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

Federal Reserve Chairman Ben Bernanke is using further quantitative easing to lift the US economy. But there's a big difference between creating more money and creating more value.

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.

With annual economic growth rates as high as our unemployment rates, China has plenty of action. So Mega-Multinational may well decide that the best investment is to send my five dollars along with the Marine private’s QE2 money across the sea to construct a new office park in Shanghai. Very quickly, my cash for a burger has been converted into Chinese currency, entering one of the fastest-growing economies on the planet.

The destination of my five dollars may disappoint Mr. Bernanke and others who’d like to see greater activity right here in America. But it reveals an important truth about economic performance: sustainable growth springs from enterprise that’s fueled by savings – not a faster currency printing press.

QE2 can't make Americans work – or save – more

China’s growth is built on bottom-up productivity – not top-down bond buying. The Chinese people are thrifty and hard working. Released from the yoke of true communism a generation ago, they are extraordinarily entrepreneurial. They seem to have figured out that the alchemy for success is an unusual mixture of boldness and humility – the boldness to imagine the future and the humility to work and sacrifice to achieve it.

Back in the US, we are impatient. We seek comfort. We consume instead of save, buy rather than build. Our forebears did the heavy lifting to put our economy on top of the world. Can’t we just reap the rewards – a great job for life, a big house filled with the latest entertainment devices, three cars in the garage? Can’t QE2 just give us that?

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It can’t, because by itself the $600 billion it represents is, like my five dollars, insubstantial and ghostlike.

Now if QE2 money inspires American business leaders to take a chance on expanding operations and hiring new people, it might lower unemployment. If it inspires discouraged workers to go out and pound the pavement for available jobs, it might increase the goods and services our economy produces. On the other hand, if it inspires us to spend more time arguing about ideology and blaming policies for our predicament, QE2 will merely increase our debt and push our economy further out of balance.

In the end, our economic success is less about our policies and more about ourselves. And that is something to be glad about. Now where’s my burger?

Paul McDonnold is the author of “The Economics of Ego Surplus,” a novel of economic terrorism. He has taught economics courses at the University of North Texas, the University of Delaware, and North Lake College in Irving, Texas.

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