For many who have been listening to news reports on Quantitative Easing, it seems lofty to think of a Federal Reserve putting billions of dollars into circulation every single month. The images of greenbacks flying off the printing pass and going into the hands of Americans seems bizarre. Who gets this imaginary money and how does it end up into circulation? It’s actually very important to understand quantitative easing, and it’s potential impact on the U.S. economy, because currently it is one of the largest market shaping stimuli in today’s economy. Essentially, Quantitative Easing is a program instituted by the Fed, where the Fed “buys” assets from commercial banks and other financial institutions. The assets they are buying is different forms of debt including Treasury bills/notes/bonds and Mortgage Backed Securities. As defined by Wikipedia, quantitative easing is: “an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective.”
How Does Quantitative Easing Create More Money?
As the central banks implement Quantitative Easing through the process of buying bonds and buying mortgage backed securities, it is a digital transfer of monetary funds, very much like a child playing with an imaginary checkbook. The Fed essentially writes an imaginary check for a real thing (Treasury Bond). Thus, money is created. Every time that occurs a predetermined quantity of money is injected into the economy.
What Does Quantitative Easing Do For The Economy?
Every single time the Fed creates money by purchasing Treasuries and Mortgage Backed Securities it lowers interest rates and increases the amount of money circulating in the system. As wiki puts it: “Quantitative easing increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield.” However, the interest rates have been nearly at 0% and have been for some time now. So now, whenever the Fed purchases these assets, it’s merely increasing the quantity of money, because it can no longer influence the price of money.
What’s The Price of Quantitative Easing?
Quantitative Easing and monetary stimulus does not come without a price. The fed did not have the money to purchase the assets, the money was create out of thin air. It’s essentially like hacking into a bank and adding a few zeros to your account balance. Voila! Extra money. The implications…banks and corporations are benefiting from the newly printed money, and new asset class bubbles are forming similar to the housing bubble that popped in 2007-2008. The ordinary American is suffering from lower interest rates because it is having a negative impact on savers, and pensions. Who can really save for retirement when interest rates are so low on “safe” investment vehicles. Additionally, the risk of hyper inflation is a reality. With the vast creation of new money, the control over that new money could easily slip through their fingers creating a major economic problem.
As an investor the only thing you can do to protect yourself is to identify “safe havens” for protecting the purchasing power of your wealth. One excellent option is a diversified portfolio in gold and silver. Precious metals retain value in the face of inflation and provide an amazing amount of protection for your dollar based portfolio. For more information on QE and portfolio diversification, speak to a Redhawk Wealth Advisor near you today.