Quantitative Easing: How the Fed Prints Money

How Quantitative Easing Actually Works

Step-by-Step Process

1. Fed decides to do QE

   • Usually during crisis or recession
   • Announces target amount (e.g., “$80 billion per month”)

2. Fed creates digital dollars

   • Literally types numbers into computer
   • No printing press needed
   • Creates bank reserves out of thin air

3. Fed buys bonds from banks

   • Treasury bonds (government debt)
   • Mortgage-backed securities (MBS)
   • Pays banks with newly created money

4. Banks now have cash reserves

   • Can lend to businesses and individuals
   • Can buy assets (stocks, bonds, real estate)
   • Required to hold less in reserves (since 2020: 0%)

5. Money spreads through system

   • Interest rates fall (more demand for bonds)
   • Asset prices rise (more money chasing same assets)
   • Eventually consumer inflation (money reaches real economy)

The Key Insight

QE increases the money supply (M in MV=PQ) without increasing production (Q).

Result: Asset inflation first, consumer inflation later.

Historical QE Programs

Program	Dates	Amount	Reason	Result
QE1	Nov 2008 - Mar 2010	$1.7T	Financial crisis, bank failures	Prevented depression, stock recovery
QE2	Nov 2010 - Jun 2011	$600B	Weak economy, low inflation	Stock rally, dollar fell
QE3	Sep 2012 - Oct 2014	$1.6T	”Unlimited” QE until employment improved	Stock market tripled from 2009
COVID QE	Mar 2020 - Mar 2022	$4.8T	Pandemic, economic shutdown	Stocks +100%, housing +40%, then inflation

Total QE (2008-2022): ~$9 trillion

For context: This is more money than existed in the entire US economy in 1980.

COVID QE: The Biggest Money Printing Ever

The Numbers

Date	Fed Balance Sheet	Monthly Purchases	What Happened
Feb 2020	$4.2T	$0	Before COVID
Mar 2020	$4.7T	+$500B	Emergency QE starts
Apr 2020	$6.6T	+$1.9T	Unlimited QE announced
Peak (Apr 2022)	$9.0T	$120B/month	Massive ongoing printing
Today (2024)	$7.5T	-$60B/month	QT (shrinking)

In 8 weeks (March-April 2020), the Fed printed more money than in 100 years of its existence.

The Predictable Outcome

Timeline	Asset Class	Performance	Who Won
Mar-Dec 2020	Stocks (S&P 500)	+68% from bottom	Asset owners
2020-2021	Housing	+40%	Homeowners, investors
2020-2021	Bitcoin	+1000% ($10k →$69k)	Crypto holders
2021-2022	Consumer goods	+20% inflation	Nobody (everyone loses)
Lifetime	Cash savings	-20% purchasing power	Savers destroyed

Pattern: Assets rise immediately, consumer prices rise 12-18 months later.

Why QE Creates Inflation

Via MV = PQ:

Before QE:
M = $4T, V = 1.5, Q = $20T
MV = $6T = PQ
P = 1 (baseline prices)

After QE (+$5T):
M = $9T, V = 1.2 (falls initially, people scared)
MV = $10.8T
If Q stays at $20T, then P = 1.54

Result: 54% inflation eventually

In practice:

1. QE happens (M increases)
2. Velocity falls initially (V drops - people save, don’t spend)
3. Asset prices rise first (money flows to stocks/housing)
4. Velocity recovers (economy reopens, people spend)
5. Consumer inflation hits (18-24 months after QE starts)

QE vs QT (Quantitative Tightening)

Quantitative Easing (QE)

• Fed buys bonds → Creates money
• Balance sheet grows → M2 increases
• Interest rates fall → Borrowing is cheap
• Assets rise → Stocks, housing boom
• Bullish for markets ✅

Quantitative Tightening (QT)

• Fed sells bonds → Destroys money
• Balance sheet shrinks → M2 decreases
• Interest rates rise → Borrowing expensive
• Assets fall → Stocks, housing decline
• Bearish for markets ❌

Current status (2024): Fed doing QT (shrinking balance sheet by $60B/month)

