7 ms·

Fed Announces Open Ended QE3

14 points by chailatte 14y ago

gph1 14y ago
Not surprising to see a libertarian-oriented site refer to QE as "money printing". It's not. Monetary policy doesn't increase the net financial assets available in an economy; that's only achieved by fiscal deficit spending. QE is just an asset swap (reserves for tsy's)--it's shifting the yield curve, but not adding anything new.
- CJefferson 14y ago
  I think it is. Before the QE, the government doesn't have the money it buys the bank assets for. It creates some more money to buy them?
- damiankennedy 14y ago
  It is effectively money printing which will lead to inflation but that does not mean it is the wrong thing to do. Inflation over time balances out old debt with new income.
  - GrothingFash 14y ago
    Isn't that just a case of input output? Like throwing a bigger boomerang and saying "hey look, a bigger boomerang is coming back, we're making progress!"?
    - damiankennedy 14y ago
      Yes exactly, and that makes the boomerang you borrowed to buy your house seem smaller.
- dstanchfield 14y ago
  You would have a point if the 'libertarian-oriented site' referred to QE as "asset printing." It didn't though. QE may not increase financial assets in an economy, but it does increase available money. The money used to purchase the bond did not exist prior to the swap. Now if you really wanted to argue that this is not money printing, I might accept the claim that the Fed will at some point unwind this position. But even that is highly dubious.
  - gph1 14y ago
    Yes, the Federal Reserve creates the electronic credits that it uses to purchase the bonds. But this is not "money printing" in any meaningful economic sense because it its just swapping one government liability for another one. There is no functional difference from the govt's persepctive between a reserve deposit and a treasury bond other than the term structure and the fact that the treasury bonds pay interest. In fact, you could argue that QE ultimately reduces private sector income because it eliminates this interest income.
  - nhaehnle 14y ago
    Your post contains a great example of what was called the Worst Argument in the World on LessWrong: http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/ http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/ To be more precise, you are using the moniker "money printing" to confuse the issue. See, inflation isn't caused by printing money, inflation is caused by spending. If there is too much spending power going around and the productive capacity of the economy cannot keep up, then prices are going to be bid up. QE isn't going to cause much more spending, because as grandparent correctly stated, nobody's total amount of assets is going to be changed by QE. After all, suppose you hold long term treasury bonds. Now the Fed offers to buy them at a higher price. Maybe you will take that offer. And maybe you'll use that money to buy some other class of assets. But will you now actually put that money into the real economy, buying some produced goods or services that you would not otherwise have bought? Most people won't do the latter, and that's why QE isn't going to cause additional spending, and this is why it isn't going to cause inflation. Note that this is very different from historical episodes where money was printed by the government for direct spending, e.g. by the southern US states during the civil war.
    - chii 14y ago
      I m not an economist, so i might've understood your point wrong, but you just argued that the Feds offered to purchase your long term bonds for a higher price - logically this must mean you've made some money (ala, profit). So having made profit, wouldn't you then spend that profit on something that you otherwise wouldn't have afford to spend? Thus, this introduces more spending power, and thus, introduce the inflation that you said wouldn't happen?
bfung 14y ago
opposite opinion to the submitted article: http://www.calculatedriskblog.com/2012/09/analysis-bernanke-delivered.html http://www.calculatedriskblog.com/2012/09/analysis-bernanke-...
ilaksh 14y ago
I've heard people say that the Fed is deliberately creating inflation in order to sabotage the American and global economy. This makes it easier to consolidate real estate and business assets, so it is beneficial to the wealthiest individuals and companies. But I'm sure I'm just latching onto a simplified explanation because I am too ignorant and stupid to comprehend the complexities of "economic science".
- OzzyB 14y ago
  If you owe someone $1billion bucks and you can't, or don't want to pay it back, inflation is your friend. It should be clear to all that with the Fed keeping near-zero interest rates whilst printing more money, inflation is the objective and is underway... I don't know if that equates to "sabotage", but it's certainly not good for folks who aren't in the Asset Class.
- nhaehnle 14y ago
  While I'm sure that there are some people who are quite happy about what the Fed is doing, that sounds very much like conspiracy theory nuts. From what I understand, the Fed is politically in a very crappy position: they have a mandate for high employment (which is a good thing!), but they cannot really do anything to meet that mandate. To create jobs, somebody needs to actually spend money. Spending money means moving money around so that afterwards, person A has less monetary assets and person B has more monetary assets. However, the Fed is not allowed to engage in such actions. All it can do is asset swaps. So it can swap short term for long term bonds, for example, but when they do that, everybody still has the same amount of monetary assets afterward. It is only the maturity and interest rate structure that changes. The hope is that lower interest rates encourage private investment and thus private spending on jobs. However, that's not very realistically going to happen on a larger scale, because demand for products matters much more to firms than a tiny change in interest rates does. And as long as unemployment is high, demand remains low, which means that firms have no incentive to create jobs. It's a vicious cycle, that in theory the government (the union of legislative and executive branch) should break out of, because they are in a unique position to do so: they are not bound by market constraints. But the government is instead bound by partisan politics and an unscientific belief in the religion of austerity. So with the government not doing anything, the Fed at least tries to do the best they can to help the situation, which happens to be almost nothing - but they still try, because of the miniscule hope that there are, after all, some positive effects.
lmg643 14y ago
This is great news for startups because it supports asset prices generally, and means that high valuations will continue.

