A Textbook Look at Quantitative Easing
As investors, we are always looking for where our opinion is somehow different than the market consensus. That's how you make money. For quite a while, it has seemed that my view of the effects of quantitative easing (QE) are quite different than that of the market. Indeed, I haven't talked to anyone in the investment business who agrees with my view. (Interestingly, I talk to lots of non-Wall Street economists who agree entirely, so take that as you will). Ahead of next week's Fed meeting, we're likely to hear a lot about the potential for QE sometime in the summer, so now is a great time to consider what QE can actually do for the economy and what it can't.
Some have described QE as somehow unique or experimental. That's entirely untrue. Take any macroeconomic text book from the last 20-years, and although the term "quantitative easing" may not have been used, the concept will be discussed at length. Here is the short version of how a textbook would describe the process: The Fed prints money by way of creating fresh bank reserves out of thin air. They buy something with the proceeds, generally government bonds. This spurs economic activity by giving banks new cash to lend. If they indeed purchase government bonds with the proceeds, this lowers real interest rates (although not necessarily nominal rates, as you will see below) and is therefore stimulative for that reason as well....836 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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