Thursday, November 18, 2010

Quantitative easing revisted



A new video, this time, with the correct explanation of QE. (I wonder if Warren Mosler did this one!!)



27 comments:

Tom Hickey said...

Great! Finally some light on the subject. QE is just a shift in asset composition and the term structure of government liabilities. No increase in nongovernment net financial assets.

Matt Franko said...

yesterday cnbc tracked down the creator of the first inacurate cartoon segment and feted him live on their channel over the lunch hour...I wont hold my breath waiting for them to track down the creator of this one.

welfarewarfare state said...

Other video has 1.7 million views! this one? aout 70,000.

Tom Hickey said...

Matt, those dummies deserve each other.

welfare..., as a world traveller friend mine was fond of saying, "Americans are stupid."

Marty Steinberg said...

"Americans are stupid."

Does that include you, tom? Any empirical proof that you can provide?

I thought Keynesians were highly critical of the European "austerity" plan. So does your remark cover that continent also? Germany's finance minister was critical of QE2. So what's your opinion of the people that elected the German government?

Thanks,

Matt Franko said...

Tom,
This is all I can come up with lately:

"Alleging themselves to be wise, they are made stupid" Romans 1:22

I literally cannot come up with any other explanation for what I am witnessing. Normally or otherwise intelligent people just cant seem to understand our western system of double entry accounting. This stupidity goes up to the highest levels of policymakers in the west.

I believe similar periods of high level ignorance at crisis times have led to the many wars and associated deaths that the west has experienced. I'm thankful it has not reached that level this time (maybe yet).

We have to keep plugging.

Resp,

googleheim said...

Germans are playing their game of chastizing the USA for "crass keynesian economics" for the purpose of making their Euro strong when they want to vacation and making it weak when they want to export.

They only go looking for debt problems in Ireland and Greece when they need to drop the Euro a bit for export purposes to prove bland Austrian pointlessnesses.

Then even if the US assets increase they pounce the U$D so it doesn't get too strong and upset their computer models creating too much strain on their exports.

Severus said...

Let's keep it simple here and follow the logic of this nice little video.

So the banks have swapped their treasuries for dollar reserves. Ok, so far this is not inflationary, the video is right. But what happens next? The bank uses their brand new dollar reserves to buy more treasuries from the Treasury (thus replacing the Chinese as buyers of the newly issued US debt). Congress now has 600 billions US$ to spend that did not previously exist. The new money is used to buy tanks, build bridges, pay school teachers, etc...
Are you guys telling me that this is not an injection of new dollars into the economy? Is this too simple? Am I missing some double entry accounting here?

Anyway, you guys should stop and think for a little bit: it's usually not a good sign when "it's our little group of people against the rest of the world", i.e. "only a few of us gets it, everyone else is uninformed or stupid".
Not a good sign at all... :-)

Matt Franko said...

Severus,

"So the banks have swapped their treasuries for dollar reserves. Ok, so far this is not inflationary, the video is right. But what happens next? The bank uses their brand new dollar reserves to buy more treasuries from the Treasury "

Im sorry you are wrong here. Once the liabilities are exchanged that is it. End of transaction.


Banks cannot buy anything with reserve balances. Reserve balances (a bank accounting construct, ie they are not "real") are only used (by exchanging them between banks only in acomputer system) to settle the real inter-bank transactions of their customers (depositors).

Now yes, the banks customers (depositors) who perhaps sold their longer dated Treasury Securities to the Fed in QE2 and have received deposits in exchange, yes these customers can if they want to, buy shorter dated Treasury securities from the Treasury at the next auction, but not the bank itself. Or the customers can just leave their balances in their checking or savings accounts.

Reserves are only an accounting construct (completely "non-real", they only exist in a computer based banking MIS system run by the Fed) used by commercial banks and the central bank to keep track of customer deposits and manage policy interest rates within the banking system.

Reserves are not "money". Information technology allows us to operate waaaaaay beyond such an archaic concept. Welcome to the 20th century in western civilization!

We are far from alone in understanding the realities of the banking system. Many people understand how all of this works. Unfortunately they are not in the top policymaking positions or on televison all the time (Mike being the only one I know of who gets on with some regularity).

Feel free to post questions.

bubbleRefuge said...

Matt, awesome response. You are 100% correct. You should make a blog post of that response.

To those who are hysterical about the FED and QE, are you satisfied that QE is meaningless other than psychological factors? Can we all agree on that? Can we advance this debate? The FED does not create inflation. Can we agree on that? The treasury and Congress are capable of creating inflation by spending too much money and I think that is a place we can have robust debates on.

unknowing skeptic said...

I'll have to thank you guys for making this QE2 stuff clear.

I now understand that there has been no money printing going on to buy these treasuries, and it's just a swap.

The real question is whether increased bank reserves will spur loaning, growth and employment. from what I've read so far it won't because there's just no demand for loans.

However, I think QE2 should also be looked at in another angle.

By purchasing treasuries at face value, the Federal Reserve has more or less established itself as a buyer of last resort.

IMO, QE2 has the dual purpose of increasing bank reserves and assuaging uncertainty surrounding the value of treasuries, since you can just sell them back to the fed.

