QE2 101: How the Federal Reserve managed to print money

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Everyone is singing the praises of the Federal Reserve’s next round of “Quantitative Easing” to the tune of nearly $1 trillion. Those in favor extol the virtues of the magical printing presses as if we all had been given a free cruise on the ship Queen Elizabeth 2. The truth for most of us is closer to 3rd class tickets on the Titanic.

Quantitative easing is simply printing more money. Normally the Federal Reserve buys government bonds passively to maintain its interest-rate target. With quantitative easing the Fed aggressively buys government bonds and other securities in large quantities.

So how does the Federal Reserve print money? First, it buys government bonds and other financial securities from big New York City banks. It pays for these bonds with newly created electronic money, using computers to change the records of the banks’ accounts at the Fed. If the banks want paper dollars, Federal Reserve Notes, the Department of the Mint at the U.S. Treasury prints and sends crisp new dollars to the Federal Reserve which forwards them to the banks.

People with inside information, or well-informed guesses can make tons of money off this process. Some bond traders and big banks are making a killing off of QE2.

The Fed says that quantitative easing will reduce interest rates and that this will increase investment spending which will increase employment and therefore help the economy recover. The truth is different. Printing money only distorts markets and slows the recovery as capital is again misallocated as was the case in the housing bubble and the tech bubble before it. Remember that Chairman Bernanke told us from 2005 to 2007 that there was no housing bubble and that everything was fine.

In addition to the threat of new bubbles, there is the more immediate and visible threat of price inflation. The value of the dollar has fallen by 13% over the last 5 months. The September Producer Price Index showed that meat prices went up 5.2% and gas went up 6.1%. Meanwhile, interest rates are at historically low levels; for retirees and savers this has virtually eliminated safe interest income and forced people into more risky assets.

Basic economics tells us that any set amount of money is sufficient as long as prices and the value of money are free to adjust. Given all the Fed’s money printing we should not be surprised that gold is up 24% this year. The reason the price fluctuates is that the value of the dollar is fluctuating, in this case plummeting, not that gold is unstable.

Quantitative easing is just printing money. This cannot help the economy recover and in many ways makes the economy and the dollar more unstable. It certainly is a bad deal for consumers, retirees and savers. The only beneficiaries are large multinational exporters, dealers in government bonds and securities, and money managers with inside information. Economic recovery will occur not because of quantitative easing, but in spite of it.

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纽约联储周五(11月12日)在其网站上公布，美联储(FED)周五购买了77.29亿美元的美国国债。

　　美联储目前已买入了到期日在2014年11月和2016年4月份到期的证券，这些债券时美联储购买6000亿美元国债的一部分。

美联储将于下周开始在每个交易日都购买美国国债，（美联储将于11月12日至12月9日通过18次公开市场操作购买1050亿美元政府债券）。

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据美联储周三发布的一项计划称，纽约联邦储备银行(New York Fed)本周五将开始购买60亿至80亿美元的美国国债。在12月9日前，美联储计划购买1,050亿美元的美国国债，其中包括一批通货膨胀保值债券(TIPS)。

市场上有美联储这样一位坚定的大买家，国债价格应该能保持在高位，而国债收益率也应能维持在低位。

尽管投资者对欧洲的主权债务再度感到担忧，但美国国债的价格已经下跌，而在以往欧洲主权债务问题会导致被视为投资避风港的美国国债出现上涨。

30年期美国国债的价格疲软并不特别令人吃惊。美联储已表示它不会购买很多30年期国债。它在周三坚持了这一承诺，只将4%的国债购买资金用于购买较长期国债。

但10年期美国国债的价格也出现了下跌，而它从美联储获得的关注要大得多。自8月26日以来，10年期美国国债的收益率已从2.50%上升到2.657%。

鉴于10年期美国国债对按揭贷款利率和其他贷款利率的影响，它对美联储而言实际上更加重要。