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How is QE anything out of the ordinary?

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March 14, 2012 – Comments (4)

Something I often see is people writing articles about how there will be more QE, driving the price of (insert whatever here) up higher.  But, why are we waiting for an announcement of more QE?  Doesn't the fed constantly print more money...always...for decades?  Is QE really anything unusual? Why do we need an announcement or articles on it...it's a given.  It's kind of like writing "gravity announced; things may fall".

 

This is not a rhetorical question, I am genuinely interested in if there is a real difference between QE and normal monetary policy that would drive inflation up.

4 Comments – Post Your Own

#1) On March 14, 2012 at 6:05 PM, Mega (99.96) wrote:

http://en.wikipedia.org/wiki/Quantitative_easing

1. The scale is larger.
2. It involves buying longer duration debt. 
3. It involves buying financial assets other than government debt, i.e. mortgage backed securites and bank debt.

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#2) On March 15, 2012 at 8:20 AM, jason2713 (< 20) wrote:

Fighting deflation now takes even more printing to keep the house of cards up.  I am curious when that can no longer work.  We'll see.

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#3) On March 15, 2012 at 3:43 PM, rfaramir (29.34) wrote:

"3. It involves buying financial assets other than government debt, i.e. mortgage backed securites and bank debt."

Hmmm. That sounds more like TARP. Buying other (troubled) assets other than government debt, which is the usual. But you could be right, and I'm thinking of even worse assets than MBS and bank debt. (It's not like the TARP money was actually used for that purpose anyway.)

 

"Fighting deflation" is evil incarnate. Deflation means that the money in our pockets and bank accounts buys more stuff. Anyone who is against this is against humanity.

Deflation is only bad for dangerously over-leveraged entities. This, too, is a good thing, as it shakes out the rotten business structures dragging down productivity and therefore wealth in our society.

Of course, we want gentle, natural, free market deflation, preferrably driven by a stable money supply and a growing body of products and services to purchase with that money (driving prices lower), not unnatural mass destruction of currency or credit. But we'll take what we can get.

 

And to answer your question, Valyooo, No, QE is not much different from normal. The Federal Reserve (and any country's central bank) exists to inflate the money supply. Think about it, if you were an entity with the legal authority and capacity to create currency in any amount you want and to purchase things of true value with it, wouldn't you do so? QE is one way they do so.

End the Fed!

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#4) On March 15, 2012 at 3:59 PM, TheDumbMoney (44.25) wrote:

I think MegaShort pretty much nails it. 

Also, QE3, or as it is generally known, Operation Twist, just involves exchanging a lot of the extra short-term debt purchases for long-term debt.  This has driven down long-duration yields in relation to short-term, hence the twist.

Note that most of what the Fed has done is not unprecedented, even though Mega is right about what makes it special.  The Fed is basically following a playbook it already played out successfully in the late 1940s after our debt skyrocketed during WWII.  I know I have blogged about this a lot, and posted this link all over this website, but it's worth posting again.

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

Sheer brilliance, in my view, and it states exactly the policies that Bernanke in fact followed 6-8 years after giving the speech.

As you know, I dislike the term "printing money."  Printing money is when you run dollar bills off a printing press.  They cannot be called back. What the fed has done is create new bank reserves.  Some go out into the conomy as loans from the banks.  But if and when it wants to the Fed can fail to reinvest the proceeds of expiring loans, thus destroying "money."  And if that is taking too long, it can raise take other measures to disincentives bank lending (aka, money creation).

DTAF

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