Monthly Archives: November 2010

Uneasy about Quantitative Easing

Quantitative Easing is a method of artificially injecting money into an economy. In the US, this occurs when the Federal Reserve creates money out of thin air and uses it to purchase US Treasury Bonds. This is done in order to raise the price of Treasuries, thereby lowering their yield. A lower yield on US Treasuries will drive interest rates lower across the board and, if all goes as planned, will spur increased lending and economic growth.

However, this practice has been widely criticized by foreign leaders. Because Quantitative Easing devalues US Treasury holdings in foreign countries, these same nations may be more reluctant to purchase US debt in the future. That would be a big problem for the world.

If you can look past the overtly doom-and-gloom attitude prevalent on the site, Zero Hedge gives a very nice overview of this issue.

I see the outcomes are almost binary: either this works or it doesn’t.

If this gamble works, business will pick up, unemployment will drop, tax revenues will flow again to the states and federal government, the sun will continue to rise in the east and roses will bloom in the spring.

If the gamble fails? There we can envision an enormous devaluation event for the US dollar and the Fed having to choose between defending the dollar (via rising interest rates) or preventing the federal government from a fiscal emergency brought about as a consequence of rising interest rates. And by “fiscal emergency” I mean being forced to slash expenditures by as much as 50% in order to service rapidly escalating interest carrying costs on the short term portion of the fiscal debt load.

As you can see, I’m uneasy about Quantitative Easing.