Quantitative easing is a word we seem to hear often these days, but what does it even mean... exactly. Many just chalk it up to "printer go brrr" and leave it at that. Mystery 'solved'. The actual truth of the matter is way too complex for people to be bothered with it, which is fine until we start making assumptions based on the 'fact' that we understand how it works when we really have no idea. That's when people start getting into trouble with the whole "printer go brrr" ideology.
Of course if the conclusion to, "Printer go brrr," happens to be, "Buy more Bitcoin," ah well then perhaps the correct conclusion was reached after all. The entire value proposition of Bitcoin is that its gross inefficiency will pay for itself magnitudes over simply because there are no other trustworthy options available. The biggest threat to fiat, is itself. If fiat is the Titanic, it is not threatened by the lifeboat that is Bitcoin, no matter what the powers that are claim.
Lifeboats can not be trusted!
Only pirates use lifeboats!
In any case, if we head on over to Investopedia they have a page that describes quantitative easing. Judging from skimming through yesterday it may be worth a looksee.
You may be surprised to hear that QE only was first employed (in USA) during the housing crisis of 2008. It feels like it's been around forever but it is a relatively new development.
Quantitative easing in the U.S.
It officially kicked off in March 2009 and concluded a year later, with the U.S. central bank purchasing $1.25 trillion total in mortgage-backed securities, $200 billion in agency debt and $300 billion in long-term Treasury securities.
$1.25 TRILLION in mortgage-backed securities? And we all know the collateral for those securities, as is self-defined, are the mortgages. House loans that people could not afford because of variable interest rates. One day the monthly payment on the house is $2000 a month, the next it's $4000 and they lose everything. So all that bad debt stacked on top of bad debt... the FED was buying it up to 'fix' the situation.
When I watched the Big Short in 2015, I didn't understand quite a bit of it. That was long before I had any interest in finance or crypto. I should probably watch it again and actually pause it and look up some of the stuff they talk about. Would be worth another blog post for sure (a mega post no doubt).
Imagine taking a home loan and turning it into yet another asset that is bought and sold on the market. Who does that? These guys. Such a house of cards this finance game we play. In any case this actually has nothing to do with that investopidea article on QE so lets get to it shall we?
Quantitative easing (QE) is a form of monetary policy in which a central bank, like the U.S. Federal Reserve, purchases securities from the open market to reduce interest rates and increase the money supply.
It is somewhat glossed over that banks are simply incentivized to give out more loans with their newfound liquidity. There is no guarantee that they'd actually do it. But of course we can't assume that we are getting the most thorough information from an Investopedia article. After all, the intended audience of a post like this is someone who might not know anything about the situation whatsoever. Once again that we see that every economic problem is so complicated that all explanations of the situation lead down a dozen rabbit holes, that in turn lead down a dozen other rabbit holes.
Quantitive easing is often implemented when interest rates hover near zero and economic growth is stalled. Central banks have limited tools, like interest rate reduction, to influence economic growth. Without the ability to lower rates further, central banks must strategically increase the supply of money.
Central banks have limited tools
Many people out there would love to blame the Federal Reserve for all of the economy's problems. But shockingly, almost all of the economy's problems are decentralized in nature.
Who is to blame for the 2008 housing crisis? Is it the realtors who essentially tricked millions of people into signing a loan that they couldn't afford? Is it the buyers who got tricked? (We certainly could blame the victim, even though it's not a fair thing to do.) Is it the banks for competing with each other in a completely unsustainable way. Is it the 'geniuses' that decided to turn debt itself into collateral? Is it the FED for swooping in and buying up all the bad debt like hotcakes, allowing everyone to get away with it?
What most fail to understand is that ironically a lot of these problems in society are not created by some centralized agent of chaos, but rather our combined collective greed on a global scale. These things are seemingly everyone's fault and no one's fault all at once, which is why it's so easy for people at the top to dance around these issues while never actually being held accountable for the unsustainable practice. "Everyone is doing it." It's like driving 10 MPH over the speed limit on the freeway. Everyone breaks the law, and everyone gets away with it.
Does Quantitative Easing (QE) Work?
Most economists believe that the Federal Reserve's quantitative easing program helped to rescue the U.S. and global economy following the 2007-2008 financial crisis, however, the results of QE are difficult to quantify.
Globally, central banks have attempted to deploy quantitative easing as a means of preventing recession and deflation in their countries with similarly inconclusive results. While QE policy is effective at lowering interest rates and boosting the stock market, its broader impact on the economy isn’t apparent.
