Quantitative Easing process explained by Forbes’ “Let Us Tell You The Ugly Truth About The Economy”

There’s been a lot of talk about the Fed’s “Quantitative Easing” in the media, but there really hasn’t been a clear explanation of what it is and why it may (or may not) be bad for the economy. I haven’t found anything I could “copy and paste” to explain what the big deal is.

While catching up with my monthly reading, I saw an article in the November 2010 issue of Fortune titled “Let Us Tell You The Ugly Truth About The Economy” (p98). About midway through the article, on page 106, the following paragraphs really hammer home what “Quantitative Easing” is…

“Let’s say the Fed buys $1 trillion of Treasury securities in the secondary market. Out of thin air, it creates $1 trillion in credit balances in the sellers’ accounts. The sellers have $1 trillion more cash than they did, increasing the money supply.

There is now $1 trillion less of publicly traded Treasuries, which props up their price. By contrast, if Goldman Sachs wanted to buy $1 trillion of Treasury securities, it would have to find $1 trillion of cash to pay for them. Sellers would have $1 trillion more cash than before, Goldman would have $1 trillion less. There would be no increase in the money supply or decrease in the Treasury supply.

If the Fed could buy endless amounts of Treasury securities without any side effects, it would almost be like free money…. The Fed can’t do that indefinitely without touching off inflation, debasing the dollar, or both.”

TL;DR : It would kind of like trying to buy a coke with a dollar bill you drew on the spot if you had the authority to do that (and the fancy paper and special ink).

Not good.