4 ms·

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

by 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.
- dnomad 9y ago
  The only thing that changed here is you swapped one type of money-like asset for another. Previously you owned bonds and now you have cash. Anything you could do before you can still do. (You can pay for stuff like factories with bonds.) I don't see why you think you're suddenly richer. QE has no impact on your wealth because you're just swapping similar assets. Now you can argue that it does send a message to the animal spirits leading to your risk preferences to change (seeing the Fed act so boldly makes you more likely to invest) which leads to a rising stock market and eventually a general "wealth effect" ... But this is kinda voodoo magic and no longer a quantitative analysis even if it's real. (BTW in reality the market for government debt is very liquid. What you're really describing hate it's liquidation risk. It becomes an issue for more think traded instruments but not for bonds.)
  - nopriorarrests 9y ago
    Well, yes. Since Fed is not making pizzas and margaritas, it can only swap one asset for another, it can't mix you a decent margarita. And if Fed will go out and just buy the whole outstanding float of GOOG, AAPL, TSLA, FB and NFLX with freshly minted money, it would be, bingo, "swap of one asset for another". Don't you think that asset swap like that will somehow affect the general economy? EDIT: damn, let's go _really_ extreme. Fed can basically swap all the government debt with dollars. All the 21 trillion of it, in a single asset swap. Click-click and boom, USA is debt free, no more interest payments, hooray. Dont you think such swap will have some real-life repercussions? If it will, how it's different from QE?
  - cherenkoray 9y ago
    > one type of money-like asset for another. If you look at it that way, aren't houses a money-like asset as well? Certainly, people now buy houses which would have in stocks or bonds before. And if so, what does that mean for the value of these assets? Are they independent from inflationary risks?

by dnomad 9y ago

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.
dnomad 9y ago
The only thing that changed here is you swapped one type of money-like asset for another. Previously you owned bonds and now you have cash. Anything you could do before you can still do. (You can pay for stuff like factories with bonds.) I don't see why you think you're suddenly richer. QE has no impact on your wealth because you're just swapping similar assets. Now you can argue that it does send a message to the animal spirits leading to your risk preferences to change (seeing the Fed act so boldly makes you more likely to invest) which leads to a rising stock market and eventually a general "wealth effect" ... But this is kinda voodoo magic and no longer a quantitative analysis even if it's real. (BTW in reality the market for government debt is very liquid. What you're really describing hate it's liquidation risk. It becomes an issue for more think traded instruments but not for bonds.)
- nopriorarrests 9y ago
  Well, yes. Since Fed is not making pizzas and margaritas, it can only swap one asset for another, it can't mix you a decent margarita. And if Fed will go out and just buy the whole outstanding float of GOOG, AAPL, TSLA, FB and NFLX with freshly minted money, it would be, bingo, "swap of one asset for another". Don't you think that asset swap like that will somehow affect the general economy? EDIT: damn, let's go _really_ extreme. Fed can basically swap all the government debt with dollars. All the 21 trillion of it, in a single asset swap. Click-click and boom, USA is debt free, no more interest payments, hooray. Dont you think such swap will have some real-life repercussions? If it will, how it's different from QE?
- cherenkoray 9y ago
  > one type of money-like asset for another. If you look at it that way, aren't houses a money-like asset as well? Certainly, people now buy houses which would have in stocks or bonds before. And if so, what does that mean for the value of these assets? Are they independent from inflationary risks?