Think Freely Media presents Common Sense with Paul Jacob

It’s one of those terms seemingly designed to conceal something ugly, dangerous, or unnerving; this example of contemporary policy jargon just looks like a euphemism. It’s “quantitative easing” (QE) and it’s Federal Reserve policy.

What does the “quantitative” part refer to?

The quantity of money in bank reserves.

Is this all about increasing that quantity?

Yes.

Isn’t that synonymous with inflation?

According to the old definition — where inflation is the increase in the supply of money — yes. But since economists became obsessed with the price level, and “correcting” the price level, today inflation usually designates a general rise in prices. Of course, more money will tend to raise prices. But because demand for money can offset supply moves, price levels are not affected on a simple input-output, one-to-one manner.

Is this what we call “printing money”?

Yes, but in the digital ledgers of banks, not in terms of paper dollars.

So this “easing” is just “easy money”?

Yes, but not “just.” Because the new money hits bank reserves, it eases banks’ pressure vis-a-vis risk. So banks can lend more.

Will banks, helped out by QE, actually follow through and make loans?

Big question. They didn’t, much, after the bailouts. Banks loan funds only when they can expect a return. Monetary manipulation doesn’t, presto chango, solve the problem of the future. If the future looks especially unstable, or uncertain, no loan.

Will this necessarily jump-start the economy?

No. Our elite experts’ desperation is showing.

This is Common Sense. I’m Paul Jacob.

By: Redactor

5 Comments

  1. Mike Spalding says:

    Thanks for the brief economics behind QE2. This brings some clarity to all the hand waving on TV.

  2. d.hughes says:

    Spot on! The Federal Reserve is lending the government money because there are not enough willing to buy Treasury Bonds! The Fed takes from the people to give to the government (reverse Robin Hood).

  3. voxoreason says:

    Debasing the currency would seem to help our exports as it would make them cheaper to other countries… or do exactamundo what Obummer accuses China of doing. (Odd that I haven’t noted anyone else making this obvious observation.)

    Is this the right president to be calling the kettle black?

  4. Art says:

    Not that long ago we referred to this as “smoke and mirrors” especially as we were looking to prosecute borrowers who provided ‘false’ financial statements of “smoke and mirrors” while trying to defraud Federal lenders. So now the Feds are using the same tactics to defraud taxpayers. Nothing has changed, it just a matter of semantics.

  5. […] this week I did a short Q&A about the latest in monetary policy: quantitative easing. This video goes into much more detail. And is pretty […]

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