Posted: Mar 21, 2014 3:14 pm
by Panderos
I think I have a better handle on how banking works now. It seems pretty clear to me that the Fed has been effectively 'printing money'. Assuming it works in the same way as it does in the UK, QE means buying up treasury bonds from non-banks, crediting their deposit accounts (and the banks reserves). Thus adding to broad money. As Rick says above, this money first flows into asset markets pumping up prices and benefiting people and organisations that deal in these things.

It's not necessarily inflationary because much may be used to pay down debt, which reduces broad money. It'll also take time for it to leave asset markets. Edit: Another factor here is that with an output gap - firms not producing what they are able to, such as a factory only running at 75%, even if the broad money supply increased, those firms are likely to just up production rather than raise prices. At least to some extent. In other words the money supply increase causes an output increase and the money supply / output ratio which affects inflation is not increased as much as if output remained constant and the money supply increased.

The justifications for doing it this way seem pretty weak, and certainly unfair. That much ain't news of course:

The Guardian in 2012 wrote:The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.

I suspect its a similar story in the good 'ol US of A.