Taper Tantrums: 3 Myths About Quantitative Easing

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Kevin Lamarque / Reuters

The Federal Reserve concludes a meeting of the Federal Open Market Committee later today, and markets are anxiously awaiting what the committee will decide with regards to the central bank’s monthly purchases of $85 billion in government debt and mortgage-backed securities. Fed chair Ben Bernanke has previously indicated that the central bank may decide to begin scaling back  these purchases, which has caused stress in financial markets as investors fear the end of central bank “stimulus.”

But the market’s reaction to rolling back of quantitative easing has always been a bit confusing. The main point of the program is to lower long-term interest rates, but when Bernanke announced the possibility that the Fed would scale back the program, the market began to expect future short-term interest rates to rise, suggesting that it did not understand or believe what the Bernanke was saying. Furthermore, each time there was news that the Fed might begin to scale back its purchases, the market slid, causing many economists to argue that it was overreacting to what would be a gradual phasing out of the program.

In other words, it would appear that even after many years of the Fed pursuing this new strategy there are many misconceptions as to what the we’re actually talking about when we talk about quantitative easing. Here are three myths that dominate the discussion:

1. Quantitative Easing is printing money: Politicians, journalists and market participants often refer to quantitative easing as “printing money.” This is because when the Fed buys bonds from banks it does so by crediting those banks’ accounts at the Fed with reserves that didn’t exist before. But it’s misleading to call this process “money printing” because it doesn’t actually do anything to increase the amount of money in circulation. In fact, in our monetary system, most money is created by private banks and not the Federal Reserve. When a bank lends you money on your credit card, that’s “printing” money. When the government buys bonds from banks, it merely raises the price of that particular type of bond and lowers the interest rate. Lower interest rates might encourage consumers to take out loans, but it won’t actually lead to more money in the system unless banks create money through making loans. And banks won’t do that unless they identify profitable lending opportunities.

2. Quantitative Easing will eventually lead to inflation: For this reason the fears that quantitative easing will eventually lead to runaway inflation are unfounded. If the government literally began printing money and started mailing out new $100 bills to citizens, that would lead to price inflation. But quantitative easing isn’t the equivalent of mailing out $100 bills — it’s merely the managing of long-term interest rates much in the same way the Fed always has managed short-term interest rates. This is not to say that Fed policy can’t ever lead to inflation — keeping interest rates too low for too long can encourage the sort of spending that would cause prices to rise too quickly. But the idea that interest rates are too low right now doesn’t make a lot of sense given the large amount of slack in the economy as shown by high unemployment and stagnant wage growth.

3. Quantitative Easing is responsible for recent stock market highs: This also means that those who argue that recent stock market highs are the result of QE are wrong. Fed bond buying will cause bond prices to be higher and interest rates to be lower, and this will encourage investors to choose stocks over bonds at the margin.  But no amount of federal bond buying is going to cause a particular stock to be a good buy if an investor doesn’t think that stock will provide a return. QE may boost profits by reducing the interest rates firms have to pay on their debt, but it’s not going to create profitable enterprises out of this air. A much more plausible reason for record stock prices is that corporate profits and profit margins are at all time highs.

So what’s the point then of QE and what effect has it had?  By buying long-term government debt and mortgage bonds, the Fed lowers interest rates companies and consumers must pay to borrow money. On the margin, this will lead to a bit more investment and slightly higher stock and home prices. The theory is that by boosting wealth through these channels, consumers and businesses will be more confident and willing to spend. And the evidence says that QE has had a slightly positive effect on the economy. But though the press often refers to QE using terms like “massive” and “unprecedented,” it doesn’t mean that it is a particularly risky policy or one that deviates much from what the Fed normally does. And that’s why we shouldn’t get too worked up about its being wound down.

45 comments
Boskley
Boskley

For anybody who is taking the propoganda proposed in this article seriously, please step back and ask yourself a few simple questions.


Q1: When you add more of something to a market, does the value of each unit go up or down (all things being equal)?

Q2: Do the QE policies IN ANY WAY promote more money in the system?

Q3: Is it moral to systematically destroy/steal the value of people's money and give that value to the richest of the rich (i.e., the central bankers and those who get access to the new money first)?


The author is right about one thing, QE is just a variation of what the Fed Reserve always does, and it's sick and it's wrong. Don't get lost in the econometrics, stealing is wrong, fraud is wrong, extortion is wrong, using force to push your agenda is wrong, and QE involves all of the above. The Fed Reserve needs to go away, money needs to be linked to real value (e.g., gold) and interest rates need to be determined by true supply and demand. In short, the statists need to get out of our lives and let people voluntarily trade with each other in pursuit of their dreams as they see fit.


