5 ms·

Quantitative easying explained

28 points by albertcardona 16y ago

dnautics 16y ago
Here is my prognostication on what will happen. There will be short-term inflation on account of QE2. This will put the squeeze on most americans, resulting in an increased drive to clear debt and an increased rate of debt default. Both of which are deflationary. Since inflation can be brought about by quantitative easing OR by debt expansion, and deflation can be brought about by quantitative tightening OR by debt contraction... Because the private debt markets still exceed the public debt and unfunded obligations by at least a factor of three, we'll see a year to two year period of deflation. The stock market will crash, gold will trend slightly downward or flat, and PGMs will go through the bottom (they're in a bubble right now that looks like it's starting to burst). The question is: How will the government respond. I think it's highly likely that the Fed will respond with QE3... Alternatively, congress will vote to default on the public debt, which I think is highly unlikely. With QE3, considering the money multiplier, we'll finally see that hyperinflation that the tea partiers are (rightly) scared about, will be incredibly painful for anyone who is not really wealthy now. Unfortunately, because of the intermediary deflationary period, academic economists and punditry like Krugman will incessantly make fun of goldbugs like Ron Paul (who is ascending to chair the congressional subcommittee on monetary policy). So. You have about year to shore up your debts, save some money, and buy nonperishable commodities, formulate an escape plan. Godspeed.
- dmm 16y ago
  Why would inflation drive people to clear debt? I thought inflation drove people to obtain more debt because debts are in dollars, if dollars are worth less, the debt is also less. In an inflationary environment it would make sense to borrow dollars to buy goods which increase in price under inflation: stocks, gold, etc. Congress will never default on the debt. The debt is in dollars and congress has the power to print dollars. We are going to print our way out of debt.
  - devmonk 16y ago
    During the great depression when people had to live with much less, they learned to save. Saving became part of the culture by necessity. Credit was offered by merchants and stores, but not to the extent it is used now. Then gamification of credit card debt and other debt through "credit card points" and "credit rating" was introduced, and everyone was told that you had to have to have a credit card and a mortgage or you wouldn't have the credit rating to allow you to borrow more money for the car, the new furniture set, etc. However, if the USD loses significant value (hyper-inflation) and the credit industry tanks, people will have to start saving again, just like the great depression. We can't print our way out of debt, obviously. The more money is printed, the higher the eventual inflation. Stocks from companies could fall if their business model relies on buying goods and services from countries whose currency increases in relative value and who sell products and services primarily to countries whose currency decreases in value. When inflation hits, and these companies' stocks fall, it would be a great time for people to invest, however those companies would have to layoff quite a few people, so only the rich and the people from other countries in the world would be able to afford to buy those stocks. When they buy those stocks and they go up, the rich get richer and other countries start buying these companies. So basically, by the government printing more money like this, they will eventually: - Raise unemployment. - Raise the wealth divide between the rich and poor. - Cause the country to have to convert from becoming a consumer to being a provider, during which there are many failures and many required changes in lifestyle and government. (Instead of bankers, accountants, and lawyers, you have more farmers, miners, and factory workers.) The wealth divide if significant enough will cause the country to go one of three ways: 1. In a country where the citizens are less aggressive but feel a sense of entitlement (like the U.S.), it may lead to a revolt in the form of Socialism or Communism by the disenfranchised. (Socialism or Communism are bad ideas, but Russia and France are good examples of countries that embraced Communism and Socialism due to wealth divide, so it could certainly happen.) This in turn may kill off any chance that the country will be economically successful in the near future, because there is little incentive to work extremely hard to have an even poorer quality of life than before the change. 2. In countries where the people are more aggressive, a dictator may arise military rule will be established. This is much harder to escape from over time as it leads to a vicious cycle of dictatorships and coups. 3. In countries where the lower-class had already been mostly established (perhaps not to the same degree) and there is less sense of entitlement or aggression, there is a possibility that the country could perhaps convert from a more taxing Socialist government to a more Capitalistic society. Although this transition would not necessarily be smooth while government run services are privatized, eventually the country could become wildly successful due to the superior work-ethic of its citizens.
