The Crash Course - Chapter 10 - Quantitative Easing

Summary

This video explores Quantitative Easing (QE), a massive monetary experiment by the Federal Reserve aimed at stabilizing the economy by digitally creating money. It discusses how the Fed injects liquidity into the financial system by purchasing Treasury bonds and mortgage-backed securities, driving asset inflation and supporting markets. However, it highlights the risks of reversing QE, which could lead to rising interest rates, market instability, and potential global inflation. Ultimately, it emphasizes that QE does not create real wealth and may have severe long-term economic consequences, warning of the dangers of over-reliance on this policy.

Takeaways

• 😀 Quantitative Easing (QE) is a global experiment in money creation, where money is essentially printed digitally rather than physically.
• 😀 Money, as a social contract, is created by mutual agreement, making printing money a social experiment rather than a conventional monetary practice.
• 😀 The Federal Reserve (Fed) creates money by adding accounting entries, which can lead to vast amounts of digital currency being created without backing by physical assets.
• 😀 QE involves the Fed buying Treasury bonds or mortgage-backed securities, injecting newly created money into the economy, mainly benefiting large financial institutions.
• 😀 In 2013, the Fed was creating $85 billion per month, significantly expanding its balance sheet, which reached nearly $4 trillion by the end of the year.
• 😀 The majority of newly created money, about $2.3 trillion, was parked in excess reserves at the Fed rather than being loaned out to the public.
• 😀 Only around $700-800 billion of QE money flowed into the market, driving up asset prices like stocks, bonds, and real estate, but mostly benefiting large institutions.
• 😀 The US stock market is now highly reliant on this artificial stimulus, and its value would likely collapse if the Fed stopped printing money.
• 😀 If the Fed tries to reverse QE and withdraw money, it could destabilize markets by flooding them with bonds, driving down asset prices and raising interest rates.
• 😀 History shows that printing money can work temporarily, but long-term prosperity cannot be created through artificial money supply increases, as inflation diminishes real wealth.
• 😀 QE is an unprecedented and risky experiment, as it diverges from traditional economic principles, and the global inflationary consequences of such policies are a serious concern.

Q & A

What is Quantitative Easing (QE)?

Quantitative Easing (QE) is a monetary policy in which a central bank creates money digitally to purchase financial assets, such as Treasury bonds and mortgage-backed securities, to stimulate the economy.

How does the Federal Reserve create money through QE?

The Federal Reserve creates money by making electronic accounting entries that signify the money exists. This money is not physical cash but rather digital, and it is used to purchase assets like bonds from banks.

What role do excess reserves play in QE?

Excess reserves refer to the extra money that banks hold at the Federal Reserve beyond the required reserves. In QE, a large portion of newly created money ends up as excess reserves, earning low interest instead of being lent out into the economy.

Why is QE considered a social experiment?

QE is viewed as a social experiment because it involves creating money out of thin air, which is based on a mutual agreement that the money has value, making it an unprecedented and untested approach to managing economies.

What happens when the Fed tries to reverse QE by selling assets?

If the Fed attempts to reverse QE by selling its assets, it could cause the prices of those assets to fall, potentially raising interest rates and disrupting markets like bonds, stocks, and housing.

How has the size of the Federal Reserve's balance sheet changed since the 2008 crisis?

Since the 2008 financial crisis, the Federal Reserve's balance sheet has grown dramatically from about $880 billion to nearly $4 trillion due to the continued implementation of QE and other monetary interventions.

What is the primary concern with printing too much money?

The primary concern with printing too much money is that it can lead to inflation. As more money is created without an increase in real wealth, the value of money decreases, making goods and services more expensive.

Why does the stock market rely on QE?

The stock market has become reliant on QE because the money created through QE often flows into asset markets, inflating stock prices. If the Fed were to stop QE, it could cause a significant decline in the market due to the sudden lack of liquidity.

How does the Federal Reserve's policy of buying Treasury bonds benefit the banks?

When the Fed buys Treasury bonds, it drives up their prices, creating profits for the banks. Banks can then sell these bonds to the Fed at a higher price, benefiting from the demand created by the Fed's purchases.

What risks does the Federal Reserve face if it cannot reverse QE effectively?

If the Fed cannot reverse QE effectively, it risks causing a market collapse. The reversal could lead to rising interest rates, falling asset prices, and significant economic disruptions, undoing the benefits of QE.