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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

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.
      - grenoire 9y ago
        What..? Where do you even get that $900 from? If it's at 6% annual then that's 0.4867% monthly, which would then be priced at $753.65.
        freejulian 9y ago
        What? I said the initial price of the bond was roughly 750$ which represented a 6% yield. 900 comes from QE. If the fed wants a 10 year interest rate of 1%, they would buy bonds on the market until the price rose from 750$ to 900$. And that is exactly what they did with QE 1-3. No wonder they got away with it... no one here even understands how QE worked.
        fwdpropaganda 9y ago
        > no one here even understands how QE worked You clearly don't. If you buy a 10 year bond for $750 and wait for 1 month, now you have a 9year,11months bond, which will have a price slightly below $750, and that's what the fed will give you for it. YOU made up that they will pay $900, but they won't.
        freejulian 9y ago
        You’re assuming there’s a coupon. I explicitly said these were zero coupon. In this case the price at 9 year 11 month is higher than 750$, dumbass. The entire point of QE is to increase the bond price, thereby reducing the yield. You don’t have a clue.
AnimalMuppet 9y ago
By your definition, any price rise in any asset is free money for whoever holds the asset. That's... kind of true, in a way, I suppose, but not a very useful way to look at it. What you seem to be either missing or sweeping under the rug is that the holder has to sell the bond in order to get the money. Your description is therefore rather odd for the reality of the situation. It looks like you wanted to find the most outrage-inducing description that had some faint correspondence to the situation.
- freejulian 9y ago
  Um, I thought I was pretty clear: when the fed prints money to buy a specific asset, then it’s free money for the asset holders.

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.
    - grenoire 9y ago
      What..? Where do you even get that $900 from? If it's at 6% annual then that's 0.4867% monthly, which would then be priced at $753.65.
      - freejulian 9y ago
        What? I said the initial price of the bond was roughly 750$ which represented a 6% yield. 900 comes from QE. If the fed wants a 10 year interest rate of 1%, they would buy bonds on the market until the price rose from 750$ to 900$. And that is exactly what they did with QE 1-3. No wonder they got away with it... no one here even understands how QE worked.
        fwdpropaganda 9y ago
        > no one here even understands how QE worked You clearly don't. If you buy a 10 year bond for $750 and wait for 1 month, now you have a 9year,11months bond, which will have a price slightly below $750, and that's what the fed will give you for it. YOU made up that they will pay $900, but they won't.
        freejulian 9y ago
        You’re assuming there’s a coupon. I explicitly said these were zero coupon. In this case the price at 9 year 11 month is higher than 750$, dumbass. The entire point of QE is to increase the bond price, thereby reducing the yield. You don’t have a clue.

AnimalMuppet 9y ago

By your definition, any price rise in any asset is free money for whoever holds the asset. That's... kind of true, in a way, I suppose, but not a very useful way to look at it. What you seem to be either missing or sweeping under the rug is that the holder has to sell the bond in order to get the money. Your description is therefore rather odd for the reality of the situation. It looks like you wanted to find the most outrage-inducing description that had some faint correspondence to the situation.

freejulian 9y ago
Um, I thought I was pretty clear: when the fed prints money to buy a specific asset, then it’s free money for the asset holders.