What QE2 Could Mean for Ordinary Americans

by Chris Birk on 20 December 2010 3 comments
Photo: yomanimus

The words “quantitative easing” tend to make the eyes glaze over. But this pending economic maneuver could have a real and significant impact on households nationwide.

The Federal Reserve announced in early November its plan to purchase $600 billion in Treasuries in an attempt to stimulate growth and job creation. This will mark the second time in three years the Fed has turned to quantitative easing, as the measure is known.

This second round, often referred to as QE2, has sparked controversy among economists and political leaders. More quantitative easing will lower long-term interest rates and, at least in theory, bolster business’s access to credit. Borrowing money, whether for business capital expenditures or for a homeowner refinance, should become easier.

At the same time, another round of quantitative easing will weaken the dollar. That will help make American exports cheaper, but it could also send commodity prices soaring.

Another Go-Round

The first round of quantitative easing (from late 2008 through spring 2010) is cited as one the turning points that helped pull back the economy from the brink. The Fed purchased about $1.7 billion in mortgage debt and Treasuries through this past March. 

Impact on American Families

For most consumers, talk of quantitative easing and increased inflation is more likely to spur yawns than careful consideration. And that’s understandable. Part of the problem is that economists and politicians alike have done a poor job of explaining what it all might mean for the average American.

Here’s a look at a few ways households and individual consumers may be affected by another round of quantitative easing, for better and worse:

Lower Interest Rates, at Least for Now

Quantitative easing is designed to keep interest rates low while spurring inflation. Home buyers and homeowners have enjoyed record-low interest rates for months. They’re likely to trend even further downward, making it easier for consumers to refinance their mortgages or to even purchase new homes. The problem is that if inflation spins out of control, the Fed will likely reign it in by raising interest rates.

Decreased Purchasing Power

A weaker dollar is going to mean that commodities like oil and food will cost more. At the same time, Americans aren’t earning more money than they were six or 12 months ago. In essence, that loaf of bread or basket of corn will require more dollars than it did before QE2 set in.

Bigger Banks and Bottom Lines Benefit

QE2 is really geared toward pushing big banks and investors to spend. The general concept is that the purchasing of government bonds “should push investors into riskier assets — such as stocks and corporate bonds ­ — and raise their value,” according to the Wall Street Journal. This is a period of “easy money.” But there’s typically little to no impact on the average consumer’s savings and money market accounts.

Will It Work?

The Fed reiterated its commitment this week to a second round of quantitative easing. The central bank has already purchased more than $114 billion in Treasuries since mid-November.

Economists are split on what this second round will accomplish. It’s unclear whether this rolling injection of cash into the economy will lead to job creation and temper unemployment. In the short term, it’s certainly likely to raise the tempers of some ordinary consumers as they face the prospect of doing more with less.

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Darwins Money's picture

It's been a real kick in the gut to the Fed that the day of the FOMC meeting announcement in November was practically the pivot bottom for interest rates. Bonds are crumbling since then, munis are getting crushed and the 10-year especially - painful. So, mortgage rates have likely seen their best days. The 2011 Tax Deal announcement was the final nail in the coffin - rates spiked practically 50 bps the next day. There's no coming back now. So, it begs the question as to whether QE2 should even continue into 2011 since the tax deal is essentially a $900 Billion stimulus program anyway. Rates aren't coming back down to prior levels unfortunately. Markes are demanding higher interest rates to turn over our debt in the fact of a 90%+ debt/GDP with no end in sight.

Guest's picture
Harm

Yeah, right. Quantitative easing, another round in the war on savers.
And I'd disagree that "QE1" saved the economy. Saved some CEO's bonuses,
rather.

Guest's picture

Ah this is more like it! Bigger bank’s bottom lines benefit and your purchasing power, which is how many goods and services your dollars will buy, is reduced. You lose big time, over time. We, the people, have to tighten our belts, employ frugal living and thrift while banksters and their dimwitted servants in government live high on the hog.

The thing with inflation is it gains momentum. It's powerful. It can't be easily contained. It's really exponential in nature meaning, as it gets going it really picks up speed....like a train that's gone off the tracks. The end result is just very bad, especially for the passengers--us!

The government should be smaller. It just keeps getting bigger and bigger. Quantitative easing is directly proportionate to this growth. Meaning, the money that the Fed prints usually either goes into the government in the form of ‘social programs’ (read: boondoggles), or it goes to the big commercial banks. These ‘social programs’ require people to work them (more bureaucrats).

Q.E. and all sorts of organized currency devaluation beget bureaucrats and bureaucrats beget more bureaucrats. They are the people who make your life hard! Straight up, anything you want to do, they've got a piece of paper you have to fill out. They are totally counter-productive and really nothing more than a huge herd of moochers. You may have something you want to produce, create, make, and they only exist to hinder your plans and to take some money from you in the process.

So! What is to be done? I think the U.S. government should default on their debt. I think all the so-called ‘department-like’ FDA and the SEC and all these other totally counter-productive and corrupt organizations should be abolished. Not paired back, not cut back, but abolished, totally and absolutely. The problem is, as Q.E. grows and the numbers of the herd of moochers grows (like 50 000 TSA monkeys), we have more and more ‘people’ (bureaucrats) who want to maintain the status quo. They aren't going to give up a job where they get paid a lot to do little or nothing. No way. They're not interested in frugal living and thrift; it's not in their nature. They squander others’ wealth as a career!

That's why, although it will be much much more painful as time passes, the ultimate bankruptcy of the U.S. government and the break up of these departments will happen. It's not a matter of if, but when. When it does, these counter-productive moochers will have to figure out something productive to do for their fellow human beings and pushing paper isn't one of the options.

End the Fed! Buy Gold!