Category: EU

The economy could use a good dose of “aggregate demand”—new spending money in the pockets of consumers—but QE3 won’t do it. Neither will it trigger the dreaded hyperinflation. In fact, it won’t do much at all. There are better alternatives. The Fed’s announcement on September 13, 2012, that it was embarking on a third round of quantitative easing has brought the “sound money” crew out in force, pumping out articles with frighting titles such as “QE3 Will Unleash’ Economic Horror’ On The Human Race.” The Fed calls QE an asset swap, swapping Fed-created dollars for other assets on the banks’ balance sheets. But critics call it “reckless money printing” and say it will inevitably produce hyperinflation. Too much money will be chasing too few goods, forcing prices up and the value of the dollar down. All this hyperventilating could have been avoided by taking a closer look at how QE works. The money created by the Fed will go straight into bank reserve accounts, and banks can’t lend their reserves. The money just sits there, drawing a bit of interest. The Fed’s plan is to buy mortgage-backed securities (MBS) from the banks, but according to the Washington Post, this is not expected to be of much help to homeowners either.