Tuesday, November 9, 2010

BEWARE OF QUANTITATE EASING

  The federal reserve announced quantitive easing in an attempt to boost the economy.I do not think it will work and the risks are very high.

 Quantitive easing can be done by the fed when it credits its books,writes a check to the central banks and receives assets from the bank in return. These assets are bonds and debt instruments.This puts more liquidity in the hands of the banks and allows them to make more loans.This is turn is supposed to boost the economy by increasing money supply.

  Did you notice the part where the fed credits its books to buy bank assets.? This is just imaginary money.It is no different than you putting an extra zero ,or two, on your checking account balance so you can buy more.

   There is the false assumption that banks will make more loans.To do that there has to be someone willing to borrow and they have to have great credit.

  We have done this before.During the financial crisis  it was necessary to prevent a meltdown and it did. But it was also expected to boost economic growth and it did not and I see less reason for it to do so now.Japan has tried it 10 times with no success,their economy is still stuck.

 The risk is inflation and possibly super inflation.The fed wants to see some inflation but if not careful,we could see out of control inflation.

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