Finally, this article should be clearly labeled as commentary or opinion because it's clearly news.

JulioRodriguez1
JulioRodriguez1

Fractional Reserve Lending is as if there are no copyright laws for those that rent dvds in video stores.  Lets suppose in this analogy that video rental stores were allowed to copy one video and rent it to another rental store.  Soon every video rental store would have had the video and most everyone interested would have seen the movie.  So who looses?  The production people, the people that put forth the labor and time to produce the film.  Each time a banks creates a loan out of thin air, It is supported socially by everyone primarily through inflation.  In order to fully comprehend fractional reserve lending you need to look at the effects.  The action enough appears somewhat innocent, the effects are a detriment.


JulioRodriguez1
JulioRodriguez1

Time magazine is part of the controlling conglomerate that aims to misinform, under inform, and misdirect, for the purpose of keeping their bank owners and their operations secret  Do you see any other industry (other than the military industrial complex) trying to control the media?  They are trying to control the media to keep the facts and truth from being known by the general public.  The plain truth is that banks create money out of thin air to lend out.  There is plenty of information online that can prove that. But media control appear to have started early in the 20th century.  Before that we see Nicholas Biddle paying off the newspapers $1000 dollars ($22,000. in today’s money).  Other than that we see:


J.P. Morgan Interests
Buy 25 of America's Leading Newspapers
and Insert Editors U.S. Congressional Record February9, 1917, page 2947

Congressman Calloway announced that the
J.P. Morgan interests bought 25 of America's leading newspapers, and
inserted their own editors, in order to control the media.




The CHAIRMAN: The Chair will recognize the gentleman from Texas, a member ofthe [defense appropriations] committee.

Mr. CALLAWAY: Mr. Chairman, I ask unanimous consent to insert in the Record a statement that I have of how the newspapers of this country have been handled by the munitions manufacturers.

The CHAIRMAN: The gentleman from Texas asks unanimous consent to extend his remarks in the Record by inserting a certain statement. Is there any objection?

Mr. MANN: Mr. Chairman, reserving the right to object, may I ask whether it is the gentleman's purpose to insert a long list of extracts from newspapers?

Mr. CALLAWAY: No; it will be a little, short statement not over 2 ½ inches in length in the Record.

The CHAIRMAN: Is there any objection?

There was no objection.

Mr. CALLAWAY: Mr. Chairman, under unanimous consent, I insert into the Record at this point a statement showing the newspaper combination, which explains their activity in the war matter, just discussed by the gentleman from Pennsylvania [Mr. MOORE]:

“In March, 1915, the J.P. Morgan interests, the steel, ship building and powder interests and their subsidiary organizations, got together 12 men high up in the newspaper world and employed them to select the most influential newspapers in the United States and sufficient number of them to control generally the policy of the daily press in the United States.

“These 12 men worked the problems out by selecting 179 newspapers, and then began, by an elimination process, to retain only those necessary for the purpose of controlling the general policy of the daily press throughout the country.They found it was only necessary to purchase the control of 25 of the greatest papers. The 25 papers were agreed upon; emissaries were sent to purchase the policy, national and international, of these papers; an agreement was reached;the policy of the papers was bought, to be paid for by the month; an editor was furnished for each paper to properly supervise and edit information regarding the questions of preparedness, militarism, financial policies and other things of national and international nature considered vital to the interests of the purchasers.

“This contract is in existence at the present time, and it accounts for the news columns of the daily press of the country being filled with all sorts of preparedness arguments and misrepresentations as to the present condition of the United States Army and Navy, and the possibility and probability of the United States being attacked by foreign foes.

“This policy also included the suppression of everything in opposition to the wishes of the interests served. The effectiveness of this scheme has been conclusively demonstrated by the character of the stuff carried in the daily press throughout the country since March, 1915. They have resorted to anything necessary to commercialize public sentiment and sandbag the National Congress into making extravagant and wasteful appropriations for the Army and Navy under false pretense that it was necessary. Their stock argument is that it is' patriotism.' They are playing on every prejudice and passion of the American people.”

JohnnieTrouble
JohnnieTrouble

Surely the story begins before QE when a government issues a bond. If I buy this bond I am lending the government money in return for interest. In QE the government buys the bond back from me by creating electronic money. They are cancelling their own debt. The government is just one part of the economy which includes the government, banks, companies and individuals. If any sector cancels its own debt there must be a loser. QE obviously stimulates the economy which is "good" because capitalist economies require confidence. But there must be losers. If the government writes off its own debt by buying bonds the government can spend more money. This must be inflationary.  

robx2013
robx2013

The author should read "Economics In One Lesson". It is a recent requirement for all freshmen in private universities. The book is a free download and has stood the test of three generations. 

