6 ms·

>Government debt actually represents the net actual savings of the private sector! Excuse me, but when Federal Reserve conducts QE and buys 1 trillion of fresh

>Government debt actually represents the net actual savings of the private sector! Excuse me, but when Federal Reserve conducts QE and buys 1 trillion of freshly issued government debt, what does it have in common with actual savings of the private sector? Who saved that paltry trillion? :)

stephen_g 9y ago
Yes, QE is interesting. Definitey goes against the “Government must tax before it can spend” idea. Remember the Fed is part of the US Government sector, so spending as a result of QE should go into the private sector, minus what is taxed back later. Government securities generally represent savings because the Governments are generally legally required to match deficit spending with bonds, etc. QE was a bit of a departure from the norm (perhaps only temporarily though) and shows what modern monetary theory says - that it isn’t really necessary, not is it necessarily inflationary (this is because all spending carries inflationary risk, and inflation has to do more with aggregate demand than money supply etc. - and the most generally anti-inflationary force is actually taxation)
- arca_vorago 9y ago
  You do know the Federal Reserve is not actually federal and is owned by private banks right? Perhaps there is some definition of US government sector I'm not aware of.
  - stephen_g 9y ago
    That's a common misconception. It's technically a soft of public-private hybrid, but the "ownership" by private banks is purely symbolic. The system is considered "independent within the Government", not independent of the Government. The Federal Reserve's governors are appointed by the President and confirmed by the US Senate, and it derives all its authority only from the Federal Reserve Act. The organisation is accountable to the Government Accountability Office as well. Most central banks though are just directly owned by the Government of the country, even if they are meant to operate independently. The "independence" of central banks is generally a bad thing though - the point is supposedly to "depoliticise" them but really it's just an attempt to remove any democratic control of them.
    - arca_vorago 9y ago
      Your first paragraph is just flat wrong. I know quite a bit about the Fed, and I'd like you to cite your source on both the "public-private hybrid" part and the "purely symbolic" part. Neither are true, unless you consider 6% of trillions and trillions (after expenses) "purely symbolic". I have no idea where you get the hybrid part. No government owns shares of the fed. Also, for your information, the GAO audits are anything but accountability. After finally getting the GAO audit part passed in 78 there were so many limitations on thier audits as to make them so piecemeal they are more of a rubber stamp than anything. (Not to mention a few times when it got out the Fed destroyed source documents) Don't call something a common misconception when you don't have a more solid understanding of the subject please. The common misconception is that they are federal, not the other way around.
- nopriorarrests 9y ago
  I have a different view. Unfortunately it's not possible to make a real scientific experiment to validate your or my assumption. My thinking is that QE is quite inflationary.I think that after 2008 crisis we were expected to have a long period of strong deflation (let's say, with prices falling 4% each year, for 8 years straight), but QE reverted that and we had 1% of inflation or something like that instead. So, formally we are in "mild inflation" ground, but in fact the QE effect was quite dramatic. We just can't observe it because we don't have a "control group economy".
  - stephen_g 9y ago
    Well, all spending carries inflation risk - what really matters is what aggregate demand is like and how much spending and taxing alters that. Certainly QE could be inflationary, but as it was it was mostly just buying back securities it was mostly asset neutral so shouldn’t have done much (just like issuing Government securities to match deficit spending (just in reverse) - it doesn’t actually alter whether deficit spending is inflationary or not since there is a quite liquid market for those assets so they’re very similar to cash). It is considered to have inflated prices of certain financial assets though (shares etc.)
