QE3: What the Federal Reserve Bank's decision means for you

Today the U.S. Federal Reserve Bank voted 11-1 to launch QE3 a form of debt monetization, which means it is going to buy the Treasury's debt and monetize it by collecting the interest on that debt over the long-term. It keeps the money domestic, but there are good and bad consequences to their decision. Debt monetization is described in more detail in the video below.

Federal debt monetization explained

The Federal Reserve Bank has already created over $2 trillion dollars to purchase U.S. government and other debt via QE1 and QE2, the unemployment rate, which the Fed is mandated to lower, is still above 8 percent despite their actions. Oil prices, which are priced in dollars are nearing $100 per barrel. This is due in part to the liquidity created by QE1, QE2 and QE3.

To illustrate further, when the Fed creates money to buy assets, the total amount of money in the U.S. financial system increases one way or the other through their purchases from primary dealers. The result becomes higher gas prices, and inflationary pressure since oil is priced in dollars. 

Yet the Consumer Price Index is still only near 1.7 percent per the Bureau of Labor Statistics, why? The CPI is not a measure of inflation, but rather a measure of price in current dollars per the Mises Institute. An additional cost to consider is the cost of tax on the price of goods and services; when taxes rise are those included in the CPI? According to Shadow Government Statistics, a website that documents inflation using the Federal Government's previous official measurement of it, inflation is actually closer to 5 percent. You be the judge.

Below are some of the effects of quantitative easing.

• Equity inflation 
• Oil inflation
• Dollar devaluation
• Low bank savings rates
• Reduced cost of servicing national debt

The reason the stock market loves monetary liquidity is because more money made available via the bond purchases makes it way into various markets. That and the incentive to invest in bonds declines and encourages equity investment, until it doesn't.  The bi-product of the debt monetization is in effect a stimulus. However, the amount of that stimulus is slowly being racheted down. QE1 was  approximately $1.42 trillion, QE2 was $770 billion and QE3 is $160 billion through the end of 2012 per MarketWatch. Since Operation Twist only traded short-term government debt to long-term, it is not adding to the size of the Fed's balance sheet. Yet according to John Carney of CNBC, the terms of QE3 are much more flexible for the central bank.

Critics of quantitative easing have been vocal about the reduced effect, and potential destructive consequences of inflationary stimulus on the national monetary system and the economy. Zero Hedge describes current European monetary policy as "Desperate maladies requiring desperate measures" in a thought provoking analysis. The Fed itself has said it can't fix the economy and has called upon Congress to adjust its fiscal policy to address the massive national debt. The effects of quantitative easing on the American consumer are no joke.