Tag Archives: monetary policy

QE3: Seriously?

Quantitative Easing is simply the introduction of money into the economy by a central bank. It has been done twice during the current recession with no positive effects and Ben Bernanke’s Federal Reserve seems ready to launch version three – often referred to as QE3.


QE1 launched on November 25th, 2008 with a Federal Reserve initiated purchase of $500 Billion in mortgage-backed securities with the hope of lowering borrowing costs in order to stimulate the drowning housing market. The fed later bought several hundred billion dollars of securities from troubled entities such as Fannie Mae, Freddie Mac and Federal Home Loan banks.

By buying up assets from private institutions, it lowered the risk those institutions possessed and would theoretically lower the cost of borrowing money.

Finding asset purchases to not be doing enough, the Federal Reserve lowered the key interest rate to .25%.

More troubled-asset buyouts occurred through 2009 and the Fed started to aggressively buy Treasury notes.

QE1 lasted until the end of March 2010 and resulted in 30-year mortgage rates dropping from 6.33% in late 2008 to 5.23% at the end of Q1 2010. $1.25 trillion was invested in asset purchases by the Federal Reserve during QE1.


QE2 went from November 3rd 2010 to June 30th of 2011.

Bought $600 billion of longer term treasuries by selling off short-term agency assets.

Although some economists had expected the move to keep interest rates low, 30-year fixed mortgage rates actually climbed .5%.

The Maturity Extension Program (aka “Operation Twist”)

By the end of 2012, the Federal Reserve hopes to put downward pressure on long term interest rates by selling a portion of its sizable inventory of long term Treasury bonds in trade for shorter term notes. By selling the longer term notes, it is expected that prices for those bonds will increase, thereby decreasing the yield or interest on them. Operation twist is not quantitative easing as it adds no net money supply due to the trading of one security for another.

Operation Twist started in the fall of 2011 and offers both good and bad news. The bad news is that it doesn’t seem to be doing very much to help the economy. Long term interest rates are at historic lows and the economy is not accelerating. This again points to the fact that borrowing costs are not the major issue holding the economy back.

One thing of note is that the sell-off of long-term Treasuries is exactly opposite of the Fed move in QE2. QE2 was about economic stimulus by lowering risk. Twist is focused on affecting interest rates in order to encourage borrowing. Neither addresses the fundamental issues of over-regulation, over-taxation and a White House opposed to free markets.

QE1 / QE2 Results

The effect on the economy from QE1 and QE2 are heavily-debated. Many experts discuss the inflationary effect that pumping so much money into the economy has while others state that banks actually never turned around and lent the money – it was used to shore up their own reserves so that the financial system did not fundamentally collapse.

While interest rates are at their lowest in recorded history, the housing and commercial real estate markets have yet to see a bounce to the upside. The real estate bubble was caused by banks being forced to loan to those that could not afford it – not by high interest rates. Lowering interest rates didn’t make those folks any more able to take on a mortgage than they were 5 years ago.

Lowering interest rates should also help corporations get funding – if only they wanted it. Large companies are sitting on their money out of distrust of the current administration and oppressive regulation. Making it a tiny bit less expensive to borrow doesn’t allay those concerns. In a recent World Economic Forum report, exactly those concerns were listed as a major reason for downgrading the U.S. economy’s competitive ranking to #7 (from #1 in 2008).

For the experts that claim that the money supply didn’t grow to higher levels during QE1 and QE2.. here’s some real chart data for you. According to the experts at Shadowstats.com (chart right) the supply of currency and coin grew substantially during the months that quantitative easing was occurring. M1 is the measure  of money in circulation and the chart says it all.

The effect of a constantly increasing money supply is inevitably inflation. Defined as “a greater number of dollars searching for a diminished number of goods” inflation occurs due to the declining buying power each dollar represents. Our dollar has its value pinned to our Gross Domestic Product which has been growing at a much slower rate than M1. Price inflation is the only possible outcome.


Ben Bernanke and his cohorts at the Federal Reserve began meeting again today. The markets are anticipating another round of Treasury buys, asset buyouts and short to long term asset roll-overs to come out of the meeting. All of which is intended to bring long term interest rates down.

Should another round of quantitative easing (QE3) occur, it will certainly continue to inflate the price of non-bond assets and long-term bonds as more investors will walk away from the anemic yields on long term notes. Stocks will continue to see price increases despite a flagging economy which may slow private investment in the economy.

The money pumped into the economy will further increase M1 and decrease buying power for the average consumer. The inflation that all grocery shoppers, electricity users and gasoline buyers have been seeing will continue – even though the government’s measure (which leaves out food and fuel) will continue to show the success of QE with no ill effects.

The real question is why it’s being done? So far, QE has neither bouyed the economy nor re-invigorated it. The housing market is still in shambles and employment is unimproved. With only two months until the election and his chairmanship on the line if President Obama loses, Bernanke may be playing politics with the American economy.

Inflation expectations are for as much as a 5% peak consumer prices in the very near future As Tyler Durden of Zerohedge.com wrote:

CPI remains below 2% but there is a clear lag between the rise in market-implied inflation and it showing up in the unicorn-laden CPI prints – what this means is that given the hubris of the Fed yesterday,market expectations of inflation are inferring CPI could rise to over 5% within the next 3 to 6 months.