    - nopriorarrests 9y ago
      stephen_g, if you are interested, then I wrote a very simple scenario of how QE could (and IMHO did) spill over into "real economy" here -- https://news.ycombinator.com/item?id=16606140 https://news.ycombinator.com/item?id=16606140
  - danmaz74 9y ago
    Preventing deflation was one of the main goals of QE, so, I don't think your view is so weird :)
yxhuvud 9y ago
Nothing. QE is just a swap, the net assets for each involved party doesn't change, only the type of assets they happen to posses. The government get a trillion of debt but also a trillion worth of assets that pay their cost back, eventually.
- nopriorarrests 9y ago
  Can you look here -- https://news.ycombinator.com/item?id=16606140 https://news.ycombinator.com/item?id=16606140 for my counter-argument?
  - yxhuvud 9y ago
    That is not really a counter argument - I am not claiming QE has no effect on the economy. I claimed that it isn't inflationary, and your example doesn't show any clear inflationary pressure.
    - hndamien 9y ago
      QE isn't inflationary?! Please explain this alchemy?
      - yxhuvud 9y ago
        I already did, a few steps up. It is a swap, not a printing press.
        hndamien 9y ago
        That is not an explanation. Where do the debt and assets come from in this example?
dnomad 9y ago
QE is just repricing risk. It doesn't really have any real economic impact. But when you're in a severe depression people will try anything. BTW it's not true at all that economic growth requires a surplus. In fact often the case is the opposite. I strongly recommend people who want to understand this read up on Modern Monetary Theory. Once you understand how this stuff really works (yes Banks create money they are not dumb intermediaries sand fractional reserve banking is a myth) it will help a lot to understand much of what is not reported on the news.
- nopriorarrests 9y ago
  >QE is just repricing risk. It doesn't really have any real economic impact. That's where things get interesting. Let's imagine, for a simplicity sake, that there are 3 types of assets -- government debt, apple stocks and tesla debt. If I'm sitting on my 1 trillion of government debt and I want actually switch to apple stocks (or maybe just get dollars and eat pizza and drink margaritas), I need to sell it to someone who will put his trillion into government debt. So, for me to "untie" my 1 trillion in government bonds and free it for consumption, someone has to "tie" his trillion dollars into it. Now, fed enters the market and buys that 1 trillion from me as a part of QE. It does not need to sell his apple stocks or delay consumption and save that 1 trillion. I now have dollars in my account, and can use it to buy, say, trillion of tesla debt, because I love Elon Musk. Musk, in turn, can look at the market and observe that it has a huge appetite for tesla debt, and it was not the case one year ago. So maybe it make sense to issue one trillion dollars worth of bonds and build Gigafactory-2 and another car factory, and he does exactly that. Are we still sure that when Gigafactory-2 is being erected and people are hired for a second car factory, "QE have no real economic impact"? It's not obvious to me.
  - danmaz74 9y ago
    > Are we still sure that when Gigafactory-2 is being erected and people are hired for a second car factory, "QE have no real economic impact"? I'm pretty sure it does have an economic impact on growth. The argument according to which it wouldn't make sense when you're at or near potential GDP, but when you fall enough below that - as in a big recession - increasing the money supply definitely has an impact. Then, it can be argued if the impact is good or bad in the long term - eg: will people create useful Gigafactories, or will they build unsustainable McMansions? But the impact is there.

