In the US, the US Federal Reserve controls the money supply. They do this by purchasing financial securities, mostly US government bonds, from financial institutions. As a result this increases their balance sheet. This is also called Quantitative Easing or QE.
You can find out more about it from Investopedia here:
The Visual Capitalist also has an excellent explanation here:
Why is this important? Because the Federal Reserve just announced USD 2.3 trillion in programs to support the economy on 9 April 2020 (Click for article). Prior to that it had already injected USD 1.5 trillion into the economy as reported on 27 March 2020 (Click for article).
So what is the impact of all this money printing (aka Quantitative Easing) and how does it affect you? We look at it below together with some analysis from investment strategist Lyn Alden (@LynAldenContact). In basic economics we learn that when you increase the supply of a commodity your reduce its value. The basic result of all this money printing is to reduce the value of the US dollar.
From 2002 to 2020:
- The Federal Reserve Balance sheet has increased approximately 840% (Refer Figure 1)
- US household net worth measured in US dollars has increased approximately 166% (Refer Figure 2)
- But US household net worth has in reality actually dropped 70% when measured in ounces of gold (Refer Figure 3)
So what has happened is that it looks like your wealth has increased, but actually it has fallen!
This is the effect of Quantitative Easing. It creates the illusion that wealth has increased when it has actually dropped. Furthermore only people with hard assets benefit from the illusion because their asset prices inflate in US dollar terms. People with no hard assets have no assets to inflate and receive no such wealth effect. Worse still their purchasing power has reduced!
More details below
Federal Reserve Balance Sheet
Looking at Figure 1 below we can see how much the Federal Reserve balance sheet has increased. In the last two weeks it has increased dramatically in response to Covid-19.
- But since 2002 to 2020, the Federal Reserve balance sheet has increased some 840%!
US Household net worth in USD
Measured in US dollars, US household net worth looks like life has never been better:
- From 2002 to present day, net worth has increased from approx USD 45k to USD 120k (166%)
- This is the effect that Quantitative Easing has. It inflates the price of assets. This is great if you are an asset holder
- However if you are a blue collar worker living from hand to mouth with no assets, you are left out of the wealth effect. The rich get richer and poor get poorer.
US Household net worth in ounces of Gold
Measured in ounces of gold, US household net worth looks like a completely different picture:
- From 2002 to 2020, US household net worth has dropped approximately 70%