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What is Quantitative Easing?
Quantitative Easing aka. Money Printing
Quantitative Easing aka. money printing is a government sleight of hand that results in an increase in the money supply. According to Wikipedia quantitative easing� is different from the typical method whereby governments buy or sell government bonds on the open market to keep market interest rates at a specified target value. That requires a cooperative market. In unusual times, i.e. when the market is panicked, and banks don’t want to buy bonds, the central bank implements “quantitative easing” by purchasing relatively worthless financial assets from banks and loaning them new electronically created money. So this is straight forward money printing compared to the more round about tradtional method.
Thus Quantiative Easing increases the excess reserves of the banks creating liquidity for the markets.
Effects of Quantitative Easing
Legendary economist, Milton Friedman once said: “Inflation is always and everywhere a monetary phenomenon.” In other words, inflation is always caused by printing too much money. But the results are seen in prices of commodities like food, clothing and energy after the printed money works its way through the economy.
Generally, after a round of “Quantitative Easing” (aka. Money Printing) it usually takes one to two years for it to show up in popular pricing. The time lag gets smaller as people catch on to the cause and begins to anticipate more inflation. The time lag is also why many people fail to see the correlation between money printing and inflation. Continue reading
The Fed Resumes Printing
By Bud Conrad, Casey Research
The Federal Reserve recently announced important policy changes after its Federal Open Market Committee (FOMC) meeting. Here are the three most important takeaways, in its own words:
- The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
- The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. In the most recent projections, FOMC participants’ estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent.
- The Fed released FOMC participants’ target federal funds rate for the next few years.
Immediate Reactions Continue reading
Fed To ‘Hold Off’ On QE 3
We noted extreme levels of optimism earlier today. What could possibly trigger a correction in stocks and commodities? If the Fed fails to signal and/or announce another round of quantitative easing (QE), it would undoubtedly leave the markets disappointed.
The Fed uses the Wall Street Journal (WSJ) as a medium to communicate with the markets. It is possible someone at the Fed picked up the phone and said, “We need to temper short-term expectations for another round of QE. Can you help us out?” Friday’s WSJ has an article titled “Fed Holds Off For Now on Bond Buys”. Notice the word “may” is not included. Here is the first paragraph of the article:
Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program.
The statement above is very direct; it does not contain “expected to” or “analysts believe the Fed will”. While anything can happen next week, the WSJ is always Continue reading
Why Quantitative Easing Has NOT Brought Back Inflation
March 25, 2011
When the FED began quantitative easing to halt the deflationary crash of 2008, almost everyone was convinced that it would result in massive inflation. The lone voice proclaiming that it wouldn’t stop the deflationary express train wreck was Robert Prechter. In the following article Prechter explains why inflation never materialized. It is an excerpt from Prechter’s, Independent Investor eBook 2011. I hope you enjoy this short excerpt. See below for details on how to get the eBook in its entirety for free. ~ Tim McMahon, editor Continue reading
What is the Federal Reserve – Part 3
Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter
How the Federal Reserve Has Encouraged the Growth of Credit
Congress authorized the Fed not only to create money for the government but also to “smooth out” the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our “fractional reserve” system, banks were authorized to employ that new money as “reserves” against which they could make new loans. Thus, new money meant new credit.
It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand (“in reserve”) to cover withdrawals. When the Fed increased a bank’s reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the “multiplier effect.” This process expanded the supply of credit well beyond the supply of money. Continue reading
What is the Federal Reserve – Part 2
This is Part II of our three-part series “Robert Prechter Explains The Fed.” In part 1 we saw how Central Banks came into being and money went from something tangible and of value like Gold or Silver to paper backed by Gold to paper backed by nothing. You can read Part I in “What is the Federal Reserve – Part 1” — and come back later this week for Part III. “Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is ‘backed’ primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise…”
What is the Federal Reserve – Part 1
Do you really know What a Dollar is?
Or how the FED controls interest rates?
What is quantitative easing? Or (QE2)? Or monetary stimulus?
For answers, let’s turn to someone who has spent a considerable amount of time studying the Fed and its functions: EWI president Robert Prechter. Today we begin a 3-part series that we believe will help you understand the Fed as well as he does. (Excerpted from Prechter’s Conquer the Crash and the free Club EWI report, “Understanding the Federal Reserve System.”)
Here is Part I.� Continue reading
How The FED Prints Money- Part 4
This is part 4 in the video series on the effects of Quantitative Easing by Chris Ciovacco the Chief Investment Officer for Ciovacco Capital Management. To see the other parts How the FED Prints Money, How the FED Prints Money – Part 2, How The FED Prints Money- Part 3
How The FED Prints Money- Part 3
Last week we looked at who gets all the money the FED prints and before that we looked at the process the FED uses to get the money “Out of Thin Air” and into the hands of people who can spend it. Today we are going to look at what is “Quantitative Easing” well it sounds cool anyway… ~editor
What is Quantitative Easing? Fed’s Perspective & Writings
Part 3 in a 6 Part Video Series on Quantitative Easing
A Wall Street Journal article (10/27/10) on quantitative easing (QE) hints the Fed will take a middle of the road approach in terms of the size and duration of QE2. As we would expect, the stock and commodity markets’ initial reaction is negative. A middle of the road approach to QE seems counter intuitive to the Fed’s own historical analysis of why quantitative easing was ineffective in Japan. In CCM’s July 2010 review of James Bullard’s Seven Faces of “The Peril”, our read between the lines interpretation of Bullard’s take on QE included:
In order for quantitative easing to sufficiently increase future inflation expectations, market participants must believe the Fed will do “whatever it takes for as long as necessary” to obtain the objective of sufficiently positive inflation. This means the Fed must be willing to leave balance sheet expansion in place for as long as necessary to create expectations of higher future inflation by market participants (consumers, investors, companies, etc.). This reminds us of past “bazooka-like” policy moves, where policymakers would say, “You think we can’t create positive inflation? Just watch.” Continue reading
How the FED Prints Money – Part 2
Yesterday we looked at the process the FED uses to get the money “Out of Thin Air” and into the hands of people who can spend it. In other words the “how” they do this magic. Basically, that route is through special dealers and then it goes into a few select hands. Today we are not going to look at the “how” but instead we will look at “Who” gets the money and where it is likely to go from there. Because if we know where it is likely to go we can get there first and profit from the incoming cash flow. ~editor
Quantitative Easing (QE2): Who Gets the Fed’s Printed Money?
Part 2 of a 6 Part Video Series on Quantitative Easing: In Part 1: How the FED Prints Money, we discussed how Mr. Bernanke’s quantitative easing program is implemented via the Fed’s eighteen primary dealers, not traditional banks.
We do not know the size of the Fed’s program, nor do we know how the markets will react in the short-term. However, one thing we know with near certainty – a large quantity of newly printed money is going to flow from the Fed to the eighteen primary dealers. We also know a significant amount of the electronic greenbacks will flow from the primary dealers into the accounts of their clients.
Since the Fed encourages the primary dealers to offer client bonds in the QE competitive bidding process, it is helpful for investors to know more about the clients of the primary bond dealers. Sovereign wealth funds, who do business with numerous primary dealers, will be one of the most influential groups who may participate in Continue reading