- illumin8 16y ago
  What are PGMs? Did you mean precious metals? Here is a question for you: If inflation occurs, why would people want to save money and clear debt? In an inflationary environment, debt is great because you only have to pay it back in future dollars. Likewise, saving money is bad in an inflationary environment because your money is worth less. Right now we are in a long-term deflationary environment as trillions in fake value are erased from the residential and commercial real estate market. Even if the Fed gave $1 million checks to every american, it probably wouldn't cause as much inflation as you think because a lot of people would just pay off their mortgages and credit card debts, then save the rest. Right now all of the Fed increasing their balance sheet is just sitting in reserves at banks, not being spent. In order to really cause inflation, the Fed has to increase the velocity of money changing hands. They haven't been able to do this yet.
  - dnautics 16y ago
    PGMs = platinum group metals, i.e. platinum, palladium, rhodium, but not gold or silver. "If inflation occurs, why would people want to save money and clear debt?" Because those credit agencies that keep calling are really annoying. Deep down people know that the only way to be secure is to be debt free. Inflation really creates insecurity - you're getting squeezed from under (as in the bottom line to pay for necessities). In that environment, having to make debt payments is scary, ESPECIALLY when the economy is crap and you could lose your job or not get pay raises. Most people (rightly so) are not interested in taking on new debt during an inflationary period. It's crazy right, economists prescribe inflation as a way to deal with "sticky wages" so that the real cost of employment goes down without having to negotiate wages downward. You cannot at the same time argue that will encourage people to borrow, because debt payments are exercised nominally (and creditors often - punitively or capriciously - rack up the interest rate on top of that) so while more of your salary is going to pay for basic necessities, that debt burden still floats on top of the budget, and possibly gets worse.
sfard 16y ago
I saw this on my friend's facebook feed and left this comment. Yo this whole thing fascinates me like crazy so I've spent some time researching shit, and I still only understand the crust of it. But since I'm bored, here's what I know. Alright, so there's two camps. First is the paul krugman camp which thinks that during a recession a government needs to spend like crazy to cause consumption and inflation. Consumption is good since spending has ripple effects on an economy. It's not obvious (and definitely not proven) that deflation is necessarily bad though. The main case is that in a deflationary economy, people spend less and save more since there's a natural yield to holding your money, which in turn can cause more deflation. And since it's hard to cut wages (or they say it is), wages become out of wack with the economy. Japan is always pointed to as the example of a zombie economy and what could happen to the US. This is the thing though - economists are so fucking caught up in their own theories and numbers that they forget about reality. They mistake symbols for economic growth (indicators) for real well being in a country. Japan is still one of the largest economies in the world, has one of the largest middle classes, lowest income disparity, and lowest unemployment in the world. I frankly can't understand why people keep shit talking Japan's economy as this nightmare when they seem to be doing pretty fucking well. They still MAKE things there like cars and have a nice mix of industry. They don't fit the economist mold of success and despite the reality that they're in many respects doing better than the US, they're the example of the worst case scenario of a deflationary spiral. Fucking academics... Anyways, back to the point at hand. Even if you believe the krugman camp, it seems to me that all they are really doing is trying to control economic boom and busts and by doing so, only causing more of them. For example, let's say deflation happens - as long as you have an open economy (and the US does) - wages will decrease and eventually people will start spending again. The fact is that spending was way out of wack before and falsely propped up the economy. During the last two booms, the US was the only country where spending was higher than income - or negative savings, which is "good" for the economy by economist's standards, it's clearly something you can't maintain. So rather than let shit calibrate itself and fall in line, the government is like "woah - we need to spend for the people since they wont". Anyways, capitalism is fun yo. Oh and I forgot to mention that reading up on this stuff, my respect for economists has fallen like crazy. This is a blanket statement that I'm sure it'll turn out I'm wrong about, but seems to me that economic theory is really just a game of anyone's best guess with the addition of math to make the whole thing look sophisticated, when it's really just one big exercise in false precision and dick measuring.