14 points by chailatte 14y ago

gph1 14y ago

Not surprising to see a libertarian-oriented site refer to QE as "money printing". It's not. Monetary policy doesn't increase the net financial assets available in an economy; that's only achieved by fiscal deficit spending. QE is just an asset swap (reserves for tsy's)--it's shifting the yield curve, but not adding anything new.

CJefferson 14y ago
I think it is. Before the QE, the government doesn't have the money it buys the bank assets for. It creates some more money to buy them?
damiankennedy 14y ago
It is effectively money printing which will lead to inflation but that does not mean it is the wrong thing to do. Inflation over time balances out old debt with new income.
- GrothingFash 14y ago
  Isn't that just a case of input output? Like throwing a bigger boomerang and saying "hey look, a bigger boomerang is coming back, we're making progress!"?
  - damiankennedy 14y ago
    Yes exactly, and that makes the boomerang you borrowed to buy your house seem smaller.
dstanchfield 14y ago
You would have a point if the 'libertarian-oriented site' referred to QE as "asset printing." It didn't though. QE may not increase financial assets in an economy, but it does increase available money. The money used to purchase the bond did not exist prior to the swap. Now if you really wanted to argue that this is not money printing, I might accept the claim that the Fed will at some point unwind this position. But even that is highly dubious.
- gph1 14y ago
  Yes, the Federal Reserve creates the electronic credits that it uses to purchase the bonds. But this is not "money printing" in any meaningful economic sense because it its just swapping one government liability for another one. There is no functional difference from the govt's persepctive between a reserve deposit and a treasury bond other than the term structure and the fact that the treasury bonds pay interest. In fact, you could argue that QE ultimately reduces private sector income because it eliminates this interest income.
- nhaehnle 14y ago
  Your post contains a great example of what was called the Worst Argument in the World on LessWrong: http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/ http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/ To be more precise, you are using the moniker "money printing" to confuse the issue. See, inflation isn't caused by printing money, inflation is caused by spending. If there is too much spending power going around and the productive capacity of the economy cannot keep up, then prices are going to be bid up. QE isn't going to cause much more spending, because as grandparent correctly stated, nobody's total amount of assets is going to be changed by QE. After all, suppose you hold long term treasury bonds. Now the Fed offers to buy them at a higher price. Maybe you will take that offer. And maybe you'll use that money to buy some other class of assets. But will you now actually put that money into the real economy, buying some produced goods or services that you would not otherwise have bought? Most people won't do the latter, and that's why QE isn't going to cause additional spending, and this is why it isn't going to cause inflation. Note that this is very different from historical episodes where money was printed by the government for direct spending, e.g. by the southern US states during the civil war.
  - chii 14y ago
    I m not an economist, so i might've understood your point wrong, but you just argued that the Feds offered to purchase your long term bonds for a higher price - logically this must mean you've made some money (ala, profit). So having made profit, wouldn't you then spend that profit on something that you otherwise wouldn't have afford to spend? Thus, this introduces more spending power, and thus, introduce the inflation that you said wouldn't happen?

bfung 14y ago

opposite opinion to the submitted article: http://www.calculatedriskblog.com/2012/09/analysis-bernanke-delivered.html http://www.calculatedriskblog.com/2012/09/analysis-bernanke-...

ilaksh 14y ago

I've heard people say that the Fed is deliberately creating inflation in order to sabotage the American and global economy. This makes it easier to consolidate real estate and business assets, so it is beneficial to the wealthiest individuals and companies. But I'm sure I'm just latching onto a simplified explanation because I am too ignorant and stupid to comprehend the complexities of "economic science".

OzzyB 14y ago
If you owe someone $1billion bucks and you can't, or don't want to pay it back, inflation is your friend. It should be clear to all that with the Fed keeping near-zero interest rates whilst printing more money, inflation is the objective and is underway... I don't know if that equates to "sabotage", but it's certainly not good for folks who aren't in the Asset Class.
nhaehnle 14y ago
While I'm sure that there are some people who are quite happy about what the Fed is doing, that sounds very much like conspiracy theory nuts. From what I understand, the Fed is politically in a very crappy position: they have a mandate for high employment (which is a good thing!), but they cannot really do anything to meet that mandate. To create jobs, somebody needs to actually spend money. Spending money means moving money around so that afterwards, person A has less monetary assets and person B has more monetary assets. However, the Fed is not allowed to engage in such actions. All it can do is asset swaps. So it can swap short term for long term bonds, for example, but when they do that, everybody still has the same amount of monetary assets afterward. It is only the maturity and interest rate structure that changes. The hope is that lower interest rates encourage private investment and thus private spending on jobs. However, that's not very realistically going to happen on a larger scale, because demand for products matters much more to firms than a tiny change in interest rates does. And as long as unemployment is high, demand remains low, which means that firms have no incentive to create jobs. It's a vicious cycle, that in theory the government (the union of legislative and executive branch) should break out of, because they are in a unique position to do so: they are not bound by market constraints. But the government is instead bound by partisan politics and an unscientific belief in the religion of austerity. So with the government not doing anything, the Fed at least tries to do the best they can to help the situation, which happens to be almost nothing - but they still try, because of the miniscule hope that there are, after all, some positive effects.

lmg643 14y ago

This is great news for startups because it supports asset prices generally, and means that high valuations will continue.