Obviously this is a pretty refreshingly honest statement to make.
Does QE work?
Meh, who knows!
Maybe it works!?!
lol
Again, economies are shockingly complex and most people can't be bothered to figure out any of this stuff. Instead, we tend to oversimply these issues and just chalk it up to "printer go brrr" and whatnot.
Commonly, the effects of quantitative easing benefit borrowers over savers and investors over non-investors
As liquidity increases for banks, a central bank like the Fed
cannot force banks to increase lending activities nor can they force individuals and businesses to borrow and invest.This creates a “credit crunch,” where cash is held at banks or corporations hoard cash due to an uncertain business climate.
To combat the Great Recession, the U.S. Federal Reserve ran a quantitative easing program from 2009-2014. The Federal Reserve's balance sheet increased with bonds, mortgages, and other assets. U.S. bank reserves grew to over $4 trillion by 2017 providing liquidity to lend those reserves and stimulate overall economic growth. However, banks held $2.7 trillion in excess reserves, an unexpected outcome of the Federal Reserve's QE program.
Wow, it's almost as if, instead of issuing more loans like the FED wants them to, the retail banking sector instead leverages QE as exit liquidity, allowing them to sell their risky securities during uncertain times and just sit on the reserves given to them by the FED. Statistical 'anomalies' like this speak volumes. Banks would rather sideline themselves and sit on their reserves even when those reserves are being devalued. Cash is king.
In 2020, the Fed announced its plan to purchase $700 billion in assets as an emergency QE measure following the economic and market turmoil spurred by the COVID-19 shutdown. However, in 2022, the Federal Reserve dramatically shifted its monetary policy to include significant interest rate hikes and a reduction in the Fed’s asset holdings to sidetrack the persistent trend of higher inflation that emerged in 2021.
So now we see the effects of the FED finally doing the opposite and unwinding their positions. As we can see, the economy is fiercely bucking under the pressure. Again, many would like to blame the FED for the current situation, when in reality it is the decentralized collective greed of humanity that sucks liquidity dry from every river of value that flows throughout the ecosystem. "If I don't act this way, someone else will."
Critics have argued that quantitative easing is effectively a form of money printing and point to examples in history where money printing has led to hyperinflation. However, proponents of quantitative easing claim that banks act as intermediaries rather than placing cash directly in the hands of individuals and businesses so quantitative easing carries less risk of producing runaway inflation.
QE can't lead to hyperinflation, because the banks aren't actually issuing more money out to the public. It's just a fun way for institutions to unload their securities without crashing the markets and taking a loss. Even if the banks were issuing more loans out to the public... that's literally exactly what the FED wanted in the first place, and in that scenario the FED actually has even more control to stop inflation by tightening once again.
QE replaces bonds in the banking system with cash, effectively increasing the money supply, and making it easier for banks to free up capital, so they can underwrite more loans and buy other assets. A bank can lend any deposits above its 10% in reserve.
How insane is it that a bank could have ten billion dollars on their balance sheet, and legally be allowed to loan out $100 BILLION? Yep, well that's the system we live in. Isn't it grand?
But it is resistant (for now). The Three Arrows Capital debacle and TERRA LUNA crashing to zero show us just how easy it is to overleverage the system and crash it into the mountain. In fact, Bitcoin is in many respects at more risk of this happening because there are virtually no regulations in play to prevent developers from inventing 'cleverly' unsustainable ways of generating short-term profits.
The only way to avoid these traps is to do the thing we were all meant to do, and be our own bank. By securing our own keys and not allowing third party agents to gamble with our money, we can be a part of the solution rather than the problem.
QE policies have been implemented globally, however, their impact on a country's economy is often debated.
After all the research that we did, we are still no closer to truly understanding the impacts of Quantitative Easing. Nobody knows. Not the banks, central banks, or the economists that advise them; they are all just guessing. This is the most important takeaway from this exercise.
Economies are so complex and oversimplified by the rabble that many will claim to understand it fully after having barely scratched the surface. Luckily crypto provides us a new way of doing things. While "central banks have limited tools" crypto is programmable smart money that contains theoretically infinite tools (they just haven't been coded yet).
It's nice to know we don't need to focus on fixing the old system when it has become more than apparent we need to build a new one from the ground up using this revolutionary technology. The grind will be slow and arduous, but it will be worth it. Two steps forward, one step back. Always.