If the author doesn't understand QE, then why doesn't QE 4 (ever) just rise 20 times? Why not 100 times?

The answer any college freshman who has read "Economics In One Lesson" would give... because it is inflationary and because it mis-directs all resources. 

QE has resulted with 10% less Americans with any job, more jobs paying less, more jobs being part-time with little or no benefits, and much worse: less youth,  women and minorities employed. What kind of political theory justifies this awful behavior? Even worse, as of December 2013, the large bankers are expecting a 14% increase in bonus as the college students loan defaults reach $1 Trillion. 

QE is nothing but subsidy for the wealthy (not just rich, but wealthy) at the expense of the working class.


The author is justifying the in-defensible. 

TomGraham
TomGraham

The author doesn't understand basic banking principles.  When the Fed is "purchasing" mortgage backed securities, it is simply accepting a deposit and issuing credit.  This credit is money that can be used by the security seller, so YES, the fed is indeed CREATING money, or proverbially "PRINTING" money.

When local banks make home loans, the money they loan has to exist on deposit in their bank before they loan it.  They do not get to create this seed money.  That is a power on the federal reserve wields.  As the fractional banking cycle happens, then banks total liabilities increase with its increased assets as the seed money deposited is issued then deposited and reserves requirements set aside.

Quantitative Easing will eventually lead to inflation - Currently, we don't feel it so much because banks are now earning interest on excess reserves and have taking the same amount of money out of circulation as has been injected via QE.

Quantitative Easing is responsible for recent stock market highs - As soon as we begin to taper, the market will fall.  When we stop tapering the market will rise.  Regardless of how "complex" the details are, there is a causal relationship.

SocialismIsEvil
SocialismIsEvil

The logic that Chris Matthews use to explain why QE is not the same as printing money does not make sense.  When the Feds credits the bank accounts with NEW money that didn't exist before to buy the bonds, this is just like PRINTING MONEY.  That's because this NEW money will find it's way into wider circulation (as the Banks will use it to pay its employees, expenses and issue dividends) and therefore increase the amount of money in circulation following the same fractional reserve banking means as any other dollar in circulation.  Had the Feds used EXISTING money to buy the bonds like everyone else, then Chris Matthews could argue that it would not increase the money in circulation.  However, this is clearly not the case with the FEDS.

MichelleIrea
MichelleIrea

QE is printing fake money. Just stop with your games liberal. Stop destroying the dollar because your liberal financial policies only work in the classroom.

CarlRossini
CarlRossini

QE does lead to inflation. No money was created when the bond was issued. It was a promise to pay. When QE happens, bonds are called, and they money that the Fed pays to redeem the bonds is immediately injected into the economy. So, instead of the dollars that pay back the bonds spread out over a number of year, the money is pumped into the economy quickly. That is why it is used as a stimulus.

b-rad
b-rad

wrong wrong wrong!

1. The FED buys Treasury bonds and mortgage backed securities (toxic assets). This props up the U.S. Treasury balance sheet as well as Banks/Financial institutes(since they are the same since the repeal of glass steagall). This creates more reserves hence: more spending in the stock market, more loans, and more government spending ( A.K.A. cheap money). This is money creation one way or another

2. To much money creation from cheap money equals inflation. That's why they wont tapper/can't tapper and it has done little for the economy in the sense of: GDP, job creation/unemployment, and . The stock market has been the focus of economic growth for the U.S. but means little in terms of growth when its artificially inseminated. 

3.This is the most false claim of all QE is a direct subsidy to the market. They don't just buy Treasury bonds they also buy Mortgage backed securities. It doesn't matter what they buy they pump up those markets then individuals make a profit sell out and invest in something else. That's what traders do. Everyone is short nowadays, they want profits everyday not once a year.  

wbertsch.ch
wbertsch.ch

Thanks for your thoughts. I agree on points 1 and 2 but not on 3. It is true that low interest rates doesn't create good companies and hence stock buying opportunities out of the air. However, very low interest rates channel money into the stock market due to lack of other investment opportunities. Over time this creates a hype in the market which attracts other investors who, irrespective of the quality of the stock, jump on the band wagon and thus push prices higher. The stock market gets a life of its own decoupled from economic reality.

dutchrjen
dutchrjen

   Come on does the person writing this article think people are stupid? QE buys old debt either government or private for more than what it's worth. The banks then have a large pool of money siting in reserve at the Federal Reserve to lend out to the public or the government. This old debt just sits in the infinite dumpster called the Federal Reserve supposedly waiting to be bought by the public again at a future date. The banks make large amounts of money using this policy. In return the banks offer the public and government LOW interest rate loans they make little money on. 

    This "old" debt pays its interest to the Fed and if it's government debt 90% of that interest goes back to the government. If QE did not exist the Federal Government would not be able to find enough investors to buy any of its treasuries. This is the reason QE is used. It prevents the collapse of the Federal Government. It also makes it impossible for the average person to make any money in banks forcing MANY to invest into the stock market or other markets. If interest rates were HIGHER less speculation would occur and housing prices would not be going back up (that is INFLATION). Also people would have an incentive to SAVE money this is badly needed for long-term growth of our economy. 

    Also allowing the government to buy more debt at an artificially low interest rate DOES create inflation eventually, and if the government can't find any investors it goes to the lender of last resort the Fed. Every year the gov buys money from the Fed essentially printing money because it can't find enough investors. Also if the banks ever lend the money out to the public that is on their balance sheet it WILL cause inflation. 

    QE IS PRINTING MONEY BACKED BY DEBT THAT THE DEBTOR ALREADY SPENT. This is causing inflation in the rich/banking class and not for the average American. Essentially, it was a transfer of wealth from mainstream America which experienced deflation to the wealthy/banks who experience inflation from bailouts and QE. This is how interest rates go down you give so much money to the lending class that they can almost give it away for free. It is simple SUPPLY and DEMAND. Whatever sector of the economy gets this money WILL HAVE INFLATION. Right now it's the rich and that is why they are just getting richer. This money has trickled down to the mainstream through loans and the government which canceled out the deflation and caused a slight mainstream inflation. 


What's going to happen if QE stops? And what are the banks going to do with all this new money created every month? Right now Central Banks are loading up on dollars are they just going to keep them as reserves in their vaults forever? 


Finally, with the massive amount of DEFAULTING that occurred during the recession there should have been LARGE amounts of deflation. Yet prices didn't go down and even the government admits that some inflation took place. Could it be that increasing the monetary base and lending more money to the government caused inflation that counteracted the deflation? 

What's going to happen if QE continues? Can the Fed stop QE for an extended period of time?

RonaldGeiken
RonaldGeiken

QE is crushing bond buyers by supplying lower rates than the market would generate. In the long and short run, it will have a great impact on pension plans that depend on reasonable interest rates to general enough money to pay pensions in the future. If only $120,000 is received as interest on a pension plan rather than the $160,000 or more that would be generated with normal interest rates, then the amount of money to pay off the pensions instead of being sufficient will be short and this will force companies and government entities to take money out of current income to fund these deficiencies. Everyone should say to themselves "For ever action there is an equal and opposite reaction" and this will answer" their questions. In other words, this is not a zero sum game.

Original5in
Original5in

QE is simply making money available to the banks to lend to companies/individuals more cheaply but neither companies nor individuals want to borrow money to grow a business until demand increases.  Currently there is a greater desire to save rather than spend so the private sector can't fix the problem very rapidly.  The only other solution is to increase government spending which is being blocked or to encourage foreign spending.  For instance China has 15 trillion of US treasuries where we are paying them interest (less than inflation) not to spend their US cash on US goods.  This hurts our economy but reduces inflation.  With current inflation low and high unemployment we should either increase government spending until unemployment is reduced or stop selling treasuries to China to encourage them to spend their US cash instead of sitting on it in the form of treasuries.  Making money more available through bond purchases that isn't being used isn't going to have a huge effect.

ChadP.Morrison
ChadP.Morrison

Well with all do respect Mr. Matthews, you may need to listen for the "pop." You know the sound when your head comes dislodged from your nether regions. First I will address each of your points briefly then go further.

1. QE isn't like printing money you say? Come on, you cannot possibly believe that one. The fed must essentially create money in order to purchase not just "government bonds," (as you point out they have always done this) but in this case private sector securities to the tune of nearly 100 billion dollars per month. Now this non-existent Monopoly money or whatever you believe it to be ends up in the profit margins of private sector institutions like the ones that created the "derivative dilemma" you may recall from 2007-08. So it isn't just the bailout money, the mortgages they took back, etc. They get money they never end up having to lend artificially inflating their share price. Lend it or not a bank with a whole lot of new unearned money on the books looks like a good investment. Simply put: The central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base. In short banks get fake money from the Fed!