The correct argument for inflation is not that QE2 involves printing money, but that U.S. Treasuries already have some ponzi-like characteristics, and unless economic activity picks up in the coming years, the U.S. may be forced to inflate their way out of debt or to default. Both of which are drastic consequences.

Just my two cents, any comments are appreciated.

Tom Hickey said...

What happens in QE is that asset composition and the term structure of rates shift but the amount of net financial assets does not change. No new money is added to the economy, however, liquidity is increased as longer term government securities are taken on the governments book as assets and bank reserves increase as bank assets.

What happens is that the reserves that were used to purchase the tsy's in the first place just get returned to the economy. It's like transferring a time deposit to a demand deposit. Those funds can be left in one's checking account, spent, or invested in something else. Similarly, the Fed is reducing the amount of risk-free assets in the attempt to drive risk and maybe increase spending, too.

The Fed is hoping that the reserves freed up will be put toward higher risk assets, like housing and equities. Instead, what is happening is that those funds are adding to the global pool of hot money and flowing abroad, mostly into the emerging economies.

This increase in the global pool of hot money tends to depreciate the dollar as dollars are exchanged for emerging nations's currencies, driving up their export prices and creating asset inflation in the emerging economies. So they are erecting capital controls and bitching loudly at the US to cease and desist.

The stock market did get a push as the Fed intended, but as the Fed admitted, this just makes prices higher than they would be otherwise, that is, higher asset values with no change in fundamentals to justify this. This is how the Fed creates bubbles.

So far, QE has not reduced rates at the long end of the yield curve. Conversely, mortgage rates have risen, so housing has not benefitted so far.

The clearest post on QE I have found is Randy Wray's explication of a post of a characteristically terse post by Warren Mosler here.

welfarewarfare state said...

Tom,

I wouldn't be so arrogant given how wrong you guys have been about the events of the last 5 years. I think I would re-examine my ideology and starting premises if I had been wrong on so grand a scale. It's like you guys have so much invested in your fallacious economic models that you can't psychologically admit that you have been wrong. Its not even a regular kind of wrong; it's nuclear-grade wrong.

I've been to European countries and they have had lower standards of living than us for a long time. This is because we started down the socialist road later than them, and when we did move in that direction we didn't socialisze as much of our economy as them...until now. While many european countries are moving away from socialism to a degree right now, we are moving aggressviely towards it.

cheers!

welfarewarfare state said...

Also Tom,

Many european economists have expressed disapproval of Fed and U.S. fiscal policies, especially the Germans. Maybe Europeans aren't smarter than Americans; maybe they are just smarter than you (and Norman the Conquered).

cheers!

googleheim said...

wasfare wasfare wubba bubba

read krugman's axis of depression column today

Marty Steinberg said...

Krugman's wife writes his columns.

Matt Franko said...

Marty,

Yes, LOL!, that probably explains it! Now I understand why Krugman cant get it.

Resp,

DoggeyStyleMikey said...

What artificial lending standards are you talking about?!?!?!!?!?

googleheim said...

Matt

What are you talking about ?

His latest column is as close to in-paradigm as he can get to

except to the appeasement of the export foxes...

Matt Franko said...

Goog,
I mainly refer to Krugman being a so called 'defict dove' in that he ultimately belives that deficits (ie the govt simply posting liabilities in its accounting system) must be "addressed" or maybe even paid back (horror!).

Also, from his column this week: " The Fed’s expansionary policies, however, have the side effect of somewhat weakening the dollar,"

This is not necessarily true. I think he believes here that lowering interest rates lower the value of the free floating USD, (Japan data would say otherwise, interest rate channel lowers fiscal transfer which makes USDs harder to get,etc).

Many other things he says that lead me to believe he is not (fully, hence not at all) in paradigm. Its a problem because he imo is very influential.

It looks to me that he's another one who has literally bought into a secular religion ('The Conscience of a Liberal') and he simply has lost his objectivity becasue of this. Sad.

welfarewarfare state said...

Google "Paul Krugman advocates housing bubble 2002." He lamely claims that this was just a piece of policy analysis and not advocacy but employs words like "should" and "ought" in the piece. If he didn't have a postition at the New York Times, he would be viewed as just another crackpot.

hiljaa said...

http://www.youtube.com/watch?v=ahrhWWuixGs

Peter Schiff Proves He Is A Dunce By Claiming QE2 A Government Conspiracy To Support Treasuries

Talk about sheer stupidity and ignorance. You would have thought that Peter Schiff might have at least tried to figure out what "Quantitative Easing" actually is and how it works before filming himself making such inane and idiotic statements, and embarrassing himself in public yet again.

Peter Schiff claims that "he has been thinking (haha)" and he reckons that "QE2 is the government's plan to step in and buy treasuries because international demand is waning and no one else wants them, so now they can cover this fact up by announcing QE2 and buying the treasuries themselves".

This is so inane and BS on so many levels, its hilarious. He probably got it out of wet dreams he had together with Alex Jones.

Firstly, international demand for treasuries is very robust, as I have pointed out before.

