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“QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broa

“QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broad money and a corresponding increase in the amount of central bank reserves. The sellers of the assets will be left holding the newly created deposits in place of government bonds. They will be likely to be holding more money than they would like, relative to other assets that they wish to hold. They will therefore want to rebalance their portfolios, for example by using the new deposits to buy higher-yielding assets such as bonds and shares issued by companies — leading to the ‘hot potato’ effect discussed earlier. This will raise the value of those assets and lower the cost to companies of raising funds in these markets.” The fed is literally giving asset holders free money at the expense of people trying to save in traditional ways (savings accounts). They buys whichever bonds they decide which then enables the holders of those bonds to collect free money. All the new money slowly works it’s way into the rest of the economy, inflating away the value of our savings. Crap like this is precisely why bitcoin will succeed. Eventually people will realize what the Central Banks are doing and will decide they’ve had enough.

skybrian 9y ago
It's not "free money". Investors get the money by selling assets. But it might be at a better price than they could have gotten elsewhere. One lesson is not to use a savings account as the only place to keep your money. Anyone who has looked at interest rates in the last few decades already knows this. Another lesson is that it would be a lot more fair if the Fed had a way to boost the economy that involved giving money to normal people. This gets talked about as "helicopter drops" but never happens. (It probably requires an act of Congress.)
- freejulian 9y ago
  It is free money. If you bought a bond for 30 years today, and the fed came along and said they’d give you what you paid for the bond plus 20 years of interest payments, how is that anything other than free money?! Without conflating savings with investment, how would you propose an individual save money?
  - fwdpropaganda 9y ago
    > It is free money. If you bought a bond for 30 years today, and the fed came along and said they’d give you what you paid for the bond plus 20 years of interest payments, how is that anything other than free money?! If you had to put it away and couldn't use it for 30 years, it's not really free, is it? It cost you 30 years of not being able to use it. Plus you're taking inflation risk, default risk, depending on the bond you might also be taking liquidity risk, etc. You're talking out of your ass dude.
    - freejulian 9y ago
      Ummmmm, you’ve got it around the wrong way friend. The central banks are buying the bonds. You had already taken on the risk of buying the bond. The fed then came and said, “I’d like to buy your bond and give you 20 years of interest payments on top of your principal.”
      - fwdpropaganda 9y ago
        If you have a 30 year bond and hold it for 10 years then you get 10 years worth of interest payments. When the fed (or anyone else) comes, they buy it at the market price of a 20 year bond (30 year bond after 10 years is a 20 year bond). You don't get any interest payment on top of that. It's still not free money, you took the risk of holding a 30 year bond for 10 years. And it's not "on top of the principal". They don't give you the principal for your 20 year bond, they give you the market price. Which fluctuates, and hence you're taking a risk and being rewarded for it.
        freejulian 9y ago
        Suppose there is a new issue zero-coupon 10 year bond with par value of $1000. The price for that bond is roughly $750 which gives me a 6%/yr return at maturity. I buy it, and the fed comes around 1 month later and decides they want to do QE. They decide the 10 year yield is what they want to target so they go on the market and start buying bonds. The price goes from $750 to $900 in a short time. I can now take my bond I purchased for $750 and sell it for $900 if I desired — this is the same as returning my principal plus a few years of interest payments after having held the bond for just a few months. The fed printed money and I directly benefited.
- daurnimator 9y ago
  > Another lesson is that it would be a lot more fair if the Fed had a way to boost the economy that involved giving money to normal people Like Kevin Rudd's stimulus package in Australia?
fwdpropaganda 9y ago
> The fed is literally giving asset holders free money at the expense of people trying to save in traditional ways (savings accounts). If you believe this, isn't the rational thing to use your dollars to buy assets? I think you're betraying a deep mis-understading of how money works. QE has been raging for 10 years, but inflation is incredibly low (2.5% US, 1.5% EU). In other words, even though you claim that the FED "gives asset holders free money", when you hold cash you're not really losing purchasing power. How do you square the two things?
- freejulian 9y ago
  Absolutely, had I realized what the fed was doing when QE was happening I would have definitely done that. And a lot of people smarter than myself did do precisely that! Inflation is only “incredibly low” if you cherry pick the basket of goods used to measure it.
  - fwdpropaganda 9y ago
    So. No need for bitcoin. You're just running away from a complex thing you don't understand but has a lot of traction, to a simple thing which you understand but has no traction. My strategy is stick with the former and educate myself more. Different strategies.
    - whytaka 9y ago
      I think an alternate money system that works alongside government issued currencies would be a huge boon to society.
      - _jal 9y ago
        Long term, you will either have government as we know it now, or an alternate currency, but not both. The monopoly on currency is closely related to the monopoly on force. I generally think a lot of anarcho-capitalist theory to be obvious nonsense, but on that, they have a point.
ethbro 9y ago
> Crap like this is precisely why bitcoin will succeed "Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time" I'll believe you when the entire world economy has run on non-Keynesian cryptocurrency economics through a couple of recessions...
- freejulian 9y ago
  Well, I mean, the greatest economic booms in American history happened when our money was backed by gold. When the dollar came off the gold standard in the 70s, we saw wages decouple from productivity. This is not a coincidence.
  - skookumchuck 9y ago
    Most people who claim that fiat money is essential for a growing economy are unable to explain the US economy from 1800-1914. The real purpose of fiat money systems is so the government can spend more than it takes in by printing the difference (or the more modern variation of just creating it with accounting gimmicks).
    - ethbro 9y ago
      The real point of fiat money is that it affords a government the option to increase the money supply at will. Whether they do that for good (e.g. to attempt to combat a recession) or for evil (e.g. to invalidate government debt / inflate their way out of deficits) is a political exercise. And knowing that, I actually think the US Fed is a pretty decent system. I shudder to think what would happen if Congress controlled monetary supply.
      - skookumchuck 9y ago
        An 1800 dollar is worth the same as a 1914 dollar. A 2018 dollar is worth about 4 cents.
squaresmile 9y ago
Right after the part you quoted: "That, in turn, should lead to higher spending in the economy.(1) The way in which QE works therefore differs from two common misconceptions about central bank asset purchases: that QE involves giving banks ‘free money’; and that the key aim of QE is to increase bank lending by providing more reserves to the banking system, as might be described by the money multiplier theory. This section explains the relationship between money and QE and dispels these misconceptions. ... Two misconceptions about how QE works Why the extra reserves are not ‘free money’ for banks While the central bank’s asset purchases involve — and affect — commercial banks’ balance sheets, the primary role of those banks is as an intermediary to facilitate the transaction between the central bank and the pension fund. The additional reserves shown in Figure 3 are simply a by-product of this transaction. It is sometimes argued that, because they are assets held by commercial banks that earn interest, these reserves represent ‘free money’ for banks. While banks do earn interest on the newly created reserves, QE also creates an accompanying liability for the bank in the form of the pension fund’s deposit, which the bank will itself typically have to pay interest on. In other words, QE leaves banks with both a new IOU from the central bank but also a new, equally sized IOU to consumers (in this case, the pension fund), and the interest rates on both of these depend on Bank Rate"
- mac01021 9y ago
  I think maybe that is beside the point. If new money is created, and the new money is not distributed evenly among all citizens, all those citizens who receive less than an equal share are harmed while those who receive more than an equal share benfit. It seems like the central bank, in this way, harms most people on a regular basis. I am not prepared, however, to argue that Bitcoin is any better in this respect.