2. QE won't cause inflation. Here is the ultimate lunacy. Get ready. You say and I quote: "it’s merely the managing of long-term interest rates much in the same way the Fed always has managed short-term interest rates. " In principle this is true in the sense that the government has always created a little fake money to buy bonds in the interest of interest if you follow. That is as far as the similarity goes I am afraid. Chris, can I call you Chris? Chris the fact is the U.S. government owned 700 billion dollars in these securities as of 2007. Mostly government bonds which are slightly different from the private sector won't you agree? Now that's 700 billion dollars over nearly a Century of such purchases. Now since 2008 this government has been buying nearly 100 billion dollars (off and on) of private sector assets per Month! That's 700 billion dollars every 7 to 8 months. It took nearly 70 years to create that much fake money before. Now we do it in less than one year. In short Inflation is the Least of our worries. In a year or so we may have no more dollar at all.

3. You say QE doesn't inflate stock prices. Yeah 2.1 trillion dollars out of thin air added to the banking sector profit margins has no effect on stock prices. I want some of what your smoking buddy. Chris look. The stock market will likely hit 5,000 before 20,000. It is artificially ballooned way past the mortgage bubble to something the likes of which markets have never seen. We are talking the market equivalent of Hiroshima and Nagasaki.

Look Mr. Matthews, the fact is QE has no truly successful historical precedent. It is a modern invention that is much like a market bubble machine on Crack Cocaine. It is too late to stop it. Do me a favor Chris, buy a farm. Start learning to grow your own food. Get some guns and ammo and be Zombie ready. You still will not survive this man made economic Apocalypse. This thing is a disaster. We are talking post soviet russia here for at least a decade. It could be worse, when QE is done we are done. Sorry bud. This isn't a conservative thing, or a liberal thing, our country is Royally screwed.

niceguylast10
niceguylast10

I have to admit I am now obsessed with this topic. A similar article and comments was on CNBC.com. I ndserstand  what the theoretical models says, I am not sure if it is the truth. If Banks are being forced to exchange highly liquid assets such as Treasuries for non-tradeable assets like reserves, how does this improve liquidity?

I really think we need to haul head traders of the primary dealers before Congress so we can get a better sense of what is exactly happening.

timbot99
timbot99

This article is total drivel. I am saying this a professional academic economist specializing in monetary economics.

1. Quantitative easing IS printing money. Yes it is. When a government buys bonds, unless it uses taxes to pay for the bonds, it must create money to pay for the bonds. No it does not print it physically. It creates the money on the Fed's books and then spends it. Bonds are exchanged for Dollars. A check from the Fed. The strange logic of Christophe Matthews statement does not make sense. The effect on interest rates, if any, is a by product of the bond purchases. Both Banks and governments can and do create money.

2. Quantitative easing will eventually lead to inflation. Yes it will. If you create money at a rapid rate, in excess of demand for money, you cause inflation. This was the experience of the Weimar Republic and more recently Zimbabwe. Interest rates have a very minor effect on inflation, virtually none at all. People may point at Volcker style interest rate increases reducing inflation, but this interest rate rise was a by product of the real cause of the fall in inflation, a fall in the growth of the money supply. No economists confuse cause and effect. The USA is actually heading for very high inflation, and soon.

3. Quantitative easing is responsible for the recent stock market highs. Yes it is. If you create a large quantity of money it roams around looking for an investment. Most of this stock investing is being done on the 'margin' - bank lending. More bank lending, the higher the price. Just like 1929. As soon as the tap is turned off by Ben Bernanke, the stock market will crash. Just like in 1929.

I am amazed that a magazine like Time could print complete nonsenses. There must be a lot of money in it for them.

niceguylast10
niceguylast10

Despite the high margins you refer to, corporate profit growth of the S&P 500 has only been around 4% year to date. And despite the fact interest rates are higher, the S&P 500 is up over 20%-well exceeding the lackluster profit growth. PE ratios in the market are a very healthy 18X. So something is not adding up. Most likely, The Primary Dealers, (mainly investment banks, not personal lending institutions) the Fed purchases bonds from  adjusted their balance sheet to buy riskier assets. In short, QE accomplishes little, and risks an equity bubble

gbmillion
gbmillion

Well said, Christopher. This is the most succinct summary of QE that I have read to date. However, judging by the surge on the stock market yesterday, few people seem to get it.

abelardonery
abelardonery

My 2 cents.

