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Is there an ELI5 of why all this cash doesn’t find its way to the economy (and that we get housing and companies valuation bubbles instead of inflation, with sa
by tarsinge 7y ago
Is there an ELI5 of why all this cash doesn’t find its way to the economy (and that we get housing and companies valuation bubbles instead of inflation, with salaries stagnating for more than a decade)?
- throwaway1777 7y agoTrickle down economics is a lie. Quantitative easing is so far removed from salaries. It ends up just creating more capital for banks, which they invest into assets (companies and properties being two asset classes) or use as liquidity. Labor isn’t really in the picture at all except that companies which use less of it can be better assets to invest in.
- eru 7y agoThe Fed's interest on excess reserves (IOER) keeps a lot of money there. The graph https://fred.stlouisfed.org/graph/?g=pB2X https://fred.stlouisfed.org/graph/?g=pB2X shows that the IOER was regularly above the effective federal funds rate. That means, banks made more money parking their money at the Fed, effectively removing it from circulation; than they could make holding bonds. When a bank holds a government bond, someone else in the economy has to do something with the money they paid for the bond. In contrast, excess reserves might as well not exist as far as the rest of the economy is concerned. https://fred.stlouisfed.org/graph/?g=pB2X https://fred.stlouisfed.org/graph/?g=pB2X shows the absolute amount of excess reserves. IOER explains a big part of the puzzle you found without invoking any conspiracy theories or sly remarks about 'trickle down economics'. See https://www.cato.org/publications/working-paper/floored-how-misguided-fed-experiment-deepened-prolonged-great-recession https://www.cato.org/publications/working-paper/floored-how-... for a broader discussion.