acting-man.com / Pater Tenebrarum / June 9, 2017
[Ed. note: This article was originally posted in November of 2010 – we have decided to republish it with updated charts, as it has proved to be very useful as a reference – the mechanics of QE are less well understood than they should be, and this article explains them in detail.]
We have noticed that lately, numerous attempts have been made to explain the mechanics of quantitative easing. They range from the truly funny as in this by now ‘viral’ You Tube video with two robotic teddy-bears discussing the Fed chairman’s qualifications (‘my plumber has a beard too’), to outright obfuscation such as the propagation of this ‘Bernanke explains he’s not printing money, it’s just an asset swap‘ notion. This was apparently repeated by NY Fed president William Dudley on one occasion as well.
However, ‘quantitative easing’ does amount to printing money, even if it does not involve the issuance of currency in the form of banknotes. Probably readers have heard the term ‘high-powered money’, which is often used as a description of the monetary base. Why is base money considered ‘high powered’? To explain this we must briefly consider how the central bank-led fractionally reserved banking cartel in a fiat money system actually works.
Let us first take a step back and consider a free market. In a free market, a highly marketable good will be chosen as money. Historically, all sorts of goods have been used as money (from salt to cowry shells), but wherever gold and silver were available, the market eventually settled on these metals. It is obvious why: there was a preexisting strong demand for them, they are highly durable, divisible, fungible and scarce. In the case of gold, its scarcity furthermore ensures a high per unit value, making it feasible for large scale transactions.