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Quantitative Easing
Is it the most effective way?
By Harry C. Veryser
University of Detroit Mercy
Rochester College
Monetary Policy. What is it?
Monetary policy is the act of influencing and/or regulating the money supply and
interest rates. In the USA, monetary policy is conducted by the Federal Reserve
Bank (Fed).
The Federal Reserve has a “dual mandate” given by Congress. The Fed is to conduct
monetary policy with a view toward:
1) Full employment (which is defined as 4-6% unemployment)
2) Price stability
The Federal Reserve’s Tools of Monetary
Policy
Four Currently in Use:
1)
Reserve Requirements
2)
The Discount Window
3)
Interest Payments on Excess Reserves
4)
Open Market Operations
A fifth on the way: The Reverse Repo Facility
Open Market Operations
The Federal Reserve’s buying and selling of
primarily US government securities (bonds) but
recently other assets as well
Quantitative Easing Programs
Quantitative Easing One
November 2008 through April 2010
$100 billion of Mortgage Backed Securities bought each month
$1.7 trillion total
Quantitative Easing Two
November 2010 through June 2011
$85 billion of US Government Securities bought each month
$595 billion total
Quantitative Easing Three
September 2012 through present
$40 Billion of MBS, $45 Billion of USG Securities each month
Began “tapering” monthly purchases beginning September 2013
Process of Quantitative Easing
FED
Commercial
Banking System
Business (The
Public
• Purchases Assets from Banks or Public
• Increases Bank Reserves
• Receives interest on Reserves from FED
• Must be Willing & Able to lend to Business & Public
• Must be Willing & Able to Borrow from Banks
• Willing and Able are the Main ways money gets into circulation
Able & Willing-Key to Credit Expansion
The Public must be Able & Willing to Borrow.
The Banking System must be Able & Willing to
lend.
Otherwise monetary (QE) is impotent!
Breakeven Point-Key to Balance
Sheet Health and the ability to
enable A & W.
ExampleA company sells a product for $100 of which its variable
costs (labor & material) is $66.00.
Which means to get $100,000 it must sell $300,000.
If it discovered a new technology or could cut fixed costs by
$100,000 that would be equivalent to 3 times that amount
in sales.
Any increase in fixed costs is equal to 3 times the sales.
Every imposed costs of government regulation necessitates
an increase of 3 times sales or a 1/3 cut in fixed costs to
break even.
Technology can lower costs and help ease the
burden of increased costs such as government
regulation.
A. Fracking & Shale Oil Discoveries
B. The Electronic Age
In a sense a race between new discoveries
and imposed costs
Application of Capital
Real Economy vs. Financial
Economy
Which controls economic
growth?
Balance Sheets- Real
Economy
A & W on the borrowers
side result of
entrepreneurial
opportunity & collateral
Good Balance Sheets and
Entrepreneurial Opportunity
make A & W possible from the
Financial or Banking Side.
Thus Monetary Policy (QE)
becomes effective!
Spending Stimulus tries to move the economy
from the sales side.
The Multiplier is a fraction of Lowering costs
and is thus generally ineffective.
Lowering Costs=Lowering BreakEven Point.
The Multiplier here is far greater
and will enable A & W to occur.
The Austrian Multiplier
 The
Huge Cost of Regulation.
 Why Spending Stimulus is less
effective.
Lowering Costs more
powerful that increasing
sales
Regulation = Costs
The United States Economy is burdened with
1.5 Trillion in regulatory costs according to a
study of the Small Business Bureau and the
National Association of Manufacturers.
QE is entirely ineffective
against Tax and Regulatory
Uncertainty.
The Mirage of
Inflation
Process of Inflation-Fiduciary Credit
FED
Commercial
Banking System
Business (The
Public
• Purchases Assets from Banks or Public
• Increases Bank Reserves
• Receives interest on Reserves from FED
• Must be Willing & Able to lend to Business & Public
• Must be Willing & Able to Borrow from Banks
• Willing and Able are the Main ways money gets into circulation
Federal Reserve Assets: Securities Held
Outright
The Road to Inflation
Progressive Democrat Lyndon Baines Johnson signs The
Coinage Act of 1965 removing silver backing from the
U.S. Currency reversing a law signed By George
Washington in 1792. On June 24, 1967 Johnson signs a
sunset provision on the convertibility of the dollar into
silver thereby making the dollar a fiat currency. On
March 20, 1968 Johnson signs a law suspending the
requirement of 25% gold backing for the U.S. Dollar.
August 15, 1971-Establishment Republican Richard
Nixon ends any discipline of gold following Progressive
Democrat Lyndon Johnson who removes the gold cover
from the dollar.
The Dynamics of Inflation
Who
first?
gets the money
Cantillon Effects
“(A) general effect of monetary expansion is a real wealth transfer from those
who receive the new money last to those who receive the new money first.
This transfer is called a “Cantillon effect,” for Richard Cantillon, who is credited
as the first to describe this process. Money is injected at specific points into the
economy. Those who receive the new money first are able to purchase real goods
and services at preexisting prices. As these recipients spend the new money, they
attract resources to themselves by bidding up prices. The second round recipients
of the new money then spend the new money according to their own preferences.
The new money works its way through the economic system with each transaction,
increasing prices in an inconsistent manner. The people who have not yet
received the new money face higher prices and are unable to purchase as
much. Their real wealth diminishes. Thus, the last recipients lose real wealth
to those who gained the new money first.”
Paul Cwik, An Investigation of Inverted Yield Curves and Economic Downturns
Since 1971! The year Nixon ended the
Gold Standard

