What is QE3? Explaining the Fed
NEW YORK ( MainStreet) On September 17 and 18 the Federal Open Market Committee, a council of twelve economic big wigs who assemble to discuss the policies of the Federal reserve, will meet. One of the topics discussed at this meeting is QE3. QE3 (quantitative easing) is the process used by the central bank to stimulate the economy. There is a heated debate concerning the effectiveness of quantitative easing, the role of the Federal Reserve in the bond market, low interest loans, job growth and inflation. The "real economy" is so intertwined with the Fed that it is difficult to decipher what exactly is influencing what. It is undisputed that the decisions made by the Fed are influencing all market participants. Given that Janet Yeller appears set to be named chair to the Federal Reserve amid uncertainty over the Fed tapering, MainStreet was seeking some insight into the approaching FOMC meeing.
Edmund Moy, chief strategist for Morgan Gold and former director of the U.S. Mint, provided some clarity regarding the Fed:
Q: Given your former position atthe U.S. Mint, could you tell us exactly how much money our government is printing?
A: The U.S. Mint and the BEP made approximately $500 billion of face value in coins and notes. Cash - coins and notes - overall represent a small percentage of the face value in circulation (about 7%) compared to electronic currency (93%). When the Federal Reserve increases liquidity - the amount of readily available currency - by quantitative easing (buying government bonds and mortgage-backed securities from financial institutions), they do so with electronic currency. With all the additional money, the financial institutions should be funding businesses that want to expand. When a company expands by building another plant, they stimulate the economy by spending on construction and hiring new employees.
Q: Does this devalue the money an average citizen has in his bank account?
A: It depends. Under a growing economy, financial institutions would be loaning the additional currency to businesses that want to expand. When businesses hire workers and create inventory, additional money makes it into the economy and creates inflation. This means more money chasing the same number of goods will increase the price of the goods balanced with the increased supply of goods to meet the increased demand. This will devalue the currency.
Right now, there is very little inflation because the economy is not growing very fast. So businesses initially borrowed money to refinance their loans, which improved their balance sheets (paying off a 7% loan with a 3% loan saves the business a lot of money). Then some businesses borrowed money to buy back stock to improve their share price. Fewer shares and the same profitability mean greater earnings per share usually raises the stock price. However, refinancing loans and stock buy-backs does not create new jobs. So the financial institutions are sitting on a huge amount of money that few companies want in a mediocre economy. The financial institutions have resorted to investing in the stock market to get a good return on all their money that is being unused. This also does not create new jobs, and it creates a stock market bubble, that is why the stock markets panic when the Fed says it will taper QE.