If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content

Another quantitative easing video

More on quantitative easing. Created by Sal Khan.

Want to join the conversation?

  • leaf green style avatar for user Tarek Seif El Nasr
    Will not quantative easing increase inflation?
    (6 votes)
    Default Khan Academy avatar avatar for user
    • blobby green style avatar for user peter.y.li
      Martin, I think you have to be mindful of multiple market forces at play. Yes, if nothing else happens, I think there will be inflationary pressures as you have described. But in a severe global recession, when there is dramatic decrease in demand by governments (e.g., austerity programs), exports (because the recession is global) and households (consider high unemployment), there are actually deflationary pressures as well (I.e., either no money to buy things, or it's better to wait for prices to fall). The question of how much easing must be made with the consideration of these pressures.
      (24 votes)
  • mr pink red style avatar for user Mustafa
    What if...
    1. Fed prints money 500billion(assets) = 500billion(liability)
    2. Fed purchases Treasuries: Mortgage Backed Securities: Corporate Bonds
    Money is now stimulated into the economy.
    3.The fiat money that was originally printed is now replaced with alternative assets:
    500billion worth of MBS's, Treasuries and Corporate Bonds
    4. New balance sheet (500BillionAsset) MBS's: Treasuries: Corporate Bonds =(500BillionLiability)
    5. 3 years later... FED makes a profit on those 'investments' through interest say 200billion
    6. New balance sheet : assets(700billion): liabilities(500billion)
    7. 7-5 = 3
    8. When the FED decides to cash in on the investments 500billion of the money is literally burnt or destroyed because it was accounted for as a liability right from the start.
    9. FED makes 300billion profit
    10. Inflation is dramatically reduced from skyrocketing in the next decade or so...
    11. The economy can grow with a modest 2% inflation year on year with a couple of deflations here and there in about the next twenty years. Also, the lower the profit margins for the FED the better. Okay, tell me what I missed.
    (4 votes)
    Default Khan Academy avatar avatar for user
    • leaf green style avatar for user Ryan
      The money going into the economy is just reserves that sit on deposit at the Fed. The money doesn't stimulate the economy unless a bank loans those funds out. If there is no demand for loans then 500 billion in reserves has entered the economy and 500 billion of bonds leave. There is no increase in assets and therefor no threat of inflation. The only thing that has changed is the make up of the assets in the economy.
      (8 votes)
  • male robot donald style avatar for user King Emile Heskey III
    What is a "log jam"?
    (2 votes)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user Dave Mac
    I've seen articles claiming the Federal Reserve is neither Federal and actually has few or even no reserves. Is their any truth to these claims?
    (1 vote)
    Default Khan Academy avatar avatar for user
    • ohnoes default style avatar for user Tejas
      That is partly true and partly false. The way it works is that there are twelve federal reserves banks. Each of those reserve banks deals with a specific portion of the country and has its own board of directors. Six of the nine directors are chosen by the member banks, and the other three are appointed by the Board of Governors. The board of directors manages the day to day business of the Federal Reserve such as making loans and handling bank-to-bank transactions. That is the part that is clearly not federal. They also appoint the president of the regional federal reserve bank.

      On the other hand, the seven members of the Board of Governors are chosen by the President, and approved by the Senate. This part, therefore, is clearly federal. The Board of Governors controls the operations of all twelve banks, and decides on both the discount rate and the reserve requirement, and it also creates regulations that all member banks must follow. The Open-Market Committee, made up of the seven governors, the president of the reserve bank of New York, and four other reserve bank presidents, basically manage the money supply. Notice, here, that even the Open-Market Committee has a majority that is appointed by Washington.

      As for the reserves issue, it depends on what you call reserves. You could claim that the federal reserve banks have no reserves, because the little cash that they hold is technically not part of the money supply while it is held by the central bank. You could claim that the federal reserve banks have very few reserves, because it has very little cash and it has no reserve accounts (at itself). You can also claim that it has infinite reserves, because the reserve banks can simply create reserves on its ledgers at will. Of course, the reason it is called the Federal Reserve is because it was originally designed to carry reserves of gold, when the United States was still on the gold standard.