1. Completely disagree with you. It's fiat money. Its trading printed money for a printed promise of money. The us government can promise to pay their debts back because they can raise taxes and cut expenditures to meet their goals. Banks who bought the government's bonds can then sell their govt bonds to the federal reserve. Federal reserve gets the government bond, banks get the cash and have better reserves and are able to loan the money out. In fact, there is a multiplier effect that exacerbates the amount the fed prints out. In essence, the fed printing money encourages banks to lend out money and take additional risks.

2. I agree with you here. QE is not main contributor to inflation. Level of inflation is a function of the dollar's price and the product's price. QE will lead to inflation by the devaluation of the dollar if the bonds that the federal reserve buys lose value. Only way for government bonds to lose value is through interest rate risk. Interest rate risk is measured based on its maturity and coupon levels. The federal reserve through operation twist bought long term govt bonds to flatten the yield curve, hence there is interest rate risk and a risk of inflation if the federal reserve decides to sell their bonds at a lost which I doubt (they will hold it to maturity). Having said that inflation is measured with CPI so the main contributor to inflation is china. A chinese slow down reduces prices (like commodities) hence why the dollar is strengthening now. 

3. Disagree with you. QE raises prices by lowering interest rates. Lowering interest rates, lowers discount rate, which increases the value of money today. Its the CAPM  or DDM models. If you looked at overall markets and specific stock correlations during QE, you would find that they had a correlation in excess of 80%. This type of correlation indicates that the market did not care whether you grew your earnings the most, or you had the brightest prospects. But that is clearly changing now. 

DaveAdams
DaveAdams

It creates more M2. It's the same as printing money. The federal reserve doesn't have the wealth to actually buy these items, so it creates them and gives it to banks and removes those assets from their sheets. Anyone old enought o be aware of what happened 5 years ago should know that suppressed interest rates artificially creates artificial demands and thats where the problems start. It's the business cycle. This time around with QE, when the music stops I doubt anyone will have a chair though.

tealeaf6717
tealeaf6717

Banks do find profitable lending opportunities in the last few years, not here, it's in emerging country market. So banks do "print" money by making loan, and it did cause inflation in emerging country, the "hot money". It's there, in a big reservoir, waiting to come home when QE taper, or end. From what I heard, those "printed" money has been flowing back home. It it not true?


JohnDavidDeatherage
JohnDavidDeatherage

But where does the money come from to pay for the bonds the government buys from the banks?  Doesn't the treasury issue bonds (30 yr Treasuries) to buy the bonds from banks?



AdolfRosenbloom
AdolfRosenbloom

@TomGraham It really is so easy for them to be critical of your position when QE has no intention of stopping anytime soon.  The fact is if they stopped QE this instant, took it right down to zero from where we are at now, the stock market would dive.  They can rationalize all they want, that is what is going to happen.

The nice thing is it's a measurable prediction.  Go ahead, stop QE.  Let's find out who's right.

And inflation?  Please.  Just go to a supermarket to find out the reality of that, and we're just getting started!

hangemhi
hangemhi

@TomGraham no, you are citing the mythical "loanable funds" theory which is wrong.  Banks make loans, THEN they get Reserves.  This is the power the Fed gave banks.  So the act of stuffing banks full of Reserves "prints" something they didn't ask for, and don't need. And when they do need it, whether they already have them on the books or not will cause them to act no differently.  

hangemhi
hangemhi

@MichelleIrea The so-called "destroyed" dollar which is worth 1/20th of a 1913 dollar ignores the fact that wages are at least 40 times greater today, and our standard of living isn't even quantifiable it is so much better.  If you like 1913 so much, you're welcome to back there.  Threat of polio, world wars, lack of clean water, high death rates, lower birth rates, no cell phones, GPS, cancer treatments.... should I go on?  The "destroyed" dollar is a huge reason society has advanced.  Deflation or stagnation would result in far few people chasing dollars resulting in less innovation and progress.  But, that's a conservative for you - anti-progress.

hangemhi
hangemhi

@CarlRossini nope!  The owner of the bond used cash to buy the bond.  The Fed buys the bond from them, and now they are right where they started.  Their balance sheet did no increase.  This is why QE is not "printing money".  Cash to Bond back to Cash again - nothing changed.  And before you say they'll spend that cash again - ask yourself why someone buys a bond in the first place?  Because they want a safe place for their money.  Are they really going to buy a car, a house or a stock with that money?  I suppose some of that cash does go there - but it is highly doubtful much of it does.  Put yourself in the same situation - if you have $100k in a CD, and the Fed forces you to take it home in $1 bills, how much more are you going to spend than you were before?  It is still your savings, it's just in a different form.  

hangemhi
hangemhi

@b-rad QE is "inflationary" in the sense that it kept a lot of deflation from happening - at least in the first QE during the crisis.  Bad loans were taken off the bank's books.  But your claim that QE will lead to more lending and therefore inflation ignores the fact that we HAD more lending and inflation before QE in the '00's.  So if QE really does what you say it does, how do you explain that your prediction came true before QE, and now hasn't happened after 4+ years of QE?  

dutchrjen
dutchrjen

@Original5in China doesn't  have 15 trillion in US treasuries. You want to increase government spending? Who is going to PAY for that? Are you just going to get the printing press running even hotter? 


