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The reserve requirement is 0%, increasing a bank's reserves doesn't allow them to lend more. There are mechanisms that allow an increase in bank reserves to be

by acover 6y ago

The reserve requirement is 0%, increasing a bank's reserves doesn't allow them to lend more. There are mechanisms that allow an increase in bank reserves to be spent in the economy without loans [0]. [0] https://positivemoney.org/how-money-works/advanced/how-quantitative-easing-works/ https://positivemoney.org/how-money-works/advanced/how-quant...

wcoenen 6y ago
I read the post you linked, and was surprised by the description of money being created when a UK bank buys a government bond from a pension fund. I thought commercial banks were only allowed to create money when creating loan assets. Is creation of money when banks buy assets a unique feature of the UK banking system, or does it also happen elsewhere? If banks would buy financial assets and create money in the process as described in the post, then that would certainly be inflationary. (e.g. I can imagine hypothetical legislation that forces banks to buy government bonds, that would be the time to run for inflation protection.) As far as I understand, this has not happened, or at least not to the degree that it caused inflation. The effect of QE has been to increase bank reserves but not the money supply, which is why we haven't seen inflation since the financial crisis.
- acover 6y ago
  The purpose of QE is to cause inflation, the federal reserve is explicitly trying to avoid a Japan situation where there are low interest rates and deflation [0]. To avoid a deflationary spiral [1]. I can't find a source that explains the mechanism for how QE affects the economy. [0] https://www.investopedia.com/articles/investing/051315/what-deflation-and-how-do-central-banks-fight-it.asp https://www.investopedia.com/articles/investing/051315/what-... [1] https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral

by acover 6y ago

wcoenen 6y ago

I read the post you linked, and was surprised by the description of money being created when a UK bank buys a government bond from a pension fund. I thought commercial banks were only allowed to create money when creating loan assets. Is creation of money when banks buy assets a unique feature of the UK banking system, or does it also happen elsewhere? If banks would buy financial assets and create money in the process as described in the post, then that would certainly be inflationary. (e.g. I can imagine hypothetical legislation that forces banks to buy government bonds, that would be the time to run for inflation protection.) As far as I understand, this has not happened, or at least not to the degree that it caused inflation. The effect of QE has been to increase bank reserves but not the money supply, which is why we haven't seen inflation since the financial crisis.

acover 6y ago
The purpose of QE is to cause inflation, the federal reserve is explicitly trying to avoid a Japan situation where there are low interest rates and deflation [0]. To avoid a deflationary spiral [1]. I can't find a source that explains the mechanism for how QE affects the economy. [0] https://www.investopedia.com/articles/investing/051315/what-deflation-and-how-do-central-banks-fight-it.asp https://www.investopedia.com/articles/investing/051315/what-... [1] https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral