Radical Difference Between QE1 and QE2

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jrf29's picture
jrf29
Status: Gold Member (Offline)
Joined: Apr 18 2008
Posts: 453
Radical Difference Between QE1 and QE2

What follows is an exerpt from a short article by Daniel Amerman, CFA.  In it he explains why in his view "QE2" is dramatically different from, and far more risky, than the first round of quantitative easing.

Daniel Amerman wrote:

It's official: the Federal Reserve announced on November 3rd that it will create approximately $600 billion of new money to fund US Treasury bond purchases, and will also utilize another $250-$300 billion of money that had been previously created (also out of the nothingness).  The usual term in the media for these planned purchases is "QE2", as in the second round of quantitative easing.

The "2" in "QE2" implies that this is something that has been done before. This implication is dead wrong.

"QE2" is radically different – and radically more dangerous – than the risky games that were played with earlier "quantitative easings". The Fed's current actions are all too likely to go down into financial infamy, and this brief article is intended to warn readers about some of the key differences this time around.

The most significant difference is that this time there appears to be no references to "sterilization" of the newly created money.  It's likely good old-fashioned monetization in other words, with potentially quick and dire results. 

It is also essential to note that the Fed won't be directly buying Treasury bonds from the US Treasury, but will instead be intervening in the Treasury bond markets.  In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks.

Rest of article

He goes on to point out serious problems associated with the original "sterilization" process, makes the connection between the federal deficit and the QE program, but goes on to point out that the deficit itself is a form of fiscal QE without which the economy would be in terrible trouble:

Quote:

This is no mere recession, and it is only massive government growth that has kept the plausible deniability in place.  In two years, the government's share of the economy grew by 8%, from 35% to 43%.  Without this fundamental change in the economy - which destroys the very basis of conventional stock market investing, as explained in the linked article - the US economy is in a collapse scenario.

I thought it was an excellent article (despite the fact that it contains a plug for Mr. Amerman's books).  Clearly the Federal Reserve is embarked upon an aggressive course. 

But I am not enough of a monetary expert to evaluate Mr. Amerman's claims.  So I ask: Is QE2 different from QE1?  How significant is this difference in terms of the economic implications?  Is QE2 merely the continuation of a bad monetary policy, or is it a dangerous and distinct new turn?  All opinions will be appreciated.

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3159
Re: Radical Difference Between QE1 and QE2

I have a question about this assertion:

Quote:

It is also essential to note that the Fed won't be directly buying Treasury bonds from the US Treasury, but will instead be intervening in the Treasury bond markets.  In other words, the Fed will be creating an artificial Treasury bond market, where it uses an unlimited amount of newly created public money to buy from private investment banks.

I have been led to believe that all Fed purchases of Treasury bonds are actually done through dealer banks, thus technically they are participating in the "bond market".  Is my information wrong?  I don't know what this means in terms of Mr. Amerman's thesis, but it would seem to have a considerable effect on his narrative.

Doug

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