QE Explanation Redux

This morning I saw on Twitter an exchange between a financial writer, an underground economist and an  abundant world economist.  These are descriptions of themselves.

There discussion revolved around whether Quantitative Easing is inflationary  or not.

Below is a repost of what I have put up on this site several times before that explains the operational mechanics of Quantitative Easing.

As you now know it is a simple asset swap of a security that earns interest for dollars.

It is in effect taking money out of the economy as there is no longer any interest earned.  Given QE is often undertaken in a poorly performing economic environment that tends towards recession – do you really think taking money out of the economy is a good idea?

It is an event framed as a stimulatory measure but in effect, the opposite occurs.  It is crystal clear in the operations.

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3 responses to “QE Explanation Redux

  1. As an engineer: Trading dollars, which pay no interest, for securities, which pay essentially zero interest, should do nothing except make the National Debt number look better to those who care.

  2. but doesn’t qe reduce interest rates and thus make it cheaper to borrow, stimulating economic activity?

    • QE buying back bonds does push down long term interest rates – emphasis on long term. It is worth keeping in mind that what determines long term rates is the series of short term rates.

      At best though the impact of interest rates are unclear. “They may not even be negative (for a rise) or positive (for a fall) depending on rather complex distributional factors. For example, remember that rising interest rates represent both a cost and a benefit depending on which side of the equation you are on. Interest rate changes also influence aggregate demand – if at all – in an indirect fashion whereas government spending injects spending immediately into the economy.”

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