klochner 16y ago
easing not easying
henryprecheur 16y ago
1M people viewed this cartoon ... This is scary. The guys who did this clearly don't understand macro-economics. And yet many people will be convinced that QE2 "is bad" because "deflation is good, I can buy more stuff for less money" or "Bernanke didn't see the subprime crisis coming, therefor is incompetent". QE2 might not be the right thing to do. But this movie doesn't educate people or make them understand why QE2 might be a bad idea (hyper-inflation is the main risk). It just make people angry and suspicious, while keeping them ignorant.
- ahi 16y ago
  You're right about the macro-economics, but the Goldman Sachs angle is still a wtf.
  - henryprecheur 16y ago
    There's nothing fishy about it. They buy treasury bonds from primary dealers, which include Goldman Sachs. http://en.wikipedia.org/wiki/Primary_dealers http://en.wikipedia.org/wiki/Primary_dealers
    - arohner 16y ago
      How about the part where Bush's Treasury Secretary (http://en.wikipedia.org/wiki/Henry_Paulson http://en.wikipedia.org/wiki/Henry_Paulson), and Clinton's Treasury Secretary (http://en.wikipedia.org/wiki/Robert_Rubin http://en.wikipedia.org/wiki/Robert_Rubin), and the NY Fed Chairman (http://en.wikipedia.org/wiki/William_C._Dudley http://en.wikipedia.org/wiki/William_C._Dudley) are all ex-Goldman Sachs. Doesn't that sound a little fishy?
  - smanek 16y ago
    If they bought the bonds from the treasury instead of the market, the newly printed money would be in the hands of the treasury. They want it in the hands of the private sector - which makes sense.
    - 16y ago
pkulak 16y ago
I saw this on Facebook. I'm a little dismayed to see it here, since it's such utter, uninformed garbage. "Deflation makes things cheaper. Yay! I want deflation!"
- Dawgiedawg 16y ago
  It also makes your pay cheaper, your job cheaper (easier to get rid of) and your mortgage more expensive (relative). Yay!
  - SkyMarshal 16y ago
    And if you have any student loans, car loans, home loans, credit card loans, they all stay the same (including their interest rates), while the amount of money in the system shrinks. The odds of your income shrinking increase, but your debts don't. For a nation in which most everyone has debt, and a large chunk of the housing market is already teetering on the brink of the default, real deflation could be a huge problem. I don't envy Bernanke's devil's choice one bit.
davidj 16y ago
Quantitative easing is just a fancy newspeak-doublespeak word for monetizing debt. Basically the treasury bond auction has functionally failed and the Fed has to step in a buy the bonds because nobody else wants them.
- colindoc84 16y ago
  This is not true. The fed is targeting specific medium term bonds. It isn't buying every bond on offer, which is what it would do during a failed auction.
heyrhett 16y ago
So, why does the fed buy the treasury bonds from the goldman sachs instead of the treasury?
- dvdt 16y ago
  To make broad generalizations, the point of quantitative easing is to increase the money supply. You do this by having more money in banks like Goldman Sachs (and of course there are many other banks that the Fed will be buying treasuries from). The idea behind this is that once banks have more cash on hand, they will be more likely to loan that money out to other businesses and people--and voila, suddenly the economy has more money in the system. If the Fed buys bonds from the Treasury, however, none of this happens. Whereas before the Fed was printing money and injecting it into the economy, selling to the Treasury is roughly equivalent is printing money and having the government hold on to it. And of course, having the government hold on to that money doesn't do the economy any good in term of monetary stimulus.
ramanujan 16y ago
Everyone here can understand dilution in the context of a VC termsheet. Printing $600 billion has much the same effect: it dilutes down all other holders of currency by increasing the US government's share. QE is thus basically a massive tax -- it does not increase the real productive capacity of the economy, but puts ever more of it in government hands to allocate as they see fit. Whether you think this is a good thing depends on whether you subscribe to Hayek or Keynes.

