Quantitative Easing is a form of monetary policy concocted during the Great Financial Crisis on November 25, 2008. It’s a strategy that allows a central bank to purchase long-term securities, bonds, or mortgage backed securities in order to inject artificial liquidity into the market and encourage more buying and lending. This liquidity injection serves to lower interest rates by bidding up fixed-income securities & expanding the Fed’s balance sheet (now sitting at a cool 23.3 trilly).
An increase of money supply provides banks with more liquidity to lend out and illuminates the elephant in the room: interest rates are essentially zero. With rates so low, with the possibility of going negative, the Fed can target specific assets to buy at virtually no risk. Since the genesis of Covid-19, the government announced a QE program injecting north of 700 billion, then extending the plan in June 2020 by committing to purchasing $80 billion worth of treasuries per month and $40 billion worth of mortgage backed securities. This type of hasty monetary policy is implemented when rates are declining to zero because the central banks are running out of options to convince the herd we’re still going up and right on the chart.
Guess what happens when the Fed pumps money into long term securities? It creates inflation. all of the sudden your milk, beef and eggs at the grocery store go up in price and your phone bill starts looking like your car payment. While this clown show ensues, are we creating anything of substance? short answer: no. since we’re not creating anything new and there’s really no significant economic growth, we get stagflation.
[the -flation blog is coming, standby.]