Banks/companies/rich HAVE most of the available money and the public does not have incentives to save by traditional methods. If they save anything they have incentives to speculate on stocks or other financial markets. The average American is spent out and didn't get the bailout of the rich/banks. Without QE interest rates would rise and the gov debt that is owned by non-Fed investors that turns-over rapidly would have to increase interest rates.

Why would banks keep interest rates low if they are no longer turning old debt into the Fed for profit? The banks keep interest rates low because they make a substantial amount of money from QE, credit card debt, and loaning for margin buying/speculating. They make very little from long-term low interest rate loans. If QE stops the stock market would probably go down, margins would be called, and interest rates would go up because the banks want to keep making a profit. The gov and the fed allow them to do this because the gov CAN'T afford higher interest rates. Even with low interest rates the gov is running 800 billion in the hole (on the books and more off the books). The financial/government system needs artificially low interest rates to survive. QE is NOT benefiting most Americans.


niceguylast10
niceguylast10

@Original5in Per the Fed data, Chinese investors held 1.27 trillion of Treasuries as of July 2013, not 15 trillion, which is close to the entire national debt. Individuals would likely spend this savings more on domestic than US goods, barring a major depreciation of the dollar which would create its own issues

hangemhi
hangemhi

@timbot99 it is shocking that a "professional academic economist" believes the nonsense that you do.  No wonder economists are academics - your theories don't apply to the real world.  They aren't even logical - like "creating money in excess of demand for money".  LOL.  I'd like some of that money.  Who isn't in demand of money?  Oh, but you're talking about loans - a demand for loans.  And this gets back to what comes first - the chicken or the egg - Reserves, or loans?  You think Reserves drive loans, and that's only true in your classroom.  Ask a banker how it really works.  Banks loan to qualified buyers on qualifying assets.  They do not check their Reserve balances.  Sure, they settle up at the end of the day "oops, we lent too much, we must get Reserves" but outside of global financial crisis melt downs Reserves are ALWAYS available - and even in the crisis the Fed made them available.  You'd thiink academics would use logic - like there being no QE in the 00's yet record loans being made.  Today there's record QE and far fewer loans.  Stick that in your text book and eat it

niceguylast10
niceguylast10

@timbot99 The Fed has stated that one of the goals of the policies is to help create inflation. So how can anyone say it will not lead to inflation.

Christopher_Matthews
Christopher_Matthews moderator

@JohnDavidDeatherage The Fed credits a bank's account with reserves (which are created out of thin air), and takes mortgage bonds/treasury bonds off the banks books. But since it's removing the bonds at the same time,  It's just trading one asset for another, not actually adding any new money to the system. The money creation happens when banks make loans or when the federal government issues debt in the first place.

catennismom
catennismom

@AdolfRosenbloom @TomGraham I deposit $2,000 in printed money at the bank. The bank pools that with other deposits and buys a treasury. The Fed buys the treasury back from my bank giving me my $2,000 printed currency bank deposit back  in the form of imaginary money.

I write a check to pay for groceries and the moment the supermarket accepts it, $2,000 of new dollars are chasing the same red bell peppers. (Which cost now $2 apiece while people gross $7 an hour.)

The bank must have reserves, true. But the bank would not have enough reserves to buy treasuries because it made bad mortgage loans. People used houses like ATMs, that mortgage money definitely got spent.

So, I agree with you.

When the Fed buys back $85 billion of various debt every month, are they picky? Do they make sure they are only buying bonds that we are told our banks have an endless supply of? Reasonable banks that agree they never needed that money in the first place and will not use it? Or does the Fed repurchase bonds with imaginary money from Deutsche Bank and the Chinese who have no secret agreement to keep it imaginary? Could the Chinese take the imaginary money they were paid back for their treasuries and buy farmland with it?

Thanks in advance for straightening me out.

catennismom
catennismom

@hangemhi @CarlRossini The bank which owns the mortgage bond used $100 printed dollars to buy the mortgage bond. The bank had loaned out $100 into a bad mortgage which got spent on meth AND the person who originally deposited the money the bank had in reserves to loan out, he wrote a check and spent it again on groceries. 

