essentially saying is this: "We're going to print a bunch of money and buy stuff for as long as we feel it is necessary." In addition, the Federal Reserve has promised to keep interest rates at ultra-low levels all the way through mid-2015. The course that the Federal Reserve has set us on is utter insanity. Ben Bernanke can rain money down on us all he wants, but it is not going to do much at all to help the real economy. However, it will definitely hasten the destruction of the U.S. dollar.[5]

Unjust enrichment of banking class

In 2012, hedge fund manager Mark Spitznagel argues in the Wall Street Journal:

Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last. Monetary inflation is a process, not a static effect...

The Fed doesn’t expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.”[6]

Destruction of capital for investment and a cause of malinvestments

In May 2012, Chris Ferreira wrote:

When the majority of people are depositing their savings into banks and contributing to a high savings rate for their country, this creates an environment of higher levels of cash reserves in banks: in other words, a nation of savers creates a situation where banks have enough capital to lend for new business ventures. As part of normal supply and demand characteristics in a free-market, lower interest rates will be adjusted to loan out this extra savings in deposits. In this case, interest rates fall in order to provide incentives to loan out money. In turn, the investment horizon for this capital is longer term and is primarily used to finance capital projects (“high orders”) and away from producing consumer goods (“low orders”). When all the excess savings in the bank are loaned out, the banks are operating at their minimum reserve requirements; interest rates then naturally increase to account for the shortage of savings in deposits, since the excess supply of money has been exhausted though loans...

If, however, central banks intervene in the market to suppress interest rates to pump an artificial stimulus into the markets, this provides the illusion to entrepreneurs that there is real excess savings in banks that would supposedly account for a longer term vision and increase of demand for capital goods.

This is a fallacy. Entrepreneurs in this scenario are led into making malinvestments, for when the suppressed interest rates are allowed to increase to their normal levels, the malinvestments fail. The longer the suppression of interest rates, the more malinvestments are created and the more systemic damage it will create in any given economy when interest rates return to normal (and corrections are inevitable).

Construction and real estate are two of the main beneficiaries of capital good investments when interest rates are low. The inverse applies for high interest rates, as more capital is spent on a shorter-term vision on consumer goods and away from capital goods.[7]

See also


  1. Higher Inflation Is On The Way, Forbes.com, February 22, 2011
  2. https://www.cnbc.com/id/49036260
  3. Does Quantitative Easing Benefit the 99% or the 1%?
  4. Effects of low interest rates
  5. QE3: Helicopter Ben Bernanke Unleashes An All-Out Attack On The U.S. Dollar
  6. Does Quantitative Easing Benefit the 99% or the 1%?
  7. Effects of low interest rates