From FT, Aug 19, 2010:

Japanese investors are buying foreign bonds at a record pace as excess cash, the strong yen and low domestic yields prompt a search for higher returns outside of Japan.
Institutional investors bought a net Y2,178bn ($25bn) in bonds issued overseas last week, the most since 2001 when records began, according to data from the Ministry of Finance.
Analysts and traders estimate that the majority of the buying is taking place in the US Treasury market, and other stable dollar markets such as Canada and Australia.

Or from the US government on who holds its bonds - amounts held for July 2010 to Aug 2010 (latest month recorded to date):

China 846.7b (July) to 868.4b (Aug)
UK 374.3b to 448.4b
Brazil 162.2b to 165b

Secondly, and most funny of all, Peter - I hope you realize that most of the assets purchased under Quantitative Easing are in fact, government bonds (treasuries). That is how the program was designed from inception.

Straight from the Federal Reserve Bank of New York about QE:

"The Central bank undertakes to buy various assets - commercial and government bonds from banks. To buy these bonds the Central Bank issues Central Bank reserves."

I have included a video from the Bank of England explaining QE. It explains very clearly "Most of the assets purchased are government bonds".

Lastly, Peter Schiff says in the video, referring to QE as 'debt monetization': "The Fed dosen't want to say we have an inflation policy..." Hello, Peter what planet are you living on? The Fed exactly said that when it launched QE1 and QE2 - that deflation or disinflation is the imminent danger to the economy and that it wishes to maintain robust inflation levels. This is also very clearly explained in the Bank of England QE video.

Peter Schiff - the dunce of all dunces - providing us yet again with irrefutable evidence that he is an economic illiterate, conspiracy theory kook and mongoloid level moron.

hiljaa said...

http://www.youtube.com/watch?v=ahrhWWuixGs

Peter Schiff Proves He Is A Dunce By Claiming QE2 A Government Conspiracy To Support Treasuries

Talk about sheer stupidity and ignorance. You would have thought that Peter Schiff might have at least tried to figure out what "Quantitative Easing" actually is and how it works before filming himself making such inane and idiotic statements, and embarrassing himself in public yet again.

Peter Schiff claims that "he has been thinking (haha)" and he reckons that "QE2 is the government's plan to step in and buy treasuries because international demand is waning and no one else wants them, so now they can cover this fact up by announcing QE2 and buying the treasuries themselves".

This is so inane and BS on so many levels, its hilarious. He probably got it out of wet dreams he had together with Alex Jones.

Firstly, international demand for treasuries is very robust, as I have pointed out before.

Secondly, and most funny of all, Peter - I hope you realize that most of the assets purchased under Quantitative Easing are in fact, government bonds (treasuries). That is how the program was designed from inception.

Straight from the Federal Reserve Bank of New York about QE:

"The Central bank undertakes to buy various assets - commercial and government bonds from banks. To buy these bonds the Central Bank issues Central Bank reserves."

I have included a video from the Bank of England explaining QE. It explains very clearly "Most of the assets purchased are government bonds".

Lastly, Peter Schiff says in the video, referring to QE as 'debt monetization': "The Fed dosen't want to say we have an inflation policy..." Hello, Peter what planet are you living on? The Fed exactly said that when it launched QE1 and QE2 - that deflation or disinflation is the imminent danger to the economy and that it wishes to maintain robust inflation levels. This is also very clearly explained in the Bank of England QE video.

Peter Schiff - the dunce of all dunces - providing us yet again with irrefutable evidence that he is an economic illiterate, conspiracy theory kook and mongoloid level moron.

hiljaa said...

http://www.youtube.com/watch?v=kl7OpKO0evg

Peter Schiff's Admiration For 'Intellectual Dynamo' Sarah Palin's 'Really Good Stuff'

Marty Steinberg said...

This blog and its commentators have an unhealthy obsession with Peter Schiff.

osseonews said...

The issue that everyone is missing here and why QE2 is obviously inflationary in practice (though not in theory, as everyone has so eloquently explained), is simply that the banks knowing that the Fed will be coming in to buy Treasuries, front run the Fed across the entire financial asset spectrum - bond prices go up, stocks go up etc. Then when the Fed starts buying they sell. That's why yields are going up now that QE2 supposedly started - all the "smart" traders are taking profits after front running the Fed. So even though the technical act of QE2 doesn't create more money, the reality of the world is that it does by making risk-free profits in financial assets possible. These profits are new money, that is then funneled back into the economy, raising prices, or more accurately lining the pockets of a small minority of people who want to maintain a status quo of high unemployment high and soaring basic living costs for the less wealthy.

The facts are that prices for nearly everything we need (health care, energy, food, education) go up every single year and some at double digit rates, e.g. health care. This is the meaning of inflation and is ravaging the middle class. If you don't see any inflation, you are either super rich or somehow don't actually live in the real US but rather in the imaginary Wall Street economy that the US Government has now mistaken as the real economy.

bubbleRefuge said...

osseonews, you make good points but I submit to you there is no demand driven inflation. Labor prices, the biggest component of inflation have been declining.