      If you want to learn more, then I would recommend going to the Federal Reserve's website at federalreserve.gov. It explains entirely how the system operates.
      (3 votes)
  • blobby green style avatar for user Rahul Kanjani
    what if they run out of money to buy more securities ?
    (1 vote)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user ehallacli
    Sal frequently mentions that FED prints money, however only US Treasury can print money. So how is FED controlling the money supply by QE while not physically printing money? I would appreciate if one can clarify this.
    Thanks.
    (1 vote)
    Default Khan Academy avatar avatar for user
    • male robot hal style avatar for user Andrew M
      The Fed buys any currency it needs from the Treasury. It pays the cost to produce the currency, not the value of the currency. So for example maybe it pays 1c for a quarter and a few cents for a twenty dollar bill.
      It really doesn't matter who does the printing. What matter is how the money is put into circulation. The Fed buys securities in exchange for dollars, and that increases the money supply.
      (1 vote)
  • blobby green style avatar for user RB!
    would credit easing akin to debt easing? essentially easing debt the debt burden in the economy?
    (1 vote)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user victorapartment1987
    What is the sign or factor to stop the open market option or QE?
    (1 vote)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user victorapartment1987
    What factors does FED watch to determine when it is the time for open market option or QE? Debt/GDP ratio, pure GDP, or something else?
    By my understanding, open market option happens during the normal boom-bust cycle, while the QE happens during deleveraging process. However, I don't understand how the FED determines when to do the corresponding option.
    (1 vote)
    Default Khan Academy avatar avatar for user
  • blobby green style avatar for user perejavier
    With all this easy money, how is the FED keeping us from Hyper Inflation? What power does he have to control strong head winds?
    (1 vote)
    Default Khan Academy avatar avatar for user
    • orange juice squid orange style avatar for user FishHead
      When signs of hyperinflation arise the plan is to take all the money back out by buying back all the treasuries and securities. Unfortunately, they bought some pretty crappy assets like toxic MBSs so when it comes time to reign the money back in it's highly unlikely that they're not going to get it all back. Thus, billions if not trillions will have been pumped into the market that they can't get back and THEN inflation will go out of control.

      I hear that when that happens we'll have to run to the IMF and the dollar will die and be replaced by the IMF's currency. Thus, the global currency is born and the dollar as well as the US economy will sputter and die, assuming that the Arabs kick us when we're down and ditch the petrodollar.

      Dark days are ahead.
      (1 vote)

Video transcript

Let's say the United States economy is going into a recession or maybe even worse than a recession. And you are the Chairman of the Federal Reserve and you need to do something about it. Well, the first thing you would do is that you would lower the federal funds rate. And that's the rate that banks lend to each other overnight. And the way that you lower it, if the banks don't do it on their own after you say you want to lower it, is that you print money as the Federal Reserve. And you use it to buy usually short-term treasury securities. And then that money gets deposited in banks. So the demand for reserves, because that's what these things are, the demand for reserves goes down, supply goes up, and the federal funds rate should go down. But what happens if you keep doing this and you keep lowering the federal funds rate all the way down so that the overnight borrowing rate is approximately 0%? What do you do then if the economy still looks like it's in a bit of a tailspin? Well you could still print money, but using that money to buy short-term debt won't help any because you're not going to lower the short-term overnight interbank interest rate anymore. So you can go out and buy other things. And those other things can be longer term treasuries or it could be other types of securities. You could buy mortgage-backed securities. You could buy commercial debt. And this idea of printing money, not just for target interest rate, but essentially, to get that money into circulation and maybe to affect other parts of the market, this is called quantitative easing. And in Bernanke's mind, although that's exactly what he's doing, he's printing money to buy other things than what the Fed traditionally does when he cares about the overnight borrowing rate, he calls it, not necessary quantitative easing, but credit easing. And in his mind, even though mechanically they are the same thing, in his mind, he saying, look, I'm printing this money not just for the sake of printing the money and putting it into circulation, I'm printing money so that I can buy particular assets where it seems like there might be a log jam in the credit markets. Because with just printing money and buying government securities, maybe the interest rates on government debt goes down, but maybe because of panic or crisis, interest or the prices on these things don't behave properly. So in order to fix that, credit easing, in the Bernanke sense, would be to go out and buy this type of asset.