If
there is reincarnation, I want to come back as a mega-bank, or better
yet as the Fed. Monetary Czar Bernanke is embarking on a buying spree
euphemistically called QE 3. The gnomes of Fed-land are really smart.
They know how much the economy will grow for four years . They know that
inflation will be 1.8% in 2012, 2013, and 2014, and (I'm not kidding!)
1.9% in 2015.
Of course, they have to be that smart. They have been granted the privilege of creating money whenever the fancy strikes them. Usually, they use that money to buy U.S. Treasury instruments of various maturities. This time, they will concentrate on long-term (how long?) securities, and maybe some mortgage-backed securities, just for variety.
In principle, this strategy should increase the value of long-term debt instruments. That is the same as lowering long-term interest rates. One might wonder why they don't buy other things, too. If they bought land or homes or cars or gold, the owners of those asset classes would probably benefit because -- unlike financial instruments -- supplies of those assets take time to increase in response to this increased demand. That would increase the money supply while lowering the asset supplies, at least temporarily. So everyone will rush to build more homes or cars, etc.
Of course, they have to be that smart. They have been granted the privilege of creating money whenever the fancy strikes them. Usually, they use that money to buy U.S. Treasury instruments of various maturities. This time, they will concentrate on long-term (how long?) securities, and maybe some mortgage-backed securities, just for variety.
In principle, this strategy should increase the value of long-term debt instruments. That is the same as lowering long-term interest rates. One might wonder why they don't buy other things, too. If they bought land or homes or cars or gold, the owners of those asset classes would probably benefit because -- unlike financial instruments -- supplies of those assets take time to increase in response to this increased demand. That would increase the money supply while lowering the asset supplies, at least temporarily. So everyone will rush to build more homes or cars, etc.
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