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January 26, 2009

Quantitative Easing Versus Credit Easing

By Wade Rousse

In this speech, Chairman Bernanke describes the Fed’s recent actions as “credit easing” rather than “quantitative easing.” The difference is that in a pure quantitative easing regime, policy makers specifically target the quantity of bank reserves. They do not focus on purchasing securities or directly increasing loans to financial institutions.

However, the Fed’s current approach can accurately be described as one that is making loans and purchasing securities. The idea is to continue actively managing the newly acquired mix of assets in a way that will favorably affect credit conditions for households and businesses. This is why the Chairman says that credit easing is a better term to explain the approach.

Therefore, even though the term “quantitative easing” is fun to say. You should be careful not to fling it out there when you’re explaining the Fed’s current monetary policy. “Credit easing” is a better description. For greater details, I strongly encourage you to read the speech.

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Posted by Wade at 5:51 PM | Comments (3) | TrackBack

January 12, 2009


By Wade Rousse

The title of this posting should make your “jargon alert” siren begin to flash and whistle. A friend recently asked me to explain “seigniorage.” I consider the friend an intelligent person, and his question prompted me to think others might be equally confused about the meaning of the term, thus this posting.

There are three ways a government can get revenue to finance its spending. First, it can tax. Second, it can borrow – by selling government bonds. And third, it can print money. The revenue raised from printing money is called seigniorage.

Harvard University professor Greg Mankiw writes an interesting case study in his text book titled “Macroeconomics.” He mentions that seigniorage hasn’t been a major source of revenue in the U.S. for a very long time. However, this was not always the case. During the American Revolution, the Continental Congress relied on printing fiat money to help finance the war.

In 1775, $6 million of new Continental currency was printed, and in 1776 $19 million more was added to the pile. The trend continued in 1777, 1778 and 1779, as $13 million, $63 million and $125 million of new currency was printed.

This large increase in the quantity of the Continental dollar made it nearly worthless. At the time, a familiar expression was, “It’s not worth a continental,” – meaning that the item had little real value.

So, seigniorage is simply another economics term that sounds confusing at first but essentially refers to a fairly simple concept – raising revenue by printing money.

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Posted by Wade at 8:15 PM | Comments (20)