Friday, February 01, 2013

Quantitative Easing, My Ass(ets)

A slightly more complete answer to Wolfgang and the others if any following such matters. I ragged on WB for predicting something untoward at the gas pump (inflation?), allegedly due to Bernanke's policy of quantitative easing (QE).

I thought I ought to remind myself of what QE is: The Fed buying financial assets like government bonds and mortgage securities. What should we expect from that and why?

Well the supply of nice financial assets is decreased, and so their price goes up, which means (and I always have to think this part through) that interest rates go down.

The why part is even easier. If the problem is insufficient demand (and it is), then too many are saving, and too few are spending. Of course interest rates are already near zero, but now it's even harder to find places to stash money. That makes assets more attractive by comparison, and drives up their prices. Ben wants to drive up asset prices, but he really wants make people spend that money. You might as well buy that house, car or yacht right now, because you sure as heck can't earn any interest on your money. It's even better if people can develop some fear of inflation - a powerful incentive to buy now what's going to be more expensive tomorrow.