A Crisis Is A Terrible Thing To Waste (Part II) - Quantitative Easing 

Sunday, December 7, 2008

The Fed has begun a very aggressive program of money printing (that goes by the fancy name “quantitative easing”) and shows every indication of continuing this program into the indefinite future. Chances are that the Fed will err to the inflationary side with this program, raising the prospect of serious inflation emerging at some point over the next year.

As we discussed last time, the Federal Reserve is taking heroic (foolish?) steps by essentially becoming the credit market. Where private participants have stepped away from lending and borrowing in anything remotely close to prior quantities, the US government and the Fed have stepped in to plug this hole.

If this was all that the  folks at the Fed were doing, it would be risky enough, but they are doing something even riskier, and for which there is precious little history or precedent to guide them. This goes by the name “quantitative easing.”

You should care about this arcane-sounding economic term, because if the Fed gets this wrong, they will ruin the economy for many years (decades?) to come and quite possibly ruin the dollar along the way. Understanding this dynamic will be essential to answering the question, “When will deflation turn into inflation?”

We will get to that question soon.  But first, what is quantitative easing?