28 points by albertcardona 16y ago

Here is my prognostication on what will happen. There will be short-term inflation on account of QE2. This will put the squeeze on most americans, resulting in an increased drive to clear debt and an increased rate of debt default. Both of which are deflationary. Since inflation can be brought about by quantitative easing OR by debt expansion, and deflation can be brought about by quantitative tightening OR by debt contraction... Because the private debt markets still exceed the public debt and unfunded obligations by at least a factor of three, we'll see a year to two year period of deflation. The stock market will crash, gold will trend slightly downward or flat, and PGMs will go through the bottom (they're in a bubble right now that looks like it's starting to burst). The question is: How will the government respond. I think it's highly likely that the Fed will respond with QE3... Alternatively, congress will vote to default on the public debt, which I think is highly unlikely. With QE3, considering the money multiplier, we'll finally see that hyperinflation that the tea partiers are (rightly) scared about, will be incredibly painful for anyone who is not really wealthy now. Unfortunately, because of the intermediary deflationary period, academic economists and punditry like Krugman will incessantly make fun of goldbugs like Ron Paul (who is ascending to chair the congressional subcommittee on monetary policy). So. You have about year to shore up your debts, save some money, and buy nonperishable commodities, formulate an escape plan. Godspeed.

dmm 16y ago
Why would inflation drive people to clear debt? I thought inflation drove people to obtain more debt because debts are in dollars, if dollars are worth less, the debt is also less. In an inflationary environment it would make sense to borrow dollars to buy goods which increase in price under inflation: stocks, gold, etc. Congress will never default on the debt. The debt is in dollars and congress has the power to print dollars. We are going to print our way out of debt.
- devmonk 16y ago
  During the great depression when people had to live with much less, they learned to save. Saving became part of the culture by necessity. Credit was offered by merchants and stores, but not to the extent it is used now. Then gamification of credit card debt and other debt through "credit card points" and "credit rating" was introduced, and everyone was told that you had to have to have a credit card and a mortgage or you wouldn't have the credit rating to allow you to borrow more money for the car, the new furniture set, etc. However, if the USD loses significant value (hyper-inflation) and the credit industry tanks, people will have to start saving again, just like the great depression. We can't print our way out of debt, obviously. The more money is printed, the higher the eventual inflation. Stocks from companies could fall if their business model relies on buying goods and services from countries whose currency increases in relative value and who sell products and services primarily to countries whose currency decreases in value. When inflation hits, and these companies' stocks fall, it would be a great time for people to invest, however those companies would have to layoff quite a few people, so only the rich and the people from other countries in the world would be able to afford to buy those stocks. When they buy those stocks and they go up, the rich get richer and other countries start buying these companies. So basically, by the government printing more money like this, they will eventually: - Raise unemployment. - Raise the wealth divide between the rich and poor. - Cause the country to have to convert from becoming a consumer to being a provider, during which there are many failures and many required changes in lifestyle and government. (Instead of bankers, accountants, and lawyers, you have more farmers, miners, and factory workers.) The wealth divide if significant enough will cause the country to go one of three ways: 1. In a country where the citizens are less aggressive but feel a sense of entitlement (like the U.S.), it may lead to a revolt in the form of Socialism or Communism by the disenfranchised. (Socialism or Communism are bad ideas, but Russia and France are good examples of countries that embraced Communism and Socialism due to wealth divide, so it could certainly happen.) This in turn may kill off any chance that the country will be economically successful in the near future, because there is little incentive to work extremely hard to have an even poorer quality of life than before the change. 2. In countries where the people are more aggressive, a dictator may arise military rule will be established. This is much harder to escape from over time as it leads to a vicious cycle of dictatorships and coups. 3. In countries where the lower-class had already been mostly established (perhaps not to the same degree) and there is less sense of entitlement or aggression, there is a possibility that the country could perhaps convert from a more taxing Socialist government to a more Capitalistic society. Although this transition would not necessarily be smooth while government run services are privatized, eventually the country could become wildly successful due to the superior work-ethic of its citizens.
illumin8 16y ago
What are PGMs? Did you mean precious metals? Here is a question for you: If inflation occurs, why would people want to save money and clear debt? In an inflationary environment, debt is great because you only have to pay it back in future dollars. Likewise, saving money is bad in an inflationary environment because your money is worth less. Right now we are in a long-term deflationary environment as trillions in fake value are erased from the residential and commercial real estate market. Even if the Fed gave $1 million checks to every american, it probably wouldn't cause as much inflation as you think because a lot of people would just pay off their mortgages and credit card debts, then save the rest. Right now all of the Fed increasing their balance sheet is just sitting in reserves at banks, not being spent. In order to really cause inflation, the Fed has to increase the velocity of money changing hands. They haven't been able to do this yet.
- dnautics 16y ago
  PGMs = platinum group metals, i.e. platinum, palladium, rhodium, but not gold or silver. "If inflation occurs, why would people want to save money and clear debt?" Because those credit agencies that keep calling are really annoying. Deep down people know that the only way to be secure is to be debt free. Inflation really creates insecurity - you're getting squeezed from under (as in the bottom line to pay for necessities). In that environment, having to make debt payments is scary, ESPECIALLY when the economy is crap and you could lose your job or not get pay raises. Most people (rightly so) are not interested in taking on new debt during an inflationary period. It's crazy right, economists prescribe inflation as a way to deal with "sticky wages" so that the real cost of employment goes down without having to negotiate wages downward. You cannot at the same time argue that will encourage people to borrow, because debt payments are exercised nominally (and creditors often - punitively or capriciously - rack up the interest rate on top of that) so while more of your salary is going to pay for basic necessities, that debt burden still floats on top of the budget, and possibly gets worse.

