The Facebook Reverse Quantitative Easing

• Posted by Robert Sinn
• on May 31st, 2012

Quantitative easing as practiced by the Federal Reserve has a primary purpose of removing financial assets (Mortgage backed securities MBS and US Treasury Bonds $TLT) from the financial system and replacing these assets with cash which offers little yield to investors. This process brings about a situation in which there are fewer higher yielding assets in the system and more cash chasing these assets. Reduced supply of risk assets and increased supply of low yielding cash naturally brings about an “easing” of financial conditions as asset prices typically appreciate due to increased demand and yields on risky assets generally decline as investors chase yield.

The Facebook IPO managed to create a relatively minor “reverse quantitative ease” by increasing the supply of financial assets ($FB shares) in the system while simultaneously removing cash from the system; $15 billion to the insiders who sold shares into the public offering, in addition to losses incurred by all current owners of Facebook shares who purchased their shares on the secondary market. Normally this wouldn’t be a big deal, however, given the already significant global deflationary headwinds the Facebook IPO couldn’t have come at much worse of a time. Was it a coincidence that equities made a short/medium term bottom on May 18th the day of the FB IPO?

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