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Forgive a related question, but I have never understood why quantitively easing was used to get demand into the economy by buying back bonds. Surely the money w

Forgive a related question, but I have never understood why quantitively easing was used to get demand into the economy by buying back bonds. Surely the money will just get reinvested in stocks or other bonds and not stimulate demand? Buy back a rich persons Ferrari and they just go and buy a Bently instead. Why not do the obvious, which is to give every adult some free money each month? Most people are not rich and so most of it gets spent very quickly on goods/service? I live in Australia and this happened back in 2008 to stave off a recession. I remember twice getting cash in the bank account without having to do anything! I am not an economist so forgive me if this is a banal question.

toomuchtodo 8y ago
> Why not do the obvious, which is to give every adult some free money each month? The federal reserve isn't equipped to do this; the federal government would need to do it (as it has before using the IRS to distribute stimulus checks). The federal reserve is equipped to buy up as many bonds as necessary to put a floor under assets. EDIT: Could the federal reserve assume an aggressive policy posture and expand out of its swim lane in creative ways [1]? Sure, but it hasn't shown the initiative to do that. [1] https://www.marketwatch.com/story/fed-should-forget-about-its-own-cryptocurrency-and-instead-create-electronic-bank-accounts-for-everyone-2018-04-30 https://www.marketwatch.com/story/fed-should-forget-about-it... (Federal Reserve should give everyone checking accounts, new study says)
- PhilWright 8y ago
  Thanks.
dangrossman 8y ago
They did just that. In 2009 the US government sent out "stimulus checks" to nearly every household.
sanxiyn 8y ago
I think Australia's 2008 cash handout was a good try. On the other hand, post-handout analysis suggests cash handout was not spent. It was saved instead. Stimulating Savings: An Analysis of Cash Handouts in Australia and the United States. http://press-files.anu.edu.au/downloads/press/p269601/pdf/stimulating.pdf http://press-files.anu.edu.au/downloads/press/p269601/pdf/st...
neom 8y ago
The people I've discussed that with believe it will kill extrinsic motivation and they believe that is a key pillar of capitalism.
ajross 8y ago
> why quantitively easing was used to get demand into the economy QE was about getting liquidity back into the essentially frozen banking sector, not getting demand into the economy. You can make an argument for causality (in either direction!) between the two, but the proximate problem being addressed was a specific crisis and not a macroeconomic goal.
AnthonyMouse 8y ago
> Forgive a related question, but I have never understood why quantitively easing was used to get demand into the economy by buying back bonds. Surely the money will just get reinvested in stocks or other bonds and not stimulate demand? It's better to think of it less as buying them back and more as not releasing as many into the market. It allows Congress to have more spending (or more tax cuts) for a given amount of actual deficit. What Congress chooses to do with the extra money is their business rather than the Fed's. They could use it to make cash payments to everyone if they wanted to -- or middle class tax cuts, which are nearly the same thing but much easier to pass.
deleted 8y ago
[deleted]
lottin 8y ago
> Why not do the obvious, which is to give every adult some free money each month? Since the supply of goods and services is fixed in the sort term, pouring more money into the economy doesn't change anything in terms of consumption. Only, prices go up, because there's more money competing for the same amount of goods and services. These idea is called "neutrality of money".
- RidingPegasus 8y ago
  Given that it's cash payments "each month", how can that be short term? If all recipients simultaneously wanted to spend the money on burritos, by month 2 there's going to be a lot more restaurants selling burritos. A better use of the money is infrastructure spending. It provides employment across multiple sectors and targeted correctly is one of the best investments a government can make.
- gbacon 8y ago
  If money were neutral, prices would rise uniformly, but this is in fact not what happens.

toomuchtodo 8y ago

> Why not do the obvious, which is to give every adult some free money each month? The federal reserve isn't equipped to do this; the federal government would need to do it (as it has before using the IRS to distribute stimulus checks). The federal reserve is equipped to buy up as many bonds as necessary to put a floor under assets. EDIT: Could the federal reserve assume an aggressive policy posture and expand out of its swim lane in creative ways [1]? Sure, but it hasn't shown the initiative to do that. [1] https://www.marketwatch.com/story/fed-should-forget-about-its-own-cryptocurrency-and-instead-create-electronic-bank-accounts-for-everyone-2018-04-30 https://www.marketwatch.com/story/fed-should-forget-about-it... (Federal Reserve should give everyone checking accounts, new study says)

PhilWright 8y ago
Thanks.

dangrossman 8y ago

They did just that. In 2009 the US government sent out "stimulus checks" to nearly every household.

sanxiyn 8y ago

I think Australia's 2008 cash handout was a good try. On the other hand, post-handout analysis suggests cash handout was not spent. It was saved instead. Stimulating Savings: An Analysis of Cash Handouts in Australia and the United States. http://press-files.anu.edu.au/downloads/press/p269601/pdf/stimulating.pdf http://press-files.anu.edu.au/downloads/press/p269601/pdf/st...

neom 8y ago

The people I've discussed that with believe it will kill extrinsic motivation and they believe that is a key pillar of capitalism.

ajross 8y ago

> why quantitively easing was used to get demand into the economy QE was about getting liquidity back into the essentially frozen banking sector, not getting demand into the economy. You can make an argument for causality (in either direction!) between the two, but the proximate problem being addressed was a specific crisis and not a macroeconomic goal.

AnthonyMouse 8y ago

> Forgive a related question, but I have never understood why quantitively easing was used to get demand into the economy by buying back bonds. Surely the money will just get reinvested in stocks or other bonds and not stimulate demand? It's better to think of it less as buying them back and more as not releasing as many into the market. It allows Congress to have more spending (or more tax cuts) for a given amount of actual deficit. What Congress chooses to do with the extra money is their business rather than the Fed's. They could use it to make cash payments to everyone if they wanted to -- or middle class tax cuts, which are nearly the same thing but much easier to pass.

deleted 8y ago

[deleted]

lottin 8y ago

> Why not do the obvious, which is to give every adult some free money each month? Since the supply of goods and services is fixed in the sort term, pouring more money into the economy doesn't change anything in terms of consumption. Only, prices go up, because there's more money competing for the same amount of goods and services. These idea is called "neutrality of money".

RidingPegasus 8y ago
Given that it's cash payments "each month", how can that be short term? If all recipients simultaneously wanted to spend the money on burritos, by month 2 there's going to be a lot more restaurants selling burritos. A better use of the money is infrastructure spending. It provides employment across multiple sectors and targeted correctly is one of the best investments a government can make.
gbacon 8y ago
If money were neutral, prices would rise uniformly, but this is in fact not what happens.