The term quantitative easing has been going around lately. It is a big term, but it’s meaning is pretty straightforward: to artificially increase the money supply. Recently released Federal Reserve notes hint that the Fed will be leaning toward utilizing more quantitative easing in the future.
What are the effects of an increased money supply? Is this merely short term stability at the cost of long term sustainability? Is quantitative easing economically sustainable?
The increase in the money supply is in attempts to inject liquidity into the economy. The idea is that the liquidity will spark investment and consumption amongst the population. (On a side note, as sustainability folk, don’t we want less consumption overall in the first place? Why would we want to stimulate that?)
It is strange that the Fed needs to stimulate the economy, even though we have been “out of a recession” for more than a year. One could argue that the Fed is attempting to prevent a double dip recession. But in doing so, I worry that it may be providing the seeds for a prolonged recession, or even the next recession.
Let me explain with a more concrete example. Take vegetables. We can either grow vegetables organically or inorganically:
With organic farming, vegetables grow at a modest yet natural rate. Care is given to the soil’s health to maintain its nutrients and longevity, and to ensure that it will be productive in future seasons. Yields will be less, at a higher quality, but the soil will be fertile and sustainable for the long term.
In an organic economy, their is no need for the Fed to stimulate the economy, as the economy is nurtured by its nature. Prices fluctuate accordingly and money will find its way to its best used purposes. Growth is slow and steady. Or to use our favorite word, growth is sustainable.
Now turn to inorganic or conventional farming. Artificial fertilizers and harmful pesticides are used to stimulate growth. The fertilizers not only make their way into the vegetables, but the high growth they encourage harms the soil in the process. You may get higher yields today, but the loss of nutrients are stripped from the soil for tomorrow. Or you may get no yields because the fertilizers and pesticides are too strong. This is an unsustainable way to grow vegetables.
In an non-organic/conventional economy, the Fed forces the economy to grow beyond its natural rate. Forcing growth hinders sustainable growth. It may even cause outrageous growth. Prices inflate due to an increase in the money supply. (Inflation used to be defined as an increase in the money supply, but it has now come to mean increased prices.) Money is malinvested and over-consumption ensues. Growth is erratic, unnatural, and artificial, perhaps even leading to a bust.
Although the Federal Reserve may desire to stimulate the economy by an increase of the money supply, quantitative easing may do more harm than good in the long run. Sure we may have an abundant harvest now, investment and consumption now, but at the cost of the future. In order have a sustainable economy, we need to return back to growing the economy organically.