A Short Note on the U.S.’ Quantitative Easing
by Guinandra Jatikusumo
I feel the urgency to write this post after I watched this misleading animated clip on the Federal Reserve’s quantitative easing policy. I think most economics students or current affairs aficionados can refute nearly most of the things mentioned in the clip, but I’d like to point out one good thing about Chairman Bernanke’s successful in his pursuit of purchasing what most of us would consider junk assets.
Read this post from the Economist. The Fed’s large-scale asset purchases have been profitable so far. Secretary Geithner literally received a total of $89 billion dollars in profits from the subprime assets the Fed’s purchased after QE1, QE2, and QE3. Chairman Bernanke did use Americans’ tax revenues and did utilize it capacity to print money in the beginning, but in the end, the citizens’ money have been incrementally restored.
Anti-Feds, the two fluffy bears in the clip included, would then argue that the Fed’s money printing would lead to inflation. Printing money means inflation, they’d say, disregarding the fact that the U.S. economy’s money velocity has shown a negative trend and that its GDP growth has demonstrated a positive trajectory since the 2008 financial crisis. But as shown from the graph below (quarterly), The Fed’s quantitative easing policies have not, and will not, lead to a Zimbabwean inflation that most anti-Fed zealots have claimed.
Though one can argue that mild inflation is bad, it has some positive features as well. Borrowing becomes cheaper as debt becomes less valuable as prices are expected to increase. One’s debt decreases in real terms. One last thing. It’s widely known that quantitative easings lower interest rates on selective assets (an important feature that’s not mentioned at all in the clip). Take a look at this graph showing how real investments have increased post-2008.
I acknowledge that in elaborating my arguments above I might have oversimplified some data. Furthermore, I haven’t actually done proper academic research on this. But in general, one can be positive about the Fed’s unconventional monetary policy. The unjustifiable detestation towards the Fed and Chairman Bernanke is often fueled by irrational preconceived notions and a strict adherence to an anti-government ideology. If we really want to learn or refuse to be indoctrinated, I personally think that we should refrain from committing this error.
Update: The NYTimes recently reports that the U.S. economy contracted in late 2012. This had nothing to do with the Fed’s action though. It’s mainly attributable to the significant decrease in military spending.