Quantitative Easing

For those who watch the news, you’ll hear the term Quantitative Easing (QE) thrown around now and then when they talk about the central bank’s monetary policy.One of the most significant issues caused by a recession is illiquidity and the drying up of credit. In 2008, the central bank started experimenting with ways to create liquidity without creating significant inflation—their solution is Quantitative Easing (QE).QE is a form of unconventional monetary policy in which the central bank prints money and then uses it to purchase private assets (stocks, bonds, mortgage-backed securities, etc.) to stimulate the economy with liquidity.Conceptually, the government purchases illiquid assets during a recession to stimulate the economy with the goal of selling them back to the private market before the next downturn. Unfortunately, this experiment concept isn’t going that well because the central bank has been purchasing WAY more than they have been selling back.This type of monetary policy doesn’t affect inflation in the short term because they exchange one asset for another—it is an accounting trick. The inflationary danger comes when the government unwinds its purchases—assets that appreciate while owned by the government will cause inflation to go up when they are sold back to the private market.Since 2008, the central bank has increased its assets from $900 billion to more than $8 trillion today—this means that they purchased $7 trillion in assets from the private market to prop up asset values and are holding a $7 trillion time bomb.So long as the government tapers the unwinding over a 5-7 year period starting now, I do not believe the inflation will be as significant. However, if the central bank continues to kick the can down the road by recklessly adding to its balance sheet, our country may have a crisis on its hands in the foreseeable future. I don’t think that there is an immediate danger of inflation caused by unwinding QE, but it will eventually hit the fan if they continue playing with debt in this way.So, when the news is talking about the Fed continuing or discontinuing its asset purchases, you’ll know they are talking about QE.