stephen_g 9y ago

Yes, QE is interesting. Definitey goes against the “Government must tax before it can spend” idea. Remember the Fed is part of the US Government sector, so spending as a result of QE should go into the private sector, minus what is taxed back later. Government securities generally represent savings because the Governments are generally legally required to match deficit spending with bonds, etc. QE was a bit of a departure from the norm (perhaps only temporarily though) and shows what modern monetary theory says - that it isn’t really necessary, not is it necessarily inflationary (this is because all spending carries inflationary risk, and inflation has to do more with aggregate demand than money supply etc. - and the most generally anti-inflationary force is actually taxation)

arca_vorago 9y ago
You do know the Federal Reserve is not actually federal and is owned by private banks right? Perhaps there is some definition of US government sector I'm not aware of.
- stephen_g 9y ago
  That's a common misconception. It's technically a soft of public-private hybrid, but the "ownership" by private banks is purely symbolic. The system is considered "independent within the Government", not independent of the Government. The Federal Reserve's governors are appointed by the President and confirmed by the US Senate, and it derives all its authority only from the Federal Reserve Act. The organisation is accountable to the Government Accountability Office as well. Most central banks though are just directly owned by the Government of the country, even if they are meant to operate independently. The "independence" of central banks is generally a bad thing though - the point is supposedly to "depoliticise" them but really it's just an attempt to remove any democratic control of them.
  - arca_vorago 9y ago
    Your first paragraph is just flat wrong. I know quite a bit about the Fed, and I'd like you to cite your source on both the "public-private hybrid" part and the "purely symbolic" part. Neither are true, unless you consider 6% of trillions and trillions (after expenses) "purely symbolic". I have no idea where you get the hybrid part. No government owns shares of the fed. Also, for your information, the GAO audits are anything but accountability. After finally getting the GAO audit part passed in 78 there were so many limitations on thier audits as to make them so piecemeal they are more of a rubber stamp than anything. (Not to mention a few times when it got out the Fed destroyed source documents) Don't call something a common misconception when you don't have a more solid understanding of the subject please. The common misconception is that they are federal, not the other way around.
nopriorarrests 9y ago
I have a different view. Unfortunately it's not possible to make a real scientific experiment to validate your or my assumption. My thinking is that QE is quite inflationary.I think that after 2008 crisis we were expected to have a long period of strong deflation (let's say, with prices falling 4% each year, for 8 years straight), but QE reverted that and we had 1% of inflation or something like that instead. So, formally we are in "mild inflation" ground, but in fact the QE effect was quite dramatic. We just can't observe it because we don't have a "control group economy".
- stephen_g 9y ago
  Well, all spending carries inflation risk - what really matters is what aggregate demand is like and how much spending and taxing alters that. Certainly QE could be inflationary, but as it was it was mostly just buying back securities it was mostly asset neutral so shouldn’t have done much (just like issuing Government securities to match deficit spending (just in reverse) - it doesn’t actually alter whether deficit spending is inflationary or not since there is a quite liquid market for those assets so they’re very similar to cash). It is considered to have inflated prices of certain financial assets though (shares etc.)
  - nopriorarrests 9y ago
    stephen_g, if you are interested, then I wrote a very simple scenario of how QE could (and IMHO did) spill over into "real economy" here -- https://news.ycombinator.com/item?id=16606140 https://news.ycombinator.com/item?id=16606140
- danmaz74 9y ago
  Preventing deflation was one of the main goals of QE, so, I don't think your view is so weird :)

yxhuvud 9y ago

Nothing. QE is just a swap, the net assets for each involved party doesn't change, only the type of assets they happen to posses. The government get a trillion of debt but also a trillion worth of assets that pay their cost back, eventually.

nopriorarrests 9y ago
Can you look here -- https://news.ycombinator.com/item?id=16606140 https://news.ycombinator.com/item?id=16606140 for my counter-argument?
- yxhuvud 9y ago
  That is not really a counter argument - I am not claiming QE has no effect on the economy. I claimed that it isn't inflationary, and your example doesn't show any clear inflationary pressure.
  - hndamien 9y ago
    QE isn't inflationary?! Please explain this alchemy?
    - yxhuvud 9y ago
      I already did, a few steps up. It is a swap, not a printing press.
      - hndamien 9y ago
        That is not an explanation. Where do the debt and assets come from in this example?

dnomad 9y ago

QE is just repricing risk. It doesn't really have any real economic impact. But when you're in a severe depression people will try anything. BTW it's not true at all that economic growth requires a surplus. In fact often the case is the opposite. I strongly recommend people who want to understand this read up on Modern Monetary Theory. Once you understand how this stuff really works (yes Banks create money they are not dumb intermediaries sand fractional reserve banking is a myth) it will help a lot to understand much of what is not reported on the news.

nopriorarrests 9y ago
>QE is just repricing risk. It doesn't really have any real economic impact. That's where things get interesting. Let's imagine, for a simplicity sake, that there are 3 types of assets -- government debt, apple stocks and tesla debt. If I'm sitting on my 1 trillion of government debt and I want actually switch to apple stocks (or maybe just get dollars and eat pizza and drink margaritas), I need to sell it to someone who will put his trillion into government debt. So, for me to "untie" my 1 trillion in government bonds and free it for consumption, someone has to "tie" his trillion dollars into it. Now, fed enters the market and buys that 1 trillion from me as a part of QE. It does not need to sell his apple stocks or delay consumption and save that 1 trillion. I now have dollars in my account, and can use it to buy, say, trillion of tesla debt, because I love Elon Musk. Musk, in turn, can look at the market and observe that it has a huge appetite for tesla debt, and it was not the case one year ago. So maybe it make sense to issue one trillion dollars worth of bonds and build Gigafactory-2 and another car factory, and he does exactly that. Are we still sure that when Gigafactory-2 is being erected and people are hired for a second car factory, "QE have no real economic impact"? It's not obvious to me.
- danmaz74 9y ago
  > Are we still sure that when Gigafactory-2 is being erected and people are hired for a second car factory, "QE have no real economic impact"? I'm pretty sure it does have an economic impact on growth. The argument according to which it wouldn't make sense when you're at or near potential GDP, but when you fall enough below that - as in a big recession - increasing the money supply definitely has an impact. Then, it can be argued if the impact is good or bad in the long term - eg: will people create useful Gigafactories, or will they build unsustainable McMansions? But the impact is there.