Thursday, January 22, 2015

Quantitative Easing Explained

Quantitative Easing (QE) is a Newspeak term for transactions by central banks which consist in the exchange of newly issued currency, not just overnight and possibly permanently, for government or corporate bonds. These transactions are equivalent to taxation through seigniorage with revenues being used to finance bond owners at artificial, privileged and distortionary low rates.

When the central bank buys government bonds in this fashion it validates financial irresponsibility and dishonesty, because we are all being taxed to cover government mismanagement of its finances while not being told the truth. It's even worse however when QE is used to buy bank assets or corporate bonds, in this case we are all  being taxed to finance private or semi-private groups not only without consent but without being told so.

In any case, there is one thing you can count on: if you don't feel that you are footing the bill now, be sure that you'll foot it later, or your descendents will do it instead of you. This is true even if the central bank ends up recovering the full value of the assets bought at the highest possible price under these programs, after all of us users of state money financed the financial privileges created by the QE transactions.

The least bad type of QE would be to use the seigniorage revenues to buy "bonds" issued by households like you and me, in other words, to give us directly cheap credit that we could use, for example, to pay back debt, invest or buy things that we need. Those bonds could be eventually cancelled if judged necessary, meaning, the debt could be forgiven, as it will probably be done anyway in the case of the unsustainable debt trajectories of governments that won't ever pay them back. But, oh I wonder why, I don't see any politician, government officer or banker saying that this would be the least bad among all possible ways to implement QE.