This morning the Federal Reserve announced it was going to embark on a third round of “quantitative easing,” a financial maneuver that already has its own nickname: QE3.
But what exactly is “quantitative easing”? Well, as The Washington Post helpfully explains,
Since the Federal Reserve can just create dollars out of thin air, it can buy up assets like long-term Treasuries or mortgage-backed securities from commercial banks and other institutions. This pumps money into the U.S. economy and reduces long-term interest rates further.
“Create dollars out of thin air” is another way of saying, “Print money.” Since the U.S. dollar is no longer backed by gold or any other commodity other than people’s faith in the government, the Federal Reserve can just print up billions of dollars and hand them out. (“Print” in this situation is entirely metaphorical, of course: the government isn’t actually printing paper bills, but rather just arbitrarily increasing the amount of “money” it has.)
Now, the average person might wonder: If creating money is that easy, then why don’t we just print up $16 trillion and get ourselves out of debt? The answer is interesting: Although the government can increase the amount of cash floating around, it can’t conjure actual value or worth. All it can do is put more money into circulation in an economic system whose underlying net worth remains the same. The end result is that, although the total amount of dollars in circulation increases, the cumulative value of things to buy remains the same — so the intrinsic worth of each dollar is diminished. Another word for this is inflation.
In fact, artificially creating inflation is one of the goals of quantitative easing, in situations where deflation (as happened during the Great Depression) would otherwise be likely to occur. The first round of QE, back in 2008, was indeed enacted to stave off looming deflation.
The Federal Reserve, we can only assume, announced QE3 as an attempt to help the economy, but many experts disagree, with some thinking it will have no effect whatsoever, while others think it could actually hurt in the long run. Quantitative easing is generally thought of as a “shot of adrenaline,” to give the economy an artificial but electrifying quick boost, in the hopes that the boost will be self-sustaining, and optimism will build upon optimism and it will shock us out of the doldrums. But other economists fear that giving adrenaline to an exhausted weak man will not magically make him strong — it will just force him to have a brief period of hyperactivity before it wears off and he collapses, weaker and more worn out than before.