Notice the year 1971!
1971-Ending the Gold Standard
Economic inequality is not a problem per se. Why not?
1) Some people are more interested in making money than
others
2) Some people produce more value than others
3) Some people inherit great sums of wealth
a. Use it to produce value for others? Great!
b. Consume and or squander it? Diminish
inequality
Simply by virtue of the fact that the following
sectors are commonly the first recipients of the
new purchasing power, expansionary monetary
policy will cause them to become artificially
larger and more profitable than otherwise:
1) Finance
2) Government
3) Large Business
"LSAPs also appear to have boosted stock prices,
presumably both by lowering discount rates and by
improving the economic outlook; it is probably not a
coincidence that the sustained recovery in U.S. equity
prices began in March 2009, shortly after the FOMC's
decision to greatly expand securities purchases. This
effect is potentially important because stock values
affect both consumption and investment decisions."
Federal Reserve Chaiman Ben Bernanke, "Monetary Policy since the Onset of the
Crisis."
Speech given at 2012 Jackson Hole Summit
Why Does Expansionary Monetary Policy
Lead to Increased Equity Prices?
1) Lower interest rates -> lower borrowing costs -> higher
margins -> higher stock valuations
2) Lower borrowing costs encourage firms to engage in stock
buybacks
3) Investors reaching for yield move away from bonds and
into dividend yielding stocks, particularly blue-chips.
Federal Reserve Securities Held Outright with
QE Programs Labelled
Correlation Between Fed Balance Sheet and S&P
500
S&P 500 Stock Index Since January of
2010
Correlation Between Fed Balance Sheet and S&P
500
As of 2010:
The top 1% wealthiest people in America owned 35% of all stocks and
mutual funds
The next 9% owned an additional 45.8%
Altogether the top 10% wealthiest owned 80.8% of all stocks and
mutual funds, meaning that the rest of the population—90% of the
population—owned only 19.2%
The top 10% wealthiest own over four times as many stocks and mutual
funds as the rest of the country
“Trickle down?”
Why Does Expansionary Monetary Policy
Lead to Increased Equity Prices?
1) Lower interest rates -> lower borrowing costs -> higher
margins -> higher stock valuations
2) Lower borrowing costs encourage firms to engage in stock
buybacks
3) Investors reaching for yield move away from bonds and
into dividend yielding stocks, particularly blue-chips.
Where is the Wealth Located?

Lower Manhattan. Particularly zip codes 10272 (shown), 10112, and 10111
Where is the Wealth Located?
Judging by median household income, as of 2014 these are the nine
richest counties in the USA according to the US Census Bureau:
1. Falls Church City, VA
2. Loudoun County, VA
3. Los Alamos County, NM
4. Howard County, MD
5. Fairfax County, VA
6. Hunterdon County, NJ
7. Arlington County, VA
8. Douglas County, CO
9. Stafford County, VA
Where is the Wealth Located?
Six of the nine are within a one hour drive of Washington DC (according
to Google Maps):
1. Falls Church City, VA (16 min drive to DC)
2. Loudoun County, VA (54 min drive to DC)
4. Howard County, MD (51 min drive to DC)
5. Fairfax County, VA (24 min drive to DC)
7. Arlington County, VA (11 min drive to DC)
9. Stafford County, VA (50 min drive to DC)
Recent Bank Bailouts

Continental Illinois in 1984 (where the term “Too
Big to Fail" was coined)

The Mexican Currency Crisis in 1994

Long Term Capital Management in 1998

TARP and TALF in 2008-2009

Quantitative Easing, 2009-present
Growing Income Inequality in America Since the Early
1970s
Share of Total Household Wealth Growth Accruing to
Various Wealth Groups
Mises Prediction on Inflation
 Everything
that is done by a government
against the purchasing power of the
monetary unit is, under present
conditions, done against the middle
classes and the working classes of the
population.

On Money and Inflation: A Synthesis of Several Lectures,
by Ludwig von Mises, given at the Foundation for
Mises and the Austrians explain that the
increase in money & credit will benefit those
who have market power or receive the
money/credit first.
The Top 1%
Again, Things diverge in 1971
Taxes tell a story
The Differential in prices give a clue
Compare the prices
The Assault on Saving
Personal Savings Rate
Americans go further into debt
The following slides show the trade deficit
increases after Johnson ends metallic backing for
U.S. dollar and Richard Nixon ends dollar
convertibility into gold.
Why Trade Deficit?

1. Tax Reform Act of 1976- Watergate Congress

2. Foreign Account Trade Compliance Act (FACTA)- Obama Congress (2010)

Source- The New American, April 24, 2014

3. American Firms leaving the U.S.

4. The U.S. Dollar becomes a fiat currency

Source: The Wall Street Journal, May 12, 2014
Johnson ends gold & silver backing from dollar
If the American people ever allow private banks to control the
issue of their currency ... the banks ... will deprive the people of
all property until their children wake up homeless on the
continent their Fathers conquered[.] I believe that banking
institutions are more dangerous to our liberties than standing
armies[.] Thomas Jefferson
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