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QE is an acronym for "Quantitative Easing". What in the heck is that? According to the Wikipedia, one of my favorite sites, "Quantitative easing (QE) is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government's own bonds to stabilize or raise their prices and thereby lower long-term interest rates. This policy is usually invoked when the normal methods to control the money supply have failed, e.g. the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero."
Well that's alarming. It sounds like it is a "Hail Mary" kind of move to me.
Wikipedia goes on to say ""Quantitative" refers to the fact that a specific quantity of money is being created; "easing" refers to reducing the pressure on banks."
A September 28, 2010 article in the BBC News website says "Lower interest rates encourage people to spend, not save. But when interest rates can go no lower, a central bank's only option is to pump money into the economy directly. That is quantitative easing (QE)." Later in the article it states, "The way the central bank does this is by buying assets - usually financial assets such as government and corporate bonds - using money it has simply created out of thin air." We sometimes hear this being referred to as "printing money" which of course in this digital age is not actually necessary. No actual printing presses, ink or paper are harmed during this delicate process.
The underlying premise is that with more money out there the banks will be more likely to lend, credit easier to get and people and businesses more likely to spend with the end result of stimulating the economy.
Hmmm...I wish I could just add a couple of zeros to my bank account and use it to pay off my house, buy a new car, or lavish Christmas gifts! Oh wait. I can't. That would be fraud; or theft. Too bad, so sad.
Well QE2 was announced a few weeks ago, so that means there must have been a QE1. I had a harder time finding definitive info on that but it looks like that occurred in late 2008 and into 2009. I guess that didn't work, so they decided to try again. which will be done over the next six months and put about $600 billion more dollars into play.
Many countries were not happy about the Federal Reserve Bank announcement. Weeks before it was official, there were a flurry of warnings that this would cause a currency war (I'll blog on that another time) and started loud international murmurings. (UK, Brazil, China, France, Germany, China).
I've even been reading articles by economic experts who don't think this will work. I've attached links to a few for your reading enjoyment.
- Keith McCullough in CNN article
- Campbell Harvey in The Street
- Jeff Nielsen in The Street
- Paul Farrell in MarketWatch
What do you think?
Image: jscreationzs / FreeDigitalPhotos.net