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This is straight from Investopedia: > To execute quantitative easing, central banks increase the supply of money by buying government bonds and other securitie

by titzer 5y ago

This is straight from Investopedia: > To execute quantitative easing, central banks increase the supply of money by buying government bonds and other securities. Increasing the supply of money lowers interest rates. When interest rates are lower, banks can lend with easier terms. Quantitive easing is typically implemented when interest rates are already near zero, because, at this point, central banks have fewer tools to influence economic growth. Ok, the Fed doesn't "print" money, the mechanism is more convoluted than that. But it absolutely does inject money into the system, which is ultimately backed by "reserves" which are created out of nothing.

mdavidn 5y ago
Well, strictly speaking, the money is backed by the promise to repay the bond with interest. At that point in the future, the money will disappear from existence.
- nly 5y ago
  The bonds in question are Treasuries, so when the money is repaid it is repaid by the Treasury. Every one of these bonds represents future borrowing (if rolling over the debt) or future tax revenue. It's the secondary effects of buying these bonds that is stimulative. Lower treasury yields means investors seek higher yields elsewhere (e.g. in stocks, corporate bonds etc etc.). They buy those, driving up prices, which in turn drives down yields there too. In any case, bond yields have been falling for decades, so if anything the GFC and COVID have just nudged things along. People are now questioning whether it's even worth owning investment grade bonds. People who want a hedge against the stock market are beginning to look at other asset classes. The wealthy are moving in to increasingly exotic and diversified asset classes. Things like forestry, commodities, private equity etc are now becoming accessible to the moderately well off and not just the super wealthy. Money managers are pushing ever more speculative investments to retail (crypto, ARK funds