Many, many people talk about the government “printing money”, but very few understand what that even means. I’m not going to pretend that I know all the ins and outs, but I’ve tried to get to the facts at lot more than most and it’s certainly not as simple as many think. One of those is that major inflation has NOT resulted, at least yet, as predicted by so many from the rounds of Quantitative Easing by the US government since the Great Recession. The Federal reserve held $800 Billion in treasury notes before beginning to buy more at the end of 2008; by June 2010 that figure had grown to $2.1 Trillion. As of October 2014 the amount was $4.5 Trillion. As far as the possible effects go, I think Wikipedia has a very fair and balanced explanation:
Quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated and too much money is created by the purchase of liquid assets. On the other hand, QE can fail to spur demand if banks remain reluctant to lend money to businesses and households. Even then, QE can still ease the process of deleveraging as it lowers yields. However, there is a time lag between monetary growth and inflation; inflationary pressures associated with money growth from QE could build before the central bank acts to counter them. Inflationary risks are mitigated if the system’s economy outgrows the pace of the increase of the money supply from the easing. If production in an economy increases because of the increased money supply, the value of a unit of currency may also increase, even though there is more currency available. For example, if a nation’s economy were to spur a significant increase in output at a rate at least as high as the amount of debt monetized, the inflationary pressures would be equalized. This can only happen if member banks actually lend the excess money out instead of hoarding the extra cash. During times of high economic output, the central bank always has the option of restoring reserves to higher levels through raising interest rates or other means, effectively reversing the easing steps taken.
Increasing the money supply tends to depreciate a country’s exchange rates relative to other currencies, through the mechanism of the interest rate. Lower interest rates lead to a capital outflow from a country, thereby reducing foreign demand for a country’s money, leading to a weaker currency. This feature of QE directly benefits exporters living in the country performing QE, as well as debtors, since the interest rate has fallen, meaning there is less money to be repaid. However, it directly harms creditors as they earn less money from lower interest rates. Devaluation of a currency also directly harms importers, as the cost of imported goods is inflated by the devaluation of the currency.
The bottom line is that it’s a very involved and complicated process and that oversimplified statements about it should be dismissed! It does NOT automatically mean devaluation of you currency! Money is the oil of the economic engine and sometimes you need more oil to keep the motor running smoothly! I’m not saying the Fed did everything right, the end result is not known yet, but all the Monday Morning Quarterbacks I hear bitching about it are getting on my nerves.
A couple of nights ago, I was listening to some talk radio on the way home from a gig, and a seemingly very knowledgeable woman came on to talk about all of this. When the subject became infrastructure, she started making even more sense. Where has all this QE money gone? Well, the Fed buys bonds from so-called “Primary Broker-Dealers” of the NY Fed, according to their own site:
Bank of Nova Scotia, New York Agency, BMO Capital Markets Corp., BNP Paribas Securities Corp., Barclays Capital Inc., Cantor Fitzgerald & Co., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Daiwa Capital Markets America Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc., Jefferies LLC, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Mizuho Securities USA Inc., Morgan Stanley & Co. LLC, Nomura Securities International, Inc., RBC Capital Markets, LLC, RBS Securities Inc., SG Americas Securities, LLC, TD Securities (USA) LLC, UBS Securities LLC.
These organizations sell bonds to the Fed, and funnel the money into the real economy, so it ends up in all kinds of areas. The woman on the radio had a suggestion: if there is another round of QE, invest directly in infrastructure programs! Bridges, roads, telecom….. You know, it’s our money, and putting it there has two great effects: improving our land, and putting cash in the hands of people who will spend it, instead of adding it to a stash of dough just sitting in a bank account. In a way it’s a miracle that this hasn’t really happened yet as America’s bridges crumble!
The other day I watched a debate between Bernie Saunders and Rand Paul that might have shown a glimpse of the problem we have in Washington. It was about a bill to make sure that seniors in the US have proper nutrition. Saunders explained that there are many who are in full-time institutions because they can’t feed themselves, which could be prevented with far simpler methods, like daily checkup at home by someone. Paul responds by saying “Only in Washington can someone suggest we can save money by spending!”. Even when Saunders responds with factual examples, the mindless rhetoric from the ‘right’ continues. It’s exactly such short-sighted thinking that is bringing us down in my opinion. Rand Paul asks why, if spending $2 Billion saves us money, why don’t we spend $20 Billion and save even more, is there no limit?! Mister Saunders answers: the limit is when seniors don’t go hungry. How is it possible we have such numbskulls ‘representing’ people?