Why Quantitative Easing Is Similar to Monopoly

Thursday, November 4, 2010
By Paul Martin

By: Jared Levy
MarketOracle.co.uk
Nov 03, 2010

The second iteration of quantitative easing (QE2) is supposed to make “money easier” — make it flow from the banks to consumers to businesses, etc. The first round of quantitative easing pumped billions of U.S. dollars into the system, but not much of it made it into my hands, and I’m guessing yours either…

If you have ever played Monopoly and have been “the bank,” you get to control all the money that is divided out to each player.

Remember that the “extra” money is not part of the money circulating in the game yet.

Did you ever cheat and add a little of that “bank” money to your own reserves? I know some of you may have at least thought about it. I mean, how cool was it to just print or add money as you saw fit, so you could buy more stuff?

That is essentially what the Federal Reserve is doing. The Federal Reserve, which is the central banking system of the U.S., is printing extra U.S. dollars to buy “stuff.” That stuff they are buying is not Boardwalk or Park Place on the Monopoly game board but rather government bonds, corporate bonds, mortgage-backed securities, and other securities from banks and other financial institutions around the country.

It’s considered a good thing for banks to sell (to the Federal Reserve) the risky and not-so-risky stuff (assets) that is sitting in their inventories. They can exchange that stuff for cash so they can go and lend new cash in the form of loans and such to Americans who are in need of it.

The Rest…HERE

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