I’ve been hearing this term a lot and I thought it best to wrap my head around it as I have a feeling that this is going to be the new buzzphrase for awhile. As we all know interest rates are about as low as they can go right now hovering around 0%. Quantitative easing is a strategy of reducing interest rates still further, where the central bank creates new money for use in an economy. At the stroke of a computer key the central bank can increase the amount of credit in it’s own bank account which can be used to buy whatever assets it wants: government bonds, equities, houses, corporate bonds, etc. As this happens, the price of the assets should rise and the yield, or interest rate will fall. The hopes of this type of tactic is that the central bank will encourage greater spending, by creating more demand and saving us all from the big bad recession wolf. Banks will have surplus credit to lend to these hypothetical willing consumers.
Side effects are rising consumer prices. The government could also loose money on it’s purchases that ultimately will be the burden of the taxpayers or by the central bank creating more money and risking higher future inflation. If the central bank prints too much money it could destroy the value of the US dollar, creating hyperinflation. If quantitative easing destroys confidence in the economy, it can be counterproductive. But the real unknown variable in all of this is that QA needs to be aggressive enough to jump start the economy immediately, but not so ultra-aggressive as to trigger hyperinflation. Despite how much reassurance our government can stand on capital hill and tell us they have this under control, nobody knows the perfect formula until after the fact.
For me this sounds like desperation on the part of the Fed, as they really have no other arrows in the quiver. It also sounds a lot like gambling. I keep hearing that the government is mortgaging the future generations of America by doing this as they will ultimately be responsible for footing the bill and the recipient of higher inflation. This is so typical of the human condition. Credit is going to be the downfall of this great nation. Just look at a simple thing like credit cards. They are way to tempting to run up a bill on other people’s dime to the point where at some point you open your statement and start freaking out.
Simply put, the government is acting like a teenager with a platinum credit card with no limit, no consequences, and no morals. Funny, I don’t remember getting a say in this that would allow them to pull such a stunt. What needs to be done is simple. Let the recession take it’s course and let us take the medicine now, so we can come out of this stronger and relatively debt free. We will be in a worse position when this is all said and done, but nobody seems to see that in Washington because we lie in a society of instant gratification. Can’t wait, saving will take forever, I want it now now NOW.
I don’t see people lining up for loans. Just who does the government think is going to go after all of this easy credit? Slowly I feel that people are becoming a little more conscious of what they spend their money on, and I hope that people don’t get sucked into another era of “easy money” creating irrational exuberance to the umpteenth power.
Maybe this is a naive uneducated approach to this problem, but maybe simplicity is what is needed here instead of confusing concepts like subprime mortgages, credit default swaps, quatitative easing, etc. It seems like these days the Fed and government (remember these are two sepearate entities) are intentionally using big words and vague phrases to intentionally confuse us so we don’t see what is really going on. Right now the Fed are behaving like the “man behind the curtain” in Oz and it’s high time they’re discovered for who they really are. They are just ordinary men who are likely making one of the biggest mistakes in our recent history, gambling our future generations away by pinning everything on quantitative easing.Basically they’re betting it all on red and taking an “all or nothing” approach. I fear if the “nothing” scenario unfolds. If that bold sentence alone doesn’t make you want to stand up and take notice then we’ve got real problems.
I apologize for rambling as I had every notion of ending this post after paragraph 2, but I guess I rambled a little bit longer than I originally intended. If I don’t thank you guys enough for all your insightful contributions I want to take this opportunity to do so. I very much appreciate all of you for providing me with this forum to share my thoughts and opinions of just about anything and everything and I hope you walk away from most posts thinking about things in a different light.
I have some potential courses of action that I hope to be sharing in the weeks, months ahead. Until then I look forward to your comments.
