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I am not a financial professional, and this is just my amateur understanding of the convoluted logic of QE. Most people probably don't even know what QE is, so hopefully this will be useful to someone.
QE stands for "quantitative easing," which is Fed speak for money creation. How does the Fed (Federal Reserve bank) create money, and why does it create money?
The Fed was created in 1913 and its job has been to prevent bank runs, and to control the money supply (not too much, not too little, just the right amount of money in circulation).
(Please don't get upset if I don't get every detail perfect, I am going on memory and this is supposed to be a rough outline).
Then we had the 2008 crisis, and the Fed decided it need to do more than just prevent bank runs and control the money supply. It also needed to prevent major crashes.
So we had the big bank bailouts that we all loved so much. And the Fed began doing QE on a massive scale, supposedly to keep the economy afloat.
What is QE? The Fed creates money by buying bonds -- government bonds, corporate bonds, mortgage-backed securities. Now, normally bonds are bought by private investors, because they think the government or company selling the bonds is worth something. They think owning the bonds will pay off.
But the Fed is not a private investor. What is the Fed? Well no one really knows, it is not part of the government but not exactly private either. Well that's complicated. Federal Reserve banks are privately owned, but the central "Fed" bank isn't.
Ok, so ... the Fed buys tons and tons of bonds, of various kinds. It doesn't care if these bonds are a good or bad investment, just buys whatever it wants. Based on what? Well maybe it prefers bonds issued by banks or corporations it likes for some reason. This is an example of crony capitalism.
Now, tons of bonds have been bought up by the Fed. That reduces the supply of bonds, which raises the price. The price of bonds is inversely related to their yield, so as the price of bonds rises, the yield (interest) lowers. That's how we got ultra low interest rates. At least that's one reason.
The Fed believes low interest rates are good for the economy, since they encourage businesses to borrow money, and consumers to buy houses and cars. Low interest also forces everyone to invest in risky assets (equities) thereby keeping the stock market blazing. And low interest makes it less impossible for the government to pay its debt.
So all that is good, right? The Fed keeps the economy humming along, instead of periodically crashing and burning and leaving us in a depression.
That is what mainstream news, and especially Democrat-leaning news (which is most of the mainstream) wants you to think. Interfering with the "natural" economy is perfectly fine, because experts are smarter than "nature." No need to worry about unintended consequences resulting from tampering with natural complex systems.
Independents, conservatives, libertarians, might see it differently. They have been predicting out of control inflation, for years. Creating nearly infinite amounts of money has to eventually inflate the money supply, and when there is too much money in circulation that contributes to inflation. There are other factors, like low supply, but it's multiple factors, not just one.
So now, the Fed promises to start "tapering." That is Fed speak for decreasing the bond purchases, or QE. NOT stopping the purchases, NOT selling any bonds, just decreasing the rate of increase. This is to, hopefully, prevent inflation from spiraling. Will it cause interest rates to rise? I don't know, but if it does the stock market could suffer, and the Fed might react by turning QE up again full force.
QE stands for "quantitative easing," which is Fed speak for money creation. How does the Fed (Federal Reserve bank) create money, and why does it create money?
The Fed was created in 1913 and its job has been to prevent bank runs, and to control the money supply (not too much, not too little, just the right amount of money in circulation).
(Please don't get upset if I don't get every detail perfect, I am going on memory and this is supposed to be a rough outline).
Then we had the 2008 crisis, and the Fed decided it need to do more than just prevent bank runs and control the money supply. It also needed to prevent major crashes.
So we had the big bank bailouts that we all loved so much. And the Fed began doing QE on a massive scale, supposedly to keep the economy afloat.
What is QE? The Fed creates money by buying bonds -- government bonds, corporate bonds, mortgage-backed securities. Now, normally bonds are bought by private investors, because they think the government or company selling the bonds is worth something. They think owning the bonds will pay off.
But the Fed is not a private investor. What is the Fed? Well no one really knows, it is not part of the government but not exactly private either. Well that's complicated. Federal Reserve banks are privately owned, but the central "Fed" bank isn't.
Ok, so ... the Fed buys tons and tons of bonds, of various kinds. It doesn't care if these bonds are a good or bad investment, just buys whatever it wants. Based on what? Well maybe it prefers bonds issued by banks or corporations it likes for some reason. This is an example of crony capitalism.
Now, tons of bonds have been bought up by the Fed. That reduces the supply of bonds, which raises the price. The price of bonds is inversely related to their yield, so as the price of bonds rises, the yield (interest) lowers. That's how we got ultra low interest rates. At least that's one reason.
The Fed believes low interest rates are good for the economy, since they encourage businesses to borrow money, and consumers to buy houses and cars. Low interest also forces everyone to invest in risky assets (equities) thereby keeping the stock market blazing. And low interest makes it less impossible for the government to pay its debt.
So all that is good, right? The Fed keeps the economy humming along, instead of periodically crashing and burning and leaving us in a depression.
That is what mainstream news, and especially Democrat-leaning news (which is most of the mainstream) wants you to think. Interfering with the "natural" economy is perfectly fine, because experts are smarter than "nature." No need to worry about unintended consequences resulting from tampering with natural complex systems.
Independents, conservatives, libertarians, might see it differently. They have been predicting out of control inflation, for years. Creating nearly infinite amounts of money has to eventually inflate the money supply, and when there is too much money in circulation that contributes to inflation. There are other factors, like low supply, but it's multiple factors, not just one.
So now, the Fed promises to start "tapering." That is Fed speak for decreasing the bond purchases, or QE. NOT stopping the purchases, NOT selling any bonds, just decreasing the rate of increase. This is to, hopefully, prevent inflation from spiraling. Will it cause interest rates to rise? I don't know, but if it does the stock market could suffer, and the Fed might react by turning QE up again full force.
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