Tuesday, April 1, 2014

Quantitative Easing

Quantitative Easing, don’t you love that term?  It is meant to be psychic balm.

The idea behind it is that the central bank can buy Treasury Notes and mortgage-backed  securities and thus increase their prices and drive down long term interest rates. The low rates are supposed to enable firms to borrow and provide employment.
      In 2012, the Bank of England (BOE) issued a report that said that the Bank of England’s policies of quantitative easing (QE)– similar to the U.S. Fed’s – had benefited mainly the wealthy.
Specifically, it said that its QE program had boosted the value of stocks and bonds by 26 percent, or about $970 billion. It said that about 40 percent of those gains went to the richest 5 percent of British households.
        Many said the BOE's easing added to social anger and unrest. Dhaval Joshi, of BCA Research  wrote that “QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it."
     "The question is whether putting more profits into the hands of the top 5 percent will really generate jobs for the rest of America. So far, the evidence is not promising."
Robert Frank, CNBC

According to an article in Wikipedia, “Central banks in most developed nations (e.g., the United Kingdom, the United States, Japan, and the EU) are prohibited from buying government debt directly from the government and must instead buy it from the secondary market. This two-step process, where the government sells bonds to private entities which the central bank then buys, has been called 'monetizing the debt' by many analysts.  The distinguishing characteristic between QE and monetizing debt is that with QE, the central bank is creating money to stimulate the economy, not to finance government spending."  Got that distinction?
     This is double-speak, as if government spending in recessions does not stimulate the economy. The term “monetizing the debt” is meant to be a take-out stopping further thought. Young economists are taught that monetizing the public debt is bad.  Further, they are taught that helping banks is good and helping people without jobs is bad.  It makes labor lazy, but not bankers.  Got that?

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