Quantitative easing by the Federal Reserve means little

You may have heard that the United States Federal Reserve today announced a “quantitative easing” of $600 billion today.  This move is intended to help break the U.S. economy free of its negative vortex of scared consumers and scared businesses.  Unfortunately, this “easing” is not going to do anything tangible.  Instead, the announcement by the Federal Reserve will operate more at the psychological reassurance level.  With interest rates already near-zero percent, people and businesses just are not borrowing money.  When interest rates are very low it tends to increase the money supply as there is an increased demand in borrowing.  Banks can lend out 90% of the money they take in with the other 10% having to remain in reserves.  But the economy still is not really budging that far upward.  Certainly the economy is not going up enough to improve the unemployment situation.

So now the Federal Reserve is offering to buy government securities.  The idea is that the purchases will introduce cash into the economic system.  This makes money even cheaper because flat demand with increased supply leads to a lowering of the value of everything.  But, as I described just a moment ago, low interest rates aren’t moving the economy.  But, you might say, $600 billion is a huge amount of money.  But it isn’t.

The Fed has said that it will stop the easing by the end of the second quarter of next year.  That is a paltry $75 billion per month between now and then.  That works out to an increase in the money supply of 0.86% per month.  That compares to a normal expansion of available money of 0.55%.  In other words, we aren’t even talking about an expansion above 1.o%!  So how is that going to move the money supply?  Would you be excited at work for an 86 cent increase in pay on every $1,000 you earn?  Clearly not.

The primary effect of the announcement of the quantitative easing is likely hoped to be P.R. driven – that is, done for public relations.  By announcing the quantitative easing the Fed is hoping to signal to investors and other interested parties that the Fed is not going to let the economy slip from this point.  That is potentially valuable.  However, I feel this is of a very minor value.

So we are still sitting in the midst of the “game of chicken” awaiting a slow recovery, or a miracle…………or a disaster.  Isn’t this fun?

Jason