Quantitative Easing – Economic Recovery’s Latest Buzzword

Although not yet confirmed, and not likely to be confirmed until after the Fed’s November meeting, estimates are that QE2 will pump up to a trillion US dollars into the economy – money that has been conjured up out of thin air and has the potential to cause a devaluation of the dollar, with a risk of causing runaway inflation in the future. History reveals that economies generally don’t reap long term benefits from artificial engineering, and a devalued dollar is very likely to increase the cost of commodities, resulting in consumers finding themselves paying significantly more for basics such as wheat and sugar, as well as America’s favorite legal upper – coffee. Paying higher prices for essentials is likely to result in higher costs, thereby negating, to some extent at least, the desired effect of stimulating the economy.

Another factor that can cause the plan of quantitative easing to go awry is when the banks use this cash injection, not to lend to businesses/consumers that may or may not replay the loan and are therefore risky, but rather to buy treasuries that are safe. Of course, this is not what the Fed wants to achieve, and to ‘force’ the banks to look for other channels of increasing revenue, the Fed buys the treasuries in the market, creating demand and lowering the yield. This makes treasuries less attractive to the banks and thereby ‘incentivizing’ the banks to look into the wider market for investment opportunities and lending money to businesses – and the Fed’s goal is accomplished. What remains to be seen at this stage, is whether the Fed will choose to go the route of quantitative easing despite its inherent risks.