May 19, 2013
Why QE3 Won’t Jump-Start the Economy—and What Would
Posted on Sep 22, 2012
By Ellen Brown, Web of Debt
This piece first appeared at Web of Debt.
The Fed’s announcement on September 13, 2012, that it was embarking on a third round of quantitative easing has brought the “sound money” crew out in force, pumping out articles with frighting titles such as “QE3 Will Unleash’ Economic Horror’ On The Human Race.” The Fed calls QE an asset swap, swapping Fed-created dollars for other assets on the banks’ balance sheets. But critics call it “reckless money printing” and say it will inevitably produce hyperinflation. Too much money will be chasing too few goods, forcing prices up and the value of the dollar down.
All this hyperventilating could have been avoided by taking a closer look at how QE works. The money created by the Fed will go straight into bank reserve accounts, and banks can’t lend their reserves. The money just sits there, drawing a bit of interest. The Fed’s plan is to buy mortgage-backed securities (MBS) from the banks, but according to the Washington Post, this is not expected to be of much help to homeowners either.
Why QE3 Won’t Expand the Circulating Money Supply
In its third round of QE, the Fed says it will buy $40 billion in MBS every month for an indefinite period. To do this, it will essentially create money from nothing, paying for its purchases by crediting the reserve accounts of the banks from which it buys them. The banks will get the dollars and the Fed will get the MBS. But the banks’ balance sheets will remain the same, and the circulating money supply will remain the same.
Since November 2008, when QE1 was first implemented, the monetary base (money created by the Fed and the government) has indeed gone up. But the circulating money supply, M2, has not increased faster than in the previous decade, and loans have actually gone down. (See chart below from Richard Koo, Nomura Research Institute.)
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