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What Is Quantitative Easing And Why Should We Care?

October 27th, 2010 · 3 Comments
Econ 101 · Macroeconomics

(Technically, I think that the title should read “Should We Care” rather than “Why Should We Care.”) Check out my latest article over at the Huffington Post. Try not to focus too much on the fact that I could reeeaallly use a proofreader. 🙂

Tags: Econ 101 · Macroeconomics

3 responses so far ↓

  • 1 Dan L // Oct 27, 2010 at 9:11 pm

    Nice article. Of course, I don’t really know what quantitative easing is, so I don’t know how accurate your description was, but good job!

  • 2 Amarsir // Oct 28, 2010 at 2:10 am

    That read well and should be a good summary to those who want a little understanding of the terms thrown around.

    The thing is, with normal rate targeting I’m willing to look the other way a bit. But when the Fed has the specific goal of moving out cash for currencies, I can’t help but look at the whole picture. The number being thrown around right now is $100 billion / month in purchases. Federal deficit for fiscal 2010? $1.29 trillion, or $107.5 billion / month.

    So if the point of QE is to crowd out investments and force private capital to go to work elsewhere, I can’t see how that would work when as a whole we’re merely treading water. Not only has our current Fiscal policy not been a demonstrative success, it’s now counteracting the monetary policy. And leaving us with the net benefit of increased deficits and a money supply that has vastly outpaced productivity.

  • 3 Philipp // Oct 31, 2010 at 10:01 am

    Hey,

    nice article. But I have a question regarding the causalities in paragraph 4 (TOW you explain how the increased money supply effects the interest rate).

    The way you portayed it, the interest rate changes as a reaction to the money supply. So far, I follow. Then you explain, why, saying that the lower interest rates will make people want to hold more cash. Isn’t the causality the other way around? Because so far, the interest rate hasn’t changed and thus, consumers can’t react to it – by holding more or less money. On the other hand, what has changed is the money supply. There is now more money in the economy, that people DON’T want to hold, because their demand for transactionactional and speculative and whatever motives hasn’t changed (the Fed only bought some Treasuries). Thus they bring that extra money to the bank and this results in more credit offer and hence a lower price for borrowing, i.e. interest rates.

    I may have depicted a very macro-textbook-version of the story, but that way, the causalities make sense to me. Or may I have missed something?

    Please enlighten me.

    Love your site.

    Phil

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