The Meaning of Quantitative Easing

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I begin by describing quantitative easing in technical terms. I go on to describe what it means when a central bank and its government engage in quantitative easing.

What is quantitative easing? It is a central bank’s "purchase" of government securities (bills, notes, bonds) directly from the government.

The term "purchase" does not capture the essence of the actual transaction. The government issues a Treasury bill, say. This is a liability of the government. The central bank takes this bill and holds it as its asset. It provides the government with its own official and legal State money or notes (or a checking account for such). The central bank accounts for this note issue as its liability. It is an IOU transferred to the government (or State). In the usual setup, these notes cannot be redeemed for anything. That is, if the government brought these notes to the central bank, it would get nothing in return for them. Hence, the money issue is not really a liability of the central bank. The government accounts for the receipt of these central bank notes as an asset.

The net result of the transaction is that the government succeeds in transforming a liability (its issue of Treasury bills) into a new asset (its holding of central bank notes). If a person issues a debt and receives an asset from someone else in return, there is no new asset involved. If a baker issues an IOU and gets an oven in return, the oven is not an increment to the stock of ovens in the world. But when the government issues its IOU (the Treasury bill), it gets an entirely new asset, the central bank money. In the U.S., the government pays interest to the FED that holds the bill, but the FED returns this interest to the Treasury. Hence, the Treasury bill held by the FED is really no liability to the government. The net result of the transaction is that the government has a new asset that it can spend, namely, the FED’s Federal Reserve notes.

There will be further effects on the banking system and the economy when the government circulates the notes. These occur through the fractional-reserve banking system, but it is not my aim here to discuss these as plenty of other sources have done this already.

The main technical point is that the government has a new asset that is made an asset by coercion, since the money has, by the power of law, been made legal tender. If we had t-accounts for the government and FED and the government issued $1,000 in t-bills, we’d see the following:

  • The government debits its asset: $1,000, Federal Reserve notes.
  • The government credits its liability: $1,000, Treasury bill outstanding.
  • The central bank debits its asset: $1,000, Treasury bill.
  • The central bank credits its liability: $1,000, Federal Reserve notes.

When we consolidate the accounts, we end up with the Treasury bill disappearing. The combined entity has Federal Reserve notes (money) as an asset and as a liability. Since it is a phantom liability that can be exchanged for nothing, the government has a new asset with no real liability connected to it. This completes the technical description of quantitative easing.

The term "quantitative easing" has propaganda value. The implied proposition is that "something" is being eased that is currently "tight" or "restricted." This makes it sound as if something positive and good is being accomplished. What is actually going on, however, is a form of seizure or taxation. It is also called inflation, when the focus is on the additional means of spending that has been created.

The Congress lifts the debt limit of the government. Suppose the government then gets money via quantitative easing. All currency in the U.S. and other states is typically forced currency that is made to pass as means of payment by law. Since this currency is imposed by force on the society, the government spending that uses these notes is tantamount to using force to extract goods and services from society. Hence, quantitative easing is seizure and taxation. It is not direct seizure from citizens using soldiers and weapons, nor is it direct taxation by means of tax rates and payments made by citizens. Instead the government takes what it wants by spending its new asset — the newly-manufactured money. This reduces what is available for everyone else to spend on. The reduction in available goods in the private sector is the tax. One result is that society finds that the prices it pays for everything else rise (albeit unevenly). The government’s absorption of goods and services measures the seizure.

Whoever participates in the consumption or receipt of those goods and services is the beneficiary of the seizure. If the government gives money to some farmers, they benefit. If it gives the money to Blackwater, it benefits. If it pays off Afghan warlords or Sunni soldiers, they benefit.

The government rationales for its seizure and taxation by quantitative easing are all false. They vary according to the situation and what appeal sounds most appealing to a population that does not understand what is actually going on. There are usually some simple slogans that have a marked appeal, because of their simplicity and superficiality. Disposing of them takes more argument than the public is ordinarily used to or wants to hear. For example, the rationale may be that government spending is needed to get the economy moving. This is a total deception, since all that is happening is that goods and services are being shifted from one set of hands to another. When there is excess capacity, such as in the automobile industry at present, the government can buy new autos and stimulate auto demand for a time. But since the private society has already shown that it does not want these autos, a collective purchase by the government adds less to social welfare than it subtracts by the seizure of the goods and services that is necessary to build the autos.

Discussing all this in depth is also beyond my limited purpose here. The main point to be made is that when a government resorts to quantitative easing, it shows that it has run out of other means to finance its endeavors. It has reached the end of the line. A government finances itself by taxes. Borrowing is a hidden form of taxation; it defers the taxes to the future. Taxes are more or less visible to the population. They are voted on by Congress or a similar body. They are coercive, but they have at least the partially redeeming feature of being somewhat in the open and somewhat controllable by the citizens who vote for their representatives. Inflationary seizure or coercion via quantitative easing means that the government wants to spend more than it can raise by taxation and borrowing. Its ambition exceeds its grasp. "Ordinary" coercive means of finance no longer suffice. The government resorts to the printing press.

Quantitative easing is a resort to the money printing press. It means seizure and coercion of goods and services from the inhabitants of a country. But it also means either a government that is spending beyond its means, or one whose economy is not strong enough to generate financing by the usual means, or both.

Suppose that a company could no longer issue debt to finance its purchases of assets. The capital market (investors) would be vetoing any further corporate expansion. This happens when a company is badly run or has problems that must be addressed or has run out of good investment projects. The governments that resort to quantitative easing are analogous to such companies, except that they can force the society to finance their spending.

The term "quantitative easing" is a relatively new term. It is one of those modern euphemisms that disguises the use of brute force. Even the term "inflation," which is what quantitative easing is, fails to capture the human impact of such government acts that invade life, liberty, and property.

All such money manipulations, which, of course, are accepted widely by economists as the norm, are the antithesis of a free market. The results cannot be good if society sets up a body with power to inject purchasing power if, when, and as it pleases and to whom it pleases. This is too much power without control over the consequences. This power simply augments government, giving it an uncontrollable option to seize the society’s goods and services. This cannot be a good idea. The supposed benefits of central banking are all illusory and impossible. Standing beside those imagined good effects are the inevitable bad consequences for many, many people, such as the now millions of unemployed whose trades and occupations are now found to be not in demand and who will now be years making the adjustments to find new work and incomes.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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