Quantitative Easing Round Two (QE2).

Today I will be writing about the second round of quantitative easing (QE2) instituted by the Federal Reserve. While QE2 might sound very daunting and complicated at first it’s really quite simple when explained correctly. I’ll start at the beginning, when the congress wants to raise money it tells the US Treasury Department, which sells US Treasury bonds to raise the money. Lets remember that the Federal Reserve is in charge of raising and lowering the interest rate and as a result stimulating the economy. Simply put, the Federal Reserve is in charge of regulating the economy. So over the last couple of years the fed has lowered interest rates almost as low as they possibly can but still want to get them lower. Lets also remember that the fed is also in charge of how much money is printed up each year. So with those factors established lets move on to what QE2 actually is.

Stated simply, QE2 is the Federal Reserve buying US Treasury bonds (the fed will be buying six billion dollars of bonds over seven months). Although that may seem strange, remember that when the fed doesn’t have any money on hand to but those bonds so they print up money instead and but the treasury bonds with the printed money. Although the US Treasury Department will eventually have to pay them back that won’t be for quite a while and that’s not the point of QE2 anyhow. The main point of QE2 is to print up money with out actually calling it the printing up of money because the printing of money is a pretty desperate economic last resort, even if you are a world super power. One even stranger thing about QE2 is that instead of buying the treasury bonds from the US Treasury Department, the fed is buying them from Goldman Sachs. If that seems strange to you then your not alone, if the government is going to print money it might as well put it in the hands of the US citizens that need it. Or at least buy the bonds from the US treasury department, not from Goldman Sachs where they will probably not get a very fair price.

The reason they are instituting the second round of QE2 in the first place is to drive interest rates lower in the long term and try to get healthy levels of inflation, instead of the deflation that we’re stuck in currently. This just doesn’t make any sense at all, it seems like every thing is higher this year than it was last year. The only place there is deflation is in luxury items like computers and jewelry. In my opinion the fed is going to far with this second round of QE2 and they might very well end up causing to much inflation. In my next blog post I will talk about what I think of Obama’s economic policy since he has taken office. Until then this has been Ian Mundy signing out.