A rising tide lifts all boats.
But if you don’t have a boat, tough luck.
The ships cruise by and leave you helpless in their wake.
The massive money printing or quantitative easing (QE) is lifting the tide. The U.S. government has pumped $3.5 trillion into the market. I’ll explain how this lifts the tide, but first you need to understand QE.
QE is a monetary policy. Central banks use it to stimulate the economy. They create new money to buy bonds from other banks. This increases the money supply.
Now how does QE lift the economy?
The artificial bond demand pushes interest rates down. The lower rates spur businesses and consumers to borrow more money. The banks that sold bonds to the central banks also have new money to lend. QE is intended to make lending easier. This leads consumers to spend more. As a result it creates jobs.
QE is showing these intended results. Yet, the side effects will be drastic. QE is a new policy. It was never tested on such a large scale before.
One problem is the $3.5 trillion now on the central bank’s balance sheet. It’s the result of three rounds of QE. This problem keeps getting kicked down the road… but all roads come to an end. Unwinding $3.5 trillion will be difficult.
Another overlooked issue of QE is that banks benefit the most. Average folks can now borrow cheap money. That’s good for the economy. Yet, the banks and businesses that touch the new money first win. The best way I can explain this is through money counterfeiting…
Bob illegally prints $5 million dollars. He then buys 10 nice homes. To buy the homes he uses real estate agents. The agents collect their fees. The agents then spend more on other goods. This new money continues to trickle down. It has a ripple effect.
By the time the money reaches you, the artificial demand Bob created has pushed prices higher. Bob benefits the most. He’s at the top of the drinking fountain and you’re at the bottom getting the backwash.
In this example Bob is the central bank. Other banks are the real estate agents. The new money keeps moving down the chain. By the time it reaches you, goods cost more. Savers lose out.
The government’s experimental money printing has propped up the economy. No doubt there. But the unintended effects of QE might not be worth it (unless you’re a big banker).