sfard 16y ago

I saw this on my friend's facebook feed and left this comment. Yo this whole thing fascinates me like crazy so I've spent some time researching shit, and I still only understand the crust of it. But since I'm bored, here's what I know. Alright, so there's two camps. First is the paul krugman camp which thinks that during a recession a government needs to spend like crazy to cause consumption and inflation. Consumption is good since spending has ripple effects on an economy. It's not obvious (and definitely not proven) that deflation is necessarily bad though. The main case is that in a deflationary economy, people spend less and save more since there's a natural yield to holding your money, which in turn can cause more deflation. And since it's hard to cut wages (or they say it is), wages become out of wack with the economy. Japan is always pointed to as the example of a zombie economy and what could happen to the US. This is the thing though - economists are so fucking caught up in their own theories and numbers that they forget about reality. They mistake symbols for economic growth (indicators) for real well being in a country. Japan is still one of the largest economies in the world, has one of the largest middle classes, lowest income disparity, and lowest unemployment in the world. I frankly can't understand why people keep shit talking Japan's economy as this nightmare when they seem to be doing pretty fucking well. They still MAKE things there like cars and have a nice mix of industry. They don't fit the economist mold of success and despite the reality that they're in many respects doing better than the US, they're the example of the worst case scenario of a deflationary spiral. Fucking academics... Anyways, back to the point at hand. Even if you believe the krugman camp, it seems to me that all they are really doing is trying to control economic boom and busts and by doing so, only causing more of them. For example, let's say deflation happens - as long as you have an open economy (and the US does) - wages will decrease and eventually people will start spending again. The fact is that spending was way out of wack before and falsely propped up the economy. During the last two booms, the US was the only country where spending was higher than income - or negative savings, which is "good" for the economy by economist's standards, it's clearly something you can't maintain. So rather than let shit calibrate itself and fall in line, the government is like "woah - we need to spend for the people since they wont". Anyways, capitalism is fun yo. Oh and I forgot to mention that reading up on this stuff, my respect for economists has fallen like crazy. This is a blanket statement that I'm sure it'll turn out I'm wrong about, but seems to me that economic theory is really just a game of anyone's best guess with the addition of math to make the whole thing look sophisticated, when it's really just one big exercise in false precision and dick measuring.

