GoldMoney: QE for dummies

The Banking/Monetary system is both staggeringly simple, they push a button to create new money, and ridiculously complex, fractional reserve ratios, treasury bonds, interest rates, open market operations, M1, M2, etc.

In a new GoldMoney post’s  Chris Martenson helps to explain one part of this bizarre system, Quantitative Easing.

“Despite its sophisticated-sounding name, QE is nothing more complicated than the Fed buying ‘assets’ from commercial banks and other private financial institutions. I put assets in quotes because the Fed does not buy things like land, Stradivarius violins, diamonds, gold, or silver from these institutions, but rather various forms of debt.”

“The main forms of debt purchased are Treasury bills/notes/bonds and Mortgage Backed Security (MBS) paper. “

“The reason that QE differs from normal monetary policy is that, in the normal case, the purchase of various bond types by the Fed does two things: it lowers interest rates, and it increases the amount of money in the system.”

“QE, on the other hand, cannot lower interbank interest rates any further than they already are, because they are at 0%. So a different name is used for the process in which the only thing being eased is the quantity of money. Hence Quantitative Easing (QE).”

This is just a fancy way of saying that the central bank, via prior errors and miscalculations, has found itself stuck in a trap where it has lost one of its most potent tools: the price of money. And now it can only fiddle with the quantity of money.”

“When the Fed performs this trick, what happens is that the assets end up on its balance sheet as well, assets of course.”

“The Fed’s asset balance had been holding steady at around $2.75 trillion for a bit over a year. But then the latest round of QE (QE4) began, which has swelled the Fed balance sheet above than $3 trillion – and it’s way to (at least) $4 trillion by year end (2013).”

At this point you might be thinking, where did the Fed get the money to buy these assets? The answer to that is simple: it was created out of thin air. Or ex nihilo, if you want to use Latin to make it sound more official.

“In these modern times, no actual paper money was created and exchanged, of course; just a few clicks on a computer keyboard. And voila! billions and billions of dollars are created.”

“There are several critical risks to flooding the world with invented money. Once we understand them, it becomes clearer how the Fed’s decision to pursue QE has put it in a box, where its available options are becoming fewer and fewer. And it explains why the Fed is continuing and will continue until it simply can’t with its aggressive money printing.”

Read the post in its entirety here.


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