The Truth About QE's Money Illusion

Hi Plebs,

Since the big financial crisis over 10 years ago, central banks have used quantitative easing (QE) as their main tool to try stabilising the economy. QE is when central banks create new money to buy government bonds and other assets from banks. This increases the total money supply in circulation.

The idea behind QE is pretty simple. By pumping new money into the system, it reduces interest rates people pay on loans. It also causes prices of things like stocks and real estate to go up. The hope is that cheaper borrowing costs and rising asset values will boost economic growth as people spend and invest more.

While it sounds complicated, QE really just boils down to creating more money out of thin air. Central bankers use lots of technical jargon, but increasing or decreasing the money supply is their basic method for impacting interest rates and asset prices.

However, over a decade later interest rates sit at rock bottom levels, yet the economy is struggling again. Many are starting to question if QE actually works like it's supposed to. The theories that QE is based on don't seem to be playing out in reality.

There's an important difference between doubting QE's effectiveness and realising QE itself may be the root problem causing instability. When you look closer at how QE operates and its consequences, it appears QE may be creating the very economic turmoil it claims to fix.

It's made even worse by the fact that central bankers who wield such powerful abilities keep using the same QE tactics over and over, despite being wrong about its impacts time and time again. Yet they have zero accountability and operate without any real oversight from elected officials or the public.

So while QE has become the go-to recipe for central banks, more people are realising that just endlessly printing money may be doing a lot more harm than good in the long run. And the lack of humility and transparency from those in charge isn't helping either.
The Fed claims QE isn't actually printing money, but the end result is basically the same. Through QE, the Fed creates new digital dollars out of nothing. It then uses those made-up dollars to buy things like government debt and mortgage backed securities.

On the books, this makes it look like there are more dollars in the banking system that can be lent out and spent in the economy. But in reality, no new goods or services were created to go along with all those new dollars.

The Fed tries to make QE sound super complex with fancy financial terms. But stripped down, it just means more dollars are getting pumped into the same economy without any increase in economic output to match it. More dollars chasing the same amount of stuff.

While QE doesn't involve a literal printing press, the effect is still putting more money into circulation. And basic economics says introducing more money while production stays the same makes each individual dollar worth less over time - the definition of inflation.

However, QE's impact isn't immediate and straightforward. First, the new money expands bank reserves and credit markets. It's this expanded lending and credit that ultimately gets those new QE dollars flowing into the real economy as people take out loans to buy things.

So while it's not physical printing per se, QE is a digital form of money creation that inevitably devalues the purchasing power of the dollar down the road. Creating more money doesn't create more actual resources or productivity. It just dilutes the value of each dollar.

This harsh reality gets buried under QE's technical veil and philosophical claims. But the truth is central banks have embraced a policy gimmick that destabilises the currency and economy bit-by-bit with each short-sighted attempt.

Yet despite over a decade of failure, those in power arrogantly cling to the same tools rather than admit their deeply flawed theories have made things worse, not better. The money illusion of QE cannot defy economic fundamentals forever.

Cheers, and onwards with Bitcoin.