Understanding the Fed’s Money Printer, and Lessons from the Crisis (EP.109)

Quantitative easing is a monetary policy whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity. But what exactly does that mean? In today’s episode, Benjamin and Cameron are going to address this topic, avoiding highly politicized aspects, like whether or not central banks should be involved in the economy in the first place, and focusing purely on the operational perspective of quantitative easing – what is it, how it works, and what the intended transmission mechanisms are. Benjamin explains what he has learned through his extensive research, from what money printing and the stock market have to do with one another, where the money for loans comes from, how central banks can influence lending rates, and the difference between regular open market operations and quantitative easing. We also cover how quantitative easing works, the relationship between bank reserves and money in the economy, and what causes inflation, as well as the effect of quantitative easing has on stock prices (if any). We also catch up on recent news stories, and Cameron takes us through five key personal finance lessons we can learn from this crisis. If you’re looking to understand quantitative easing, this episode will hopefully become a useful resource! Tune in today.

Key Points From This Episode:

• This week’s book of the week is Mindf*ck: Cambridge Analytica and the Plot to Break America by Canadian, Christopher Wylie [0:04:38]
• A chart showing the ratio of the Nasdaq 100 index divided by the Russell 2000 [0:08:22]
• University endowment sued for active investing by 94-year-old Clarence Herbst. [0:10:02]
• This was not the first time Clarence Herbst had an issue with his alma mater. [0:13:05]
• Multimillion-dollar mismanagement of public pension funds in Maryland, 2014. [0:13:22]
• Benjamin introduces the main topic, quantitative easing (QE), a central bank action. [0:14:42]
• What do money printing and the stock market have to do with one another? [0:17:37]
• You can summarize money as a social construct that facilitates economic activity. [0:20:06]
• As long as there are credit-worthy borrowers, banks will print money out of thin air. [0:22:28]
• The distinction between central banks and private banks, which interact with customers and have to monitor their net flow of money. [0:25:27]
• Open market operations allow a central bank to influence overnight lending rates. [0:28:30]
• The difference between regular open market operations and QE. [0:33:14]
• A couple of theories about how QE might work, like the portfolio balance theory. [0:37:42]
• There is no relationship between reserves and money in the economy. [0:41:11]
• What causes inflation? It’s not reserves! Demand for loans drives demand for loans. [0:43:07]
• What about the effect of QE on stock prices? We would expect a positive impact. [0:45:14]
• Money is this medium that facilitates economic activity and that's all it does. [0:47:40]
• Five key personal finance lessons we can learn from this crisis: Stocks are volatile [0:50:35]
• Debt is dangerous and emergency funds have a very important purpose. [0:50:35]
• Don’t stop spending, always prepare for the worst – disability insurance is crucial! [0:54:51]
• Cameron still wants to understand how fee-free trading platforms make money – nothing is for free! [0:50:35]