klochner 16y ago

easing not easying

henryprecheur 16y ago

1M people viewed this cartoon ... This is scary. The guys who did this clearly don't understand macro-economics. And yet many people will be convinced that QE2 "is bad" because "deflation is good, I can buy more stuff for less money" or "Bernanke didn't see the subprime crisis coming, therefor is incompetent". QE2 might not be the right thing to do. But this movie doesn't educate people or make them understand why QE2 might be a bad idea (hyper-inflation is the main risk). It just make people angry and suspicious, while keeping them ignorant.

ahi 16y ago
You're right about the macro-economics, but the Goldman Sachs angle is still a wtf.
- henryprecheur 16y ago
  There's nothing fishy about it. They buy treasury bonds from primary dealers, which include Goldman Sachs. http://en.wikipedia.org/wiki/Primary_dealers http://en.wikipedia.org/wiki/Primary_dealers
  - arohner 16y ago
    How about the part where Bush's Treasury Secretary (http://en.wikipedia.org/wiki/Henry_Paulson http://en.wikipedia.org/wiki/Henry_Paulson), and Clinton's Treasury Secretary (http://en.wikipedia.org/wiki/Robert_Rubin http://en.wikipedia.org/wiki/Robert_Rubin), and the NY Fed Chairman (http://en.wikipedia.org/wiki/William_C._Dudley http://en.wikipedia.org/wiki/William_C._Dudley) are all ex-Goldman Sachs. Doesn't that sound a little fishy?
- smanek 16y ago
  If they bought the bonds from the treasury instead of the market, the newly printed money would be in the hands of the treasury. They want it in the hands of the private sector - which makes sense.
  - 16y ago

pkulak 16y ago

I saw this on Facebook. I'm a little dismayed to see it here, since it's such utter, uninformed garbage. "Deflation makes things cheaper. Yay! I want deflation!"

Dawgiedawg 16y ago
It also makes your pay cheaper, your job cheaper (easier to get rid of) and your mortgage more expensive (relative). Yay!
- SkyMarshal 16y ago
  And if you have any student loans, car loans, home loans, credit card loans, they all stay the same (including their interest rates), while the amount of money in the system shrinks. The odds of your income shrinking increase, but your debts don't. For a nation in which most everyone has debt, and a large chunk of the housing market is already teetering on the brink of the default, real deflation could be a huge problem. I don't envy Bernanke's devil's choice one bit.

davidj 16y ago

Quantitative easing is just a fancy newspeak-doublespeak word for monetizing debt. Basically the treasury bond auction has functionally failed and the Fed has to step in a buy the bonds because nobody else wants them.

colindoc84 16y ago
This is not true. The fed is targeting specific medium term bonds. It isn't buying every bond on offer, which is what it would do during a failed auction.

heyrhett 16y ago

So, why does the fed buy the treasury bonds from the goldman sachs instead of the treasury?

dvdt 16y ago
To make broad generalizations, the point of quantitative easing is to increase the money supply. You do this by having more money in banks like Goldman Sachs (and of course there are many other banks that the Fed will be buying treasuries from). The idea behind this is that once banks have more cash on hand, they will be more likely to loan that money out to other businesses and people--and voila, suddenly the economy has more money in the system. If the Fed buys bonds from the Treasury, however, none of this happens. Whereas before the Fed was printing money and injecting it into the economy, selling to the Treasury is roughly equivalent is printing money and having the government hold on to it. And of course, having the government hold on to that money doesn't do the economy any good in term of monetary stimulus.

ramanujan 16y ago

Everyone here can understand dilution in the context of a VC termsheet. Printing $600 billion has much the same effect: it dilutes down all other holders of currency by increasing the US government's share. QE is thus basically a massive tax -- it does not increase the real productive capacity of the economy, but puts ever more of it in government hands to allocate as they see fit. Whether you think this is a good thing depends on whether you subscribe to Hayek or Keynes.