skybrian 9y ago

It's not "free money". Investors get the money by selling assets. But it might be at a better price than they could have gotten elsewhere. One lesson is not to use a savings account as the only place to keep your money. Anyone who has looked at interest rates in the last few decades already knows this. Another lesson is that it would be a lot more fair if the Fed had a way to boost the economy that involved giving money to normal people. This gets talked about as "helicopter drops" but never happens. (It probably requires an act of Congress.)

freejulian 9y ago
It is free money. If you bought a bond for 30 years today, and the fed came along and said they’d give you what you paid for the bond plus 20 years of interest payments, how is that anything other than free money?! Without conflating savings with investment, how would you propose an individual save money?
- fwdpropaganda 9y ago
  > It is free money. If you bought a bond for 30 years today, and the fed came along and said they’d give you what you paid for the bond plus 20 years of interest payments, how is that anything other than free money?! If you had to put it away and couldn't use it for 30 years, it's not really free, is it? It cost you 30 years of not being able to use it. Plus you're taking inflation risk, default risk, depending on the bond you might also be taking liquidity risk, etc. You're talking out of your ass dude.
  - freejulian 9y ago
    Ummmmm, you’ve got it around the wrong way friend. The central banks are buying the bonds. You had already taken on the risk of buying the bond. The fed then came and said, “I’d like to buy your bond and give you 20 years of interest payments on top of your principal.”
    - fwdpropaganda 9y ago
      If you have a 30 year bond and hold it for 10 years then you get 10 years worth of interest payments. When the fed (or anyone else) comes, they buy it at the market price of a 20 year bond (30 year bond after 10 years is a 20 year bond). You don't get any interest payment on top of that. It's still not free money, you took the risk of holding a 30 year bond for 10 years. And it's not "on top of the principal". They don't give you the principal for your 20 year bond, they give you the market price. Which fluctuates, and hence you're taking a risk and being rewarded for it.
      - freejulian 9y ago
        Suppose there is a new issue zero-coupon 10 year bond with par value of $1000. The price for that bond is roughly $750 which gives me a 6%/yr return at maturity. I buy it, and the fed comes around 1 month later and decides they want to do QE. They decide the 10 year yield is what they want to target so they go on the market and start buying bonds. The price goes from $750 to $900 in a short time. I can now take my bond I purchased for $750 and sell it for $900 if I desired — this is the same as returning my principal plus a few years of interest payments after having held the bond for just a few months. The fed printed money and I directly benefited.
daurnimator 9y ago
> Another lesson is that it would be a lot more fair if the Fed had a way to boost the economy that involved giving money to normal people Like Kevin Rudd's stimulus package in Australia?

