Bailout for Greece - not trusted by the markets? Greek contracts framework for future fraud?
Feb 07

Quantitative Easing for Dummies

Let’s just for a moment dream a bit and pretend you are the head of a central bank, say the Federal Reserve - or even better, the owner of such an institute.  Speaking of which, did you know that quite a few central banks are privately held institutes?  In that sense, there is not much ‘federal’ about the Federal Reserve, and if some indications are right, it’s not a ‘reserve’ either…!.  Mull over this for a bit: the most influential countries have handed over the right to print money to some privately held institutes, can you believe that?

So there you are with this central bank of yours in your back yard.  That must give you a fuzzy warm feeling, don’t you think? This is what you do to get richer still:

  • First of all, by playing around with varying interest rates, you create what now is known as ‘economic cycles‘.
  • These interest rate induced cycles are needed for your business model, otherwise things never would turn for the worse as gravely as they do - but only so for those ‘out there’ mind you.
  • When things have turned really bad, your government - or rather: your client - must increase spending, hence she is forced to lend more money, lots of it!  Good for you that your government turned that monopoly over to you earlier on, isn’t it?
  • You’ve reduced interest rates to nil or almost so, and you start to provide your client (a.k.a. government) with money, lots of it.  As you’re not into phylanthropy, you want collateral from your client, so you ‘purchase’ government paper and bonds at the current rate.
  • The money you use to ‘pay’ for this ‘purchase’ is what your client gets to fund his increased spending.
  • Since you don’t have these amounts of cash stuffed away somewhere, you just print new money out of nothing (’ex nihilo’).
  • This increase in the amount of money that is in circulation - or rather lifting the restrictions on the amount of money that is in circulation - is what is called ‘quantitative easing‘.

Bottom line:

Quantitative Easing is printing new money (i.e. creating new cash out of nothing) and lending it for interest.  Your client (a.k.a. government)  one day needs to pay back his debts -  with additional interest added to it.   Since you get your freshly printed money back over time, in the long term most of not all of this new money is no longer in circulation - it’s in your pocket now.

It must be a heck of a feeling to call a central bank your own….

By the way: central banks not only ‘help’ governments, a very similar business model is used to ’service’ the major commercial banks.

Remember this article, when one day you see a very concerned central bank manager proclaim that ‘the amount of money needs to be tightened up to keep things in control’.  What he really means to say is:

  • We want our freshly printed money back - the government and major banks should start to pay back their debts.
  • We’re setting you up for the next interest rates induced ‘economic cycle’ - ad infinitum…

Call me a cynic if you will, but please prove me wrong… :(

Quantative easing for Dummies

Share and Enjoy: These icons link to social bookmarking sites where readers can share and discover new web pages.
  • bodytext
  • Bumpzee
  • Facebook
  • Furl
  • Mixx
  • NewsVine
  • Reddit
  • StumbleUpon
  • YahooMyWeb
  • Google
  • Blogosphere News
  • Propeller
  • Technorati
  • TwitThis
  • BlinkList
  • blogmarks
  • BlogMemes
  • E-mail this story to a friend!
  • feedmelinks
  • Live
  • MisterWong
  • Slashdot

Leave a Reply

You must be logged in to post a comment.