We often discuss quantitative easing (QE) in regard to Federal Reserve (FED) decisions and how it affects our economy. And, while our overall focus is on the long-term, we’ve found it necessary to consider short-term applications as well, since prices tend to fluctuate violently with QE announcements.
Something that’s become abundantly clear in recent days, however, is that there are a lot of people out there who still don’t know what QE is. Perhaps they’re just realizing the plight of our economy. Maybe they’ve recognized the problems all along, but simply never considered what QE really is. With this in mind, we’re going to take a look at quantitative easing, define it, and then examine the different measures of quantitative easing we’ve seen. It’ll likely take several days to round off our study, but we expect it’ll be a great resource for our readers’ educational purposes, and to pass on to others as you attempt to educate them about the condition of our economy and how the FED affects it.
Today we’ll start with a simple definition. What, exactly, is quantitative easing, or QE as it’s become called? Let’s start simple.
A short and simple GI definition of QE would be: Printing currency for the purpose of increasing the money supply in an effort to stimulate the economy.
Of course, this is very simplistic and accepts the surface purpose. In the short-term it has shown some ability to be affective. But, as we’ve pointed out in recent articles, the overarching goal is not the benefit of the people, but to consolidate wealth among central banks.
Because of how QE is implemented, it’s clear that only a central bank printing a fiat currency could pull it off. If the currency is backed by a hard asset (gold, silver) then the bank is restricted to printing only up to the amount backed by the asset. In such a scenario QE, at least as we know it today, is impossible. The money supply cannot be increased except in two cases: 1) the hard assets are increased or 2) the bank has yet to print enough money to represent current assets.
However, as noted above, printing the cash is a very simplistic definition of QE. The reason for this is that there needs to be a means of circulating the cash once it’s printed. The circulation of cash, meaning the rate at which it changes hands through various transactions, is called the velocity of money (VOM). Simply printing the cash and letting it pile up won’t do much. The cash needs to be made available. It has to be infused into the economy in such a manner that will promote its circulation or velocity.
We’ll discuss this in more detail throughout the week. For today, however, we’ll leave you with this video we’ve posted before. It’s a great introduction to QE.
For your prosperity,
J. Keith Johnson
The Gold Informant