The Fed tells the bank "you are paid back" but the bad-mortgage-meth-user never paid his mortgage back to the bank. He does not give back the $100. So one would think the moment the Fed pretends a bad mortgage is valuable, the money supply doubles for whatever the Fed imaginarily pays back.

I look forward to understanding qe!

anthony.allen04
anthony.allen04

@Christopher_Matthews The reason the Treasury sells bonds is to pay for Government spending not covered by taxes. If the Fed is buying these bonds with reserves "created out of thin air", how is that not money creation? Essentially the government is spending monopoly money?

RonaldGeiken
RonaldGeiken

@Christopher_Matthews @JohnDavidDeatherage I believe Bernie Madoff had something like this going too, however he did not call it quantitative easing and he is spending time in jail because of that. Bernie never did anything much worse than the Fed, but he is paying a great penalty. I don't suppose that anyone connected with Qualitative Easing will ever pay any penalty or go to jail. I just wonder who really invented and coined this operation. I am sure there are politicians from years past that are sorry they didn't think of it earlier.

KunalBhatia
KunalBhatia

@Christopher_Matthews @JohnDavidDeatherage 

 @Christopher_Matthews @JohnDavidDeatherage 

Chris, you are wrong in one aspect here. For the fed to replace one asset with another, Fed needs to already possess that asset, which is Liquid money in this case. 

Banks release bonds to raise debt money; that is, a promise to repay back amount raised at a future date along with some added interest. This is an asset to fed, but a liability to that bank. That bank gets liquid cash in return, which is an asset that bank.
Now this cash isn't coming out from Fed's reserves. Fed doesn't have infinite reserves. Most of it is new money that Fed prints to supplement the money base (increase money in circulation), in hope to stimulate the economic growth. Now this money is a Debt obligation to the fed, and is backed by Fed's promissory notes, but it still is new money. 

So, the Fed after all, does print money.


David_Cretcher
David_Cretcher

@Christopher_Matthews @JohnDavidDeatherageChristopher great easy to read article.   It's about time the media got this right.   You're right, there is no money printing, but the process is slightly more complicated.  The reserves are not created out of thin air. Most people don't realize it, but all bank reserve(MZero) and Federal Reserve Notes are backed with an equal amount of Treasuries. That's how the Fed's balance sheet balances.  The FRNs are banknotes and the legal requirement to secure banknotes with "United States Bonds" or "like securities" goes back before the Fed. It used to say it on the bills.The Fed doesn't create money they issue banknotes -FRN.   They buy the bonds with FRN, the bonds can then be used to collateralize the new banknotes, which are used to settle the account.  It not out of  thin air .  As you point out they swap the Federal Reserve Notes for Treasury Notes.  Both are Federal debt obligations.  So nothing really changes except the interest payments got to the Government instead of the private sector.  Seems like it is splitting hairs, but it hopefully helps in understanding the process.  

JohnDavidDeatherage
JohnDavidDeatherage

@Christopher_Matthews @JohnDavidDeatherageThanks for responding!  So QE doesn't actually expand the money supply until banks make loans.  But isn't that the ultimate goal of Easing(s); to make more money/credit available for lenders to lend? By holding down interest rates, QE makes borrowing cheaper which encourages more borrowing.

If that's correct, then QE is inflationary but only when banks will expand their lending practices?  When the economy recovers (on its own), borrows will borrow and inflation will be a consequence?

again, thanks for responding. great article!



Boskley
Boskley

@Christopher_Matthews @JohnDavidDeatherage  As noted in previous comment, just because it's not much different then what it always does, doesn't mean that it's not wrong. Good intentions aside, manipulating interest rates has serious negative side effects because the central planners don't know what the rates should be in the first place. Prices, interest rates, inflation, are all important market signals that should not be skewed based on the political leanings of a handful of people.

catennismom
catennismom

@Christopher_Matthews @JohnDavidDeatherage Could the German Bundesbank just buy up Greek debt so that the Greeks don't have any more debt? Greece owes its debt to German banks; the German banks would just hold those unprinted Euros and not lend them out, like our banks do.

Christopher_Matthews
Christopher_Matthews moderator

@JohnDavidDeatherage @Christopher_Matthews Correct, and this is not much different from what the Fed always does: buy and sell bonds with the goal of keeping inflation and unemployment low. If the economy does start to heat up, they will try to influence interest rates in a way that prevents inflation. That's the idea, anyway.