Bernanke's bold QE2 finally explained -- with burgers and fries

I am standing in line at the Burger Barn, wondering what the effect of the Federal Reserve’s plan to pump $600 billion into the US economy will be (an economics education makes one do strange things). The move, dubbed quantitative easing 2, or QE2, aims to spur economic recovery. Can it really do that? What is so special about all those dollars compared to the five I hold in my hand?

To get an idea, I imagine the future path of the money I am about to hand to the cashier.

The course of my cash

The first place it goes is into the Barn’s cash register. From there it is counted into a snug zippered pouch and taken to the local branch of the First Huge Bank for deposit into the Barn’s checking account.

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Here something strange happens. The five-dollar bill that was in my pocket is pigeonholed into a teller drawer. It waits to be handed out to some random customer and taken back into the swirl of physical currency. But as I see it, my five dollars is still in the checking account of the Burger Barn. It has simply lost its physical body, gone virtual. It now exists as pulses across an electronic network, and as an idea. That idea resides not only in Burger Barn’s checking account, but also as an asset in the balance sheet of the First Huge Bank, Inc., where it piles up with other people’s ideas of deposits to form a huge mountain of virtual cash.

Some of that cash might be from QE2. When the Federal Reserve buys government bonds in a program like QE2, it pays for them with newly created money that goes into the account of the US Treasury. The money is then available to the US government to pay its many expenses, from road construction to Medicare bills to, perhaps, the salary of a Marine private who deposits his paycheck in the First Huge Bank.

Let’s say First Huge passes mine and the Marine’s QE2 dollars, along with many others, to Mega-Multinational Corporation in the form of a short-term commercial loan.

My dollars may be destined for Shanghai

At this point Federal Reserve Chairman Ben Bernanke rubs his hands together expectantly. This is where policy rubber meets the road. The hope is that Mega-Multinational will build new offices, stores, and factories in the US, hiring workers to staff them and helping bring down the unemployment rate. And with some of the money, something like that may happen. But the economy today is global. Dollar bills, especially the virtual kind, can travel the planet like the Star Trek crew, beaming into and out of wherever the action is deemed to be.

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