Why quantitative easing isn’t printing money

I am no fan of Quantitative Easing, but few people today understand what the Central Banks are doing in this infamous strategy. A common refrain is that the US Fed is “printing money’. In fact that is an incorrect statement.

This article offers a simple and instructive example of the balance sheet transactions that take place between the US Federal Reserve and the banks in the process known as “QE”. It also helps to explain, why the ability to continue QE is not infinite nor creating the desired inflation the Bernank had hoped. The bottom line is that QE is a balance sheet swap with banks that boosts their notional reserves available for lending. But to increase spending and inflation though, two more things have to happen: customers have to want to borrow, and banks have to want to extend them credit. No appetite on either side means no increased loans = no money velocity = no inflation. We have already seen this dead end repeatedly in Japan over the past decade:

“The proof that QE is not inflationary can be seen in Japan. Japan ran a QE regime from 2001 to 2006, and yet is still in deflation. The reason their QE didn’t work is because even with interest rates at zero, nobody wanted to borrow. There was no demand for loans. Bank lending started falling on a year-on-year basis in November 1998 and was consistently negative until September 2005. Until the banks start to lend out the reserves, no money is created and no inflationary pressures build.”

See the balance sheet math given here: Why quantitative easing isn’t printing money and also see: How gold rallied for years on a ‘misunderstanding’.

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