I’ve been wondering about “quantitative easing” since seeing how quickly the money supply has been increasing lately. Is the Federal Reserve really able to just print money out of thin air, decreasing the value of money relative to everything else and giving us a forced pay cut? You and I would go to jail for counterfeiting money. So is that what the Federal Reserve is doing? I looked up many articles and it seems to be that money is being created out of thin air to buy bonds.
Consider this article:
https://www.investopedia.com/terms/q/quantitative-easing.asp
“To execute quantitative easing, central banks increase the supply of money by buying government bonds and other securities. Increasing the supply of money lowers interest rates. When interest rates are lower, banks can lend with easier terms. Quantitative easing is typically implemented when interest rates are already near zero, because, at this point, central banks have fewer tools to influence economic growth.”
They don’t specifically say that money is being printed but how else do you increase the money supply? Former Fed chair Alan Greenspan has famously stated “The United States can pay any debt that it has because it can always print money to do that.” https://twitter.com/jameshenryand/status/1426372051460366337
He was a master of normally making things sound too complicated for ordinary people to understand. Consider this quote: “We’re not printing money; we’re just expanding the federal bank’s balance sheet. But eventually, that will turn into printed money.” https://www.cfr.org/event/alan-greenspan-central-banks-stagnation-and-gold
The best counterargument I’ve read as to why Quantitative Easing isn’t really printing of money is that the money is created digitally, not on a printing press. It seems clear to me that they are creating money out of thin air, thus reducing the value of the U.S. dollar relative to everything else.
The Investopedia article goes on to say: “If central banks increase the money supply, it can create inflation. The worst possible scenario for a central bank is that its quantitative easing strategy may cause inflation without the intended economic growth. An economic situation where there is inflation, but no economic growth, is called stagflation.”
And they have certainly succeeded in creating inflation. The producer price index for final demand, which tracks inflation pressure before it reaches consumers, jumped 7.8 percent for the 12 months ended in July.
In July 2021, the cost of Bacon was up 11% from July 2020, Beef was up 8%, Lettuce was up 5%, Fish was up 7%, Milk was up 8%, Airfare was up 19%, Gasoline was up 42%, Dresses were up 19%, Hotels were up 24%, Used Cars were up 42%, New Cars were up 6%, and Public Transport was up 14%.
Washington State has had a moratorium on rent increases since last March. Now that landlords are able to finally raise rents to keep up with inflation, caused by the printing of money, tenants unions are calling landlords greedy and are calling for rent strikes. https://www.krem.com/article/money/economy/boomtown-inland-northwest/unionizing-against-rent-increases/293-a514173e-6597-4a7b-a601-91ef600532b9
Why not call for the Fed to stop devaluing the currency? By devaluing the currency, not only does the Fed make goods more expensive, it also effectively gives everyone a pay cut as people are being paid with money that isn’t worth as much as it used to be. Unless workers are able to get their salaries up, they fall behind. We don’t have a wage problem, we have a money problem. Politicians can be seen to be heroes by increasing the minimum wage. But they didn’t do anything to stop the devaluation of the currency. In fact, they are responsible for it due to reckless spending of money they don’t have. That spending puts pressure on the Fed to keep interest rates low or near zero, so interest payments on the national debt are not too high. Politicians need low interest rates so they can engage in deficit spending. If interest rates were higher, the national debt would be harder to sustain. https://www.usdebtclock.org/
Rents typically go up, with a bit of delay, after housing prices go up. And housing prices have gone up a lot recently.
But what really caused housing prices to go up? Certainly, there were interruptions to the supply chain, high lumber prices, people moving from high density areas to lower density areas to reduce the risk of Covid infections, the ability to work from home resulting in people fleeing high cost of living areas for lower cost of areas…
But how about the increase in the money supply? This graph shows the correlation between the money supply in England and housing prices: https://twitter.com/dlacalle_IA/status/1032911640335855616
We probably have a similar correlation in the U.S. So when the money supply increases, interest rates go down, people are able to afford more expensive houses, and values go up and more money chases houses that are available for sale. There will be some new construction, but the cost of labor and materials will be higher for these new houses, so the cost of the new houses will be higher than houses built several years ago.
Instead of calling landlords and suppliers greedy for raising prices, why not blame the Fed for devaluing the currency? And blame the politicians for deficit spending?
It isn’t so much that property is going up in value as dollars are going down in value relative to everything else because it is rapidly being printed (“quantitative easing”). Certain areas are also seeing rapid growth due to in-migration, which increases values more than the inflation rate. But even with flat population, values go up with inflation.
So knowing that the value of the money in your wallet and bank account is going down, what can you do about it? Low cost leverage through 30 year fixed loans is one of the best ways to get ahead of inflation. When you borrow money to buy a property, you get to pay it back in the future with money that isn’t worth as much, as paper money goes down in value over time relative to goods.
If property values go up with inflation, leverage gets you ahead of inflation.
Let’s say you put 10% down on a $100,000 house. That means you have invested $10,000 and borrowed $90,000. Your equity is $10,000. In a year, with inflation at 5% (even if no population change there will be inflation), the house is worth $105,000. (The official government consumer price index is 5% for a basket of goods. In actuality, inflation may be more and home prices may rise more quickly than inflation if there is in-migration and insufficient new construction. Spokane has the second highest price increases, second only to Boise, since 2017. ) Your equity is now approximately $105,000-10,000 or $95,000. $5000 higher. That is a 50% rate of return on the $10,000 cash you invested.
That is oversimplified because there are closing costs when you sell, because the holding costs (payments, taxes, insurance, repairs) may be more (or less) than rent, and your payments will partly be for loan principal. But it gives you an idea of the value of leverage if there is inflation.
Leverage cuts both ways. If there is deflation (which could be triggered if the Fed raises interest rates too quickly), your loss can similarly be multiplied. The central bank will do everything it can to avoid deflation though.
This is how banks make money, with leverage. It is called the fractional reserve system. Banks can lend out more money than they have on deposit; i.e., they use leverage. So they want inflation. And the Federal Reserve is made up of bankers.