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QE is effectively creating money, which is then used to purchase financial assets in the hope that the person selling it will use the proceeds for something tha
by ddeck 10y ago
QE is effectively creating money, which is then used to purchase financial assets in the hope that the person selling it will use the proceeds for something that is economically stimulative. It also reduces borrowing costs along the way.
Most central banks buy government bonds. As a result of this buying, the returns on these bonds are reduced and supposedly less attractive to the investors that previously would have bought them (or did buy them and then sold them to the central bank).
The issue is that an investor that previously would have bought a government bond, doesn't suddenly decide to spend that money in the general economy because government bond returns went down. They instead put it into other financial assets, like corporate bonds, the stock market, or perhaps real estate, thus driving a bubble in these asset classes.
In places like Japan, the central bank buys nearly all bonds issued by the government (effectively financing the government deficit). This distorts markets tremendously. Japan is the most indebted developed government in the world with close to zero GDP growth for 20 years and yet you need to pay them to loan them money for 10 years (i.e. negative return on their bonds).
As an investor, you currently have to pay the governments of most Western European countries to loan them money. In Switzerland for example, if you loan them $100 today, you'll get back $98 in 2 years and no interest. Even Spain and Italy which are in terrible shape fiscally, have a negative return on their 2 year bonds [1].
We now have extremely distorted markets. Heavily indebted governments around the world are borrowing money for free, enabled by their "politically independent" central banks. Some central banks are purchasing equities outright (Bank of Japan announced last month they would double their purchasing of equity ETFs).
There's also a great deal of research indicating that such QE policies increase wealth inequality, by driving up the price of financial assets (which are owned by the rich) and increasing the cost of living for everyone else that needs access to these assets (rent etc.) [2]
To most laymen, the idea that creating money and buying financial assets will somehow stimulate spending and inflation is clearly flawed. Central banks by design however, have few other options.
[1] https://twitter.com/MktOutperform/status/773577673587105792 https://twitter.com/MktOutperform/status/773577673587105792
[2] http://www.bloomberg.com/news/articles/2016-03-10/how-central-banks-have-made-wealth-inequality-worse http://www.bloomberg.com/news/articles/2016-03-10/how-centra...
- rtpg 10y agoWell TARP worked out pretty well, right? I think there's a logic to QE in scenarios like the credit crunch, since suddenly banks need cash and there's a bunch of illiquid assets on everyone's balance sheets. But I do agree that owners of treasury bonds aren't really going out and spending their proceeds at Wal-Mart for a while.
- darawk 10y agoTARP was a very specific program that had very specific goals. It was strictly intended to prevent the collapse of the banking sector, not to inflate the economy more generally. It may have done that as a side effect, but that was not its primary purpose.
- EdHominem 10y agoAll the same people who fucked stuff up are still in charge and still have all their money. How do you figure it worked, even one iota, except for them? We have plenty of jails and very few bankers in them, despite widespread fraud. Again, not sure how this is a success. We need banks, but we don't need the ones we have. Ruthlessly prune them, guaranteeing the people's deposits, and capitalize new ones with stricter rules. Of course, now it's too late. We've printed trillions of dollars, inflating our currency, and given it to the thieves without (meaningfully) changing the system.
- cinquemb 10y ago>…Heavily indebted governments around the world are borrowing money for free… I don't disagree with any of what you say, but this part in particular makes me think that at the end of the day, governments around the world (esp "developed") ones are having a hard time allocating their ability to acquire resources (with their fiat currency effective "infinite money") in a way that will appease their respective populous. Is this a political failure of us all to hold our governments accountable? Are we witnessing the inability of fiat currency systems to effectively act as a way to distribute physical resources beyond this current threshold to those with a "need" that can't quite be satisfied with current availability of such resources on global markets? What seems to be the case is that when notional value out paces market value (or price what people are willing or able to buy at, if any buyers at all at any given price points [beyond those who are able to borrow for free at large $ levels) in any given asset classes, there isn't really any good market incentive to correct such (but plenty of bad ones like defaults on contracts). I really don't see things changing soon without drastic changes to how we all consider resource allocation in general.