And Now a Financial Message from An Astute GAW reader
Everywhere you turn in the financial media lately, you hear people talking about "quantitative easing."
What Does Quantitative Easing Mean?
A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
It means creating massive amounts of money out of thin air with the hope of getting the economy back on track.
Economists — at least some economists — believe that when you want to improve the economy you need to get more money out there, circulating around.
The problem is, there are only a few ways to do this.
One way: Have the government spend money by, say, paying people to build roads or install solar panels. That would get money into people's pockets.
But we already did that, with the big stimulus last year — and it's a politically unpopular idea at the moment, so Congress isn't about to do it again.
Option two: The Federal Reserve can cut interest rates, which makes it cheaper to borrow. So people borrow more, buy more, build more new things.
But we already did that, too. The Fed lowered interest rates all the way down to zero. Can't go any lower.
For almost all of modern economic history, policy makers have used those two tools — government spending or Fed interest rate cuts. That's it. But with this financial crisis, for the first time in U.S. history, those two tools won't work.
Enter quantitative easing, an idea the Fed is borrowing from Japan, which used it a decade ago when it had a similar problem.
It works like this.
A big bank — Bank of America, say — has $50 billion in government bonds. They'd sell those bonds if anyone would pay enough for them, but nobody is willing to pay that much. So the bank just holds on to them.
With quantitative easing, the Fed comes along and says, "Hey, Bank of America, we'll buy those bonds for a little more than anyone else is willing to pay." Bank of America says, "OK, great, send us the money."
This is where the Fed gets to use central-bank magic. They pay for that $50 billion purchase in new money. They just invent it. That's what the Fed — but nobody else — gets to do.
So now Bank of America has $50 billion they need to do something with. The Fed is hoping that Bank of America will decide to lend that $50 billion to companies and people to invest or spend. That stimulates the whole economy.
It sounds great. Create new money, get it out there, everyone wins. But — of course there's a but.
Nobody really knows if this works. It's still really controversial among economists. It's only been tried a few times and, as in the case of Japan, hasn't had the greatest results.
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This here was sent to Goliath with this title in email, "Some Econ 101 for Golaith to post for the readers to ponder"
Me not too bright. SO maybee some analysists out there can explain this here to Goliath. Is it true or maybe some kind of dad blasted financial pornographty?
What Does Quantitative Easing Mean?
A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
It means creating massive amounts of money out of thin air with the hope of getting the economy back on track.
Economists — at least some economists — believe that when you want to improve the economy you need to get more money out there, circulating around.
The problem is, there are only a few ways to do this.
One way: Have the government spend money by, say, paying people to build roads or install solar panels. That would get money into people's pockets.
But we already did that, with the big stimulus last year — and it's a politically unpopular idea at the moment, so Congress isn't about to do it again.
Option two: The Federal Reserve can cut interest rates, which makes it cheaper to borrow. So people borrow more, buy more, build more new things.
But we already did that, too. The Fed lowered interest rates all the way down to zero. Can't go any lower.
For almost all of modern economic history, policy makers have used those two tools — government spending or Fed interest rate cuts. That's it. But with this financial crisis, for the first time in U.S. history, those two tools won't work.
Enter quantitative easing, an idea the Fed is borrowing from Japan, which used it a decade ago when it had a similar problem.
It works like this.
A big bank — Bank of America, say — has $50 billion in government bonds. They'd sell those bonds if anyone would pay enough for them, but nobody is willing to pay that much. So the bank just holds on to them.
With quantitative easing, the Fed comes along and says, "Hey, Bank of America, we'll buy those bonds for a little more than anyone else is willing to pay." Bank of America says, "OK, great, send us the money."
This is where the Fed gets to use central-bank magic. They pay for that $50 billion purchase in new money. They just invent it. That's what the Fed — but nobody else — gets to do.
So now Bank of America has $50 billion they need to do something with. The Fed is hoping that Bank of America will decide to lend that $50 billion to companies and people to invest or spend. That stimulates the whole economy.
It sounds great. Create new money, get it out there, everyone wins. But — of course there's a but.
Nobody really knows if this works. It's still really controversial among economists. It's only been tried a few times and, as in the case of Japan, hasn't had the greatest results.
*************************************************************
This here was sent to Goliath with this title in email, "Some Econ 101 for Golaith to post for the readers to ponder"
Me not too bright. SO maybee some analysists out there can explain this here to Goliath. Is it true or maybe some kind of dad blasted financial pornographty?
Comments
These three sentences created in my mind, an overall concept that says quantitative easing was unsuccessful in Japan and quantitative easing is used to improve the overall economy.
"Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity."
"believe that when you want to improve the economy"
"It's only been tried a few times and, as in the case of Japan, hasn't had the greatest results."
The purpose of using quantitative easing in Japan was to fight deflation. It didn't work. If it is used in the US, where we are not experiencing deflation, what exactly is it expected to accomplish, what would it do?
The Federal Reserves policies meant to address the financial crisis in 2008 were also a form of quantitative easing. Did those policies prevent a complete collapse? It added "new assets and new liabilities without sterilizing" them with corresponding subtractions. The UK used quantitative easing to alleviate its financial crisis.
I did find that some believe if overdone it could trigger inflation or hyperinflation. Some argue that since it would be used to ease credit markets that wouldn't happen.
any money declared by a government to be legal tender.[1]
state-issued money which is neither legally convertible to any other thing, nor fixed in value in terms of any objective standard.[2]
money without intrinsic value.[3]
The term derives from the Latin fiat, meaning "let it be done", as the money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.
This along with reductions in gold supplies will continue to drive gold prices up until that bubble bursts too.
Of course, I also believe that one day mankind will land on the moon, so what do I know?
Remember, when we have gold, we do so because we live in fear. When we have no gold, we live in danger.