Skip to content

Quantitative Easing

Quantitative Easing 101

A non-technical but accurate explanation of Quantitative Easing is presented below. It is important that you understand this subject thoroughly because it represents the future… 

Quantitative Easing: Our Tiger by the Tail

Friedrich Hayek’s A Tiger by the Tail: The Keynesian Legacy of Inflation was published in 1978. It seems an appropriate description of what Quantitative Easing (QE) has produced. We are far along on a journey that cannot be stopped without enormous damage.

Quantitative Easing is a euphemism for money creation. Money creation is, by definition, inflation. Eventually inflation produces higher commodity and other prices. Inflation can be created by other Fed policies besides QE. However, for purposes of this article, QE will be dealt with as if it is the primary cause (which it has been recently).

According to Chairman of the Federal Reserve Ben Bernanke, we are in phase 2 (QE2) of “money printing.” Those knowledgeable of history find this characterization amusing, because the Fed has engaged in almost continuous money creation from its founding in 1913. Since then, 96% of the dollar’s purchasing power has disappeared with much of the loss occurring subsequent to the mid-1970s.

Mr. Bernanke initiated his so-called QE2 ostensibly to improve traction for the weak economic recovery. According to Bernanke, the program will end in June. With regard to his promise, Mr. Bernanke resembles Charlie Brown’s friend Lucy placing a football.

QE will end but not in June, at least not permanently. It will not end as a result of political decision or Fed mandate. It will fall victim to Stein’s Law: “if something cannot go on forever, it will stop.”

Why Quantitative Easing?

Money creation is never proper economic policy. It does not improve or create wealth. Its purpose is to fool citizens. As such, it is a fraud employed by governments to deceive and steal. If high enough, QE results in societal disruption. At worst, it produces hyperinflation, violence and government overthrow. History offers numerous examples.

The famed economist John Maynard Keynes did not invent inflation, but he was instrumental in making it seem acceptable as economic policy. In his General Theory, he advocated solving unemployment problems by “fooling” workers with higher nominal wages. He assumed workers were too obtuse to differentiate between nominal and real wages.

Keynes also was aware of the more devastating aspects of inflation:

The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

He probably was not advocating the destruction of capitalism, although his economic system and his elitism were not inconsistent with such an outcome.

What is Wrong With QE?

Inflation, as a policy, is a politician’s dream. As Friedrich Hayek noted:

… moderate inflation is generally pleasant while it proceeds, whereas deflation is immediately and acutely painful.

Given the short-term orientation and desire to please, inflation is an easy political choice. From an economic standpoint, however, inflation is always harmful. Keynes’ ideological opponents understood the short-term benefits, but knew inflation’s dangers. Ludwig von Mises stated:

Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.

Ludwig von Mises

In a swipe at Keynes’ notorious short-term focus, Mises

QE Simplified

An explanation of Quantitative Easing (and Country Rape) so simple that even Paul Krugman might be able to understand it.

Return to Top