The Fed Balance Sheet: Your Leading Indicator

Fed Balance Sheet = Total assets Fed owns = Money created through QE

How to Read It

Fed Balance Sheet	What It Means	Market Implication
Growing (QE)	Fed printing money	Buy stocks, real estate, risk assets
Flat	Neutral, waiting	Hold positions, watch closely
Shrinking (QT)	Fed destroying money	Reduce risk, raise cash, defensive
Accelerating growth	Panic mode QE	Maximum risk-on, huge bull market
Accelerating shrinkage	Aggressive tightening	Sell everything, recession incoming

Track it here: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm 

Historical Correlation

Fed Balance Sheet vs S&P 500: 0.92 correlation

When Fed balance sheet goes up → Stocks go up (with 3-6 month lag)
When Fed balance sheet goes down → Stocks go down (with 3-6 month lag)

This isn’t a coincidence. It’s cause and effect.

How To Invest During QE

When QE Is Announced

Asset Class	Expected Return	Why	Risk Level
Stocks	+20-50%	Liquidity flood, lower rates	Medium
Real Estate	+10-30%	Low mortgage rates, asset inflation	Medium-High
Bitcoin/Crypto	+100-500%	Fixed supply vs infinite dollars	Very High
Gold	+20-40%	Inflation hedge, currency debasement	Low-Medium
Cash/Bonds	-10-20% real	Inflation eats purchasing power	Guaranteed loss

The QE Playbook

Phase 1: QE Announcement (Day 1-30)

• Buy growth stocks (tech, high beta)
• Buy Bitcoin/crypto (inflation hedge)
• Sell bonds (yields will fall, but real returns negative)

Phase 2: QE Ongoing (Months 1-12)

• Ride the bull market (stay long stocks)
• Add real estate exposure (REITs, physical property)
• Dollar-cost average into crypto
• Don’t hold cash (losing 10-20%/year real)

Phase 3: QE Ending Warning Signs (Months 12-24)

• Watch for “taper tantrum” (Fed hints at slowing)
• Take profits on most speculative positions
• Rotate to defensive stocks (utilities, consumer staples)
• Build cash position (for eventual QT buying opportunity)

Phase 4: QT Begins

• Sell growth stocks (first to fall)
• Raise cash to 30-50% of portfolio
• Short-term Treasuries (safe, positive real yield)
• Wait for bottom to buy aggressively

Common Misconceptions

❌ “QE is printing physical money”

Wrong: QE is digital. Fed creates bank reserves electronically.
Right: No physical bills printed. Just database entries.

❌ “QE doesn’t cause inflation”

Wrong: Look at asset prices (stocks +100%, housing +40%)
Right: QE causes inflation, but assets inflate first, consumer goods later.

❌ “QE helps the economy”

Wrong: QE helps asset owners, not workers.
Right: Creates wealth inequality (Cantillon Effect). Rich get richer.

❌ “Fed can do QE forever”

Wrong: Eventually causes hyperinflation or currency collapse.
Right: Short-term boosts, long-term destruction of purchasing power.

❌ “QE is ‘stimulus’”

Wrong: Stimulus would put money in people’s pockets directly.
Right: QE gives money to banks and asset owners first.

The Uncomfortable Truth

QE is the biggest wealth transfer in history.

• From: Savers, workers, fixed-income retirees, the poor
• To: Banks, asset owners, stock holders, the wealthy

How it works:

1. Fed prints money → Banks get it first
2. Banks buy assets → Stocks, real estate prices rise
3. Wealthy own most assets → Their portfolios soar
4. Eventually inflation → Workers’ wages lag, purchasing power falls
5. Savers destroyed → Cash loses 10-20% real value per year

Result: Wealth inequality explodes during QE periods.

Data:

• During QE era (2008-2022): Top 1% wealth increased by $20 trillion
• Bottom 50% wealth increased by $3 trillion
• Most of bottom 50% increase was home equity (already owned homes)

Next Steps

• Understand who benefits first (Cantillon Effect) →
• Track M2 money supply →
• Learn MV=PQ equation →
• See how to protect yourself →
• Study Fed policy tools →

Live Data Sources:

• Fed Balance Sheet 
• M2 Money Supply 
• Fed Reserve Balances 

Recommended Reading:

• “The Price of Tomorrow” by Jeff Booth
• “Layered Money” by Nik Bhatia
• “The Bitcoin Standard” by Saifedean Ammous

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Bottom Line: QE = Money printing = Asset inflation = Buy assets, don’t hold cash. The Fed will always print in a crisis. Position accordingly.