Except it never works. All it does is devalue the money that you have, and artificially inflate the prices of hard assets you own.
Chump reporters yesterday parroted the, “Dow Jones Industrial Average was up on the news yesterday by 90 points.”, without thinking about why. The reality is the Fed is out of bullets and yesterday’s announcement will do nothing to stimulate the economy. If you haven’t been watching, Japan has engaged in continuous quantitative easing since the 1990's. They call it the lost decade over there but it’s more like the lost economy.
In a quantitative ease, the Fed buys US Treasury Debt of different expirations and injects actual cash into the economy. Banks that hold the treasuries sell them to the Fed, and receive the cash. Ideally, the banks will turn and lend that money out to businesses at a low interest rate.
The problem with the strategy is there is no economic growth in the broad economy. The Fed is fighting massive headwinds out of its control. China is in trouble and we all know about the European situation. So businesses don’t demand the cash from the banks, and the banks simply reinvest the cash in the US Treasury market. There is no velocity of money turning over through the economy.
But here are some real world effects when the Fed announces a policy like this. Some markets ignore supply and demand fundamentals because of the devalued dollar. For example, prior to the announcement the December Lean Hog contract ($HE_F) was trading around 71.05. It was trending lower on the day, and that makes sense because farmers are responding to the drought by culling hog herds and sending a lot of them to market for slaughter. But the end of the day, the hogs rallied 100 points. Pure QE effect.
