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Chapter 5: The Fed on Steroids

few keys on its computer. Economists call this practice
monetizing the debt or quantitative easing (QE). Notice
what is happening here. The Federal Reserve creates
money out of thin air, and then lends it out and collects
interest on this newly created money—and who
ultimately pays the interest? The American taxpayer!

Quantitative Easing has found widespread use
since 2008. Central banks, such as the Federal Reserve,
Bank of Japan, and the European Central Bank, have
resorted to this policy to kick-start economic growth. In
the United States, we have experienced four rounds of
quantitative easing; in the fourth round, the Fed bought
long-term U.S. Treasury notes, buying $85 billion in
Treasuries from member banks each month. The Fed
has also been active in buying mortgage-backed
securities from Fannie Mae and Freddie Mac. When the
Fed increases the money supply more than the economy
increases goods and services, we should experience an
inflation problem. However, despite this flood of newly
created money, we have not experienced an inflation
problem.
The first reason QE has not caused inflation is
that a lot of this new money has flowed to other
countries instead of circulating in America. Because the
U.S. dollar is still the world’s standard currency, there
is a demand for it internationally. But as mentioned
above, this is about to change.

Second, when banks do not lend this money to the
public, the money will not cause inflation. Because the
Federal Reserve pays interest on money that banks
deposit at the Fed, banks have an incentive to park
money at the Fed rather than lending it to people. The
Fed’s interest is only about .05 percent, but banks still

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