fwdpropaganda 9y ago

> The fed is literally giving asset holders free money at the expense of people trying to save in traditional ways (savings accounts). If you believe this, isn't the rational thing to use your dollars to buy assets? I think you're betraying a deep mis-understading of how money works. QE has been raging for 10 years, but inflation is incredibly low (2.5% US, 1.5% EU). In other words, even though you claim that the FED "gives asset holders free money", when you hold cash you're not really losing purchasing power. How do you square the two things?

freejulian 9y ago
Absolutely, had I realized what the fed was doing when QE was happening I would have definitely done that. And a lot of people smarter than myself did do precisely that! Inflation is only “incredibly low” if you cherry pick the basket of goods used to measure it.
- fwdpropaganda 9y ago
  So. No need for bitcoin. You're just running away from a complex thing you don't understand but has a lot of traction, to a simple thing which you understand but has no traction. My strategy is stick with the former and educate myself more. Different strategies.
  - whytaka 9y ago
    I think an alternate money system that works alongside government issued currencies would be a huge boon to society.
    - _jal 9y ago
      Long term, you will either have government as we know it now, or an alternate currency, but not both. The monopoly on currency is closely related to the monopoly on force. I generally think a lot of anarcho-capitalist theory to be obvious nonsense, but on that, they have a point.

ethbro 9y ago

> Crap like this is precisely why bitcoin will succeed "Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time" I'll believe you when the entire world economy has run on non-Keynesian cryptocurrency economics through a couple of recessions...

freejulian 9y ago
Well, I mean, the greatest economic booms in American history happened when our money was backed by gold. When the dollar came off the gold standard in the 70s, we saw wages decouple from productivity. This is not a coincidence.
- skookumchuck 9y ago
  Most people who claim that fiat money is essential for a growing economy are unable to explain the US economy from 1800-1914. The real purpose of fiat money systems is so the government can spend more than it takes in by printing the difference (or the more modern variation of just creating it with accounting gimmicks).
  - ethbro 9y ago
    The real point of fiat money is that it affords a government the option to increase the money supply at will. Whether they do that for good (e.g. to attempt to combat a recession) or for evil (e.g. to invalidate government debt / inflate their way out of deficits) is a political exercise. And knowing that, I actually think the US Fed is a pretty decent system. I shudder to think what would happen if Congress controlled monetary supply.
    - skookumchuck 9y ago
      An 1800 dollar is worth the same as a 1914 dollar. A 2018 dollar is worth about 4 cents.

squaresmile 9y ago

Right after the part you quoted: "That, in turn, should lead to higher spending in the economy.(1) The way in which QE works therefore differs from two common misconceptions about central bank asset purchases: that QE involves giving banks ‘free money’; and that the key aim of QE is to increase bank lending by providing more reserves to the banking system, as might be described by the money multiplier theory. This section explains the relationship between money and QE and dispels these misconceptions. ... Two misconceptions about how QE works Why the extra reserves are not ‘free money’ for banks While the central bank’s asset purchases involve — and affect — commercial banks’ balance sheets, the primary role of those banks is as an intermediary to facilitate the transaction between the central bank and the pension fund. The additional reserves shown in Figure 3 are simply a by-product of this transaction. It is sometimes argued that, because they are assets held by commercial banks that earn interest, these reserves represent ‘free money’ for banks. While banks do earn interest on the newly created reserves, QE also creates an accompanying liability for the bank in the form of the pension fund’s deposit, which the bank will itself typically have to pay interest on. In other words, QE leaves banks with both a new IOU from the central bank but also a new, equally sized IOU to consumers (in this case, the pension fund), and the interest rates on both of these depend on Bank Rate"

mac01021 9y ago
I think maybe that is beside the point. If new money is created, and the new money is not distributed evenly among all citizens, all those citizens who receive less than an equal share are harmed while those who receive more than an equal share benfit. It seems like the central bank, in this way, harms most people on a regular basis. I am not prepared, however, to argue that Bitcoin is any better in this respect.