In Deep with Michelle Ray – May 17

When: Thursday, May 17th, 10pm Eastern/7pm Pacific

Where: In Deep with Michelle Ray on Blog Talk Radio

What: Join Social Media Director of ConservativeDailyNews.com, Michelle Ray (@GaltsGirl) as she discusses the issues that impact America.

Tonight: Breitbart stirs up the birthers, criminal monetary policy, the IRS loves illegal immigrants, and Ron Paul bails… kind of.


Show Recording: (Available after show)

End The Fed… And Replace it With What?

Whenever the subject of eliminating the Federal Reserve is raised, there is an inevitable question posed: What would replace it? This question leads to one of the most common criticisms levelled against the “End the Fed” crowd: Eliminating the central bank and giving control of monetary policy to Congress would result a situation like Zimbabwe, where the national legislature printed insane quantities of worthless money. The Zimbabwean dollar was ultimately destroyed.

This argument is only valid if we assume that the government is allowed to issue fiat money. A government which can issue as much worthless currency as it likes, on a whim, is indeed the ‘nightmare scenario’.

On the other hand, if the money issued is sound money, directly exchangeable for a set value of a commodity (such as gold or silver), then the government can only issue currency equivalent to the amount of that commodity it holds. This is, in fact, the monetary system our Constitution created.

I think it’s safe to say that our government will never voluntarily return to a gold standard (or some other commodity standard). There is, however, another way to achieve this goal: Allow currencies to compete with the dollar.

I’ll use a hypothetical (my own) to illustrate the point:

Suppose a local hospital wants to create a way for local businesses- which are cash-strapped- to have health services coverage. The hospital (like most today) is also cash-strapped, and has difficulty paying salaries and purchasing supplies. Solution? An alternative currency, which I’ll call “HospitalBux”, which are redeemable for services at the local hospital.

The local grocer’s sales are down and he’s throwing away unsold product, and he has difficulty paying his employees because of the poor sales. The hospital needs to stock its kitchen with foodstuffs. So, the hospital offers to trade foodstuffs for HospitalBux with the grocer, who then pays his employees partially in dollars and partially in HospitalBux, since they have no health insurance (the grocer couldn’t afford to offer it). The local plumber, who is self-employed and has difficulty affording insurance, agrees to an exchange of plumbing services (as needed) for HospitalBux, offsetting another expense for the hospital and giving the plumber a way to save for health services when he eventually needs them.

HospitalBux can be accumulated and never lose value (unlike dollars) since they’re exchanged for services rather than money- an appendectomy, for instance, will always cost 200 HospitalBux; a person could accumulate quite alot of HospitalBux over a working lifetime, and be assured of meeting their medical needs in retirement. HospitalBux are also insured by a private insurance company, in the event the hospital goes out of business.

Other hospitals in the region set up similar HospitalBux arrangements, and these hospitals set up an exchange mechanism between themselves, allowing HospitalBux to be spent at a number of hospitals. This saves each individual hospital the expense of having to purchase and maintain equipment and hire specialists to cover every single medical need, since hospitals can now share both services supply and patient demand.

Other businesses in the area accept payment for goods and services in HospitalBux, either because they will save and use them themselves, or because other people accumulate and save them and will trade dollars for them.

As we can see, it’s actually a fairly straightforward proposition to set up a new currency. One can see the benefits of such a system; one can also see how such a currency could compete with the dollar, because it never loses value (in other words, there is no inflation).

Would “HospitalBux” be a viable currency? There’s no way to know, except to try it against other alternative currency models and see which functions best in the long run. As always, competition reveals which concepts work best and which fail.

There’s a problem we encounter, though: legal tender laws. Once a debt is accumulated, that debt can only be satisfied with legal tender. Taxes and government fees must be paid in legal tender, as well as wages and salaries of employees. This means that no other currency could genuinely compete with the dollar, since every business and every individual must have dollars, regardless of the faults of the dollar or the superiority of other currencies.

The subject of competition brings us to part of the explanation of why the United States Constitution mandates gold and silver: More than two thousand years of currency practices had shown that pure gold and silver coins, impressed with a government seal guaranteeing weight and purity, were the most viable form of money.

Even in 1789, competing currencies were a fact of life. Whiskey, for example, was more common than the dollar as a rural currency, which inspired the Whiskey Tax. Even at the turn of the 20th century (and after the passage of the first legal tender laws), competing currencies were still in use in some manner. One need only look at a Sears and Roebuck catalogue of that era (I have several in my collection) to see this: Paper, coin, bullion, and postage stamps were all accepted by Sears as payment.

As with anything else, competition can improve the dollar. If people prefer commodity-based money over a dollar which has no intrinsic value, and the federal government were barred from taking anti-competitive actions against other currencies (legal tender laws, for example), then the federal government would be left with only two options: Take actions to make the dollar more desirable, or let the dollar fail. On the other hand, if alternative currencies are a bad idea and the current management of the dollar is the best monetary policy, then competition would bear that out, too.

Ron Paul, the greatest champion of ending the Fed, favors currency competition to make the Fed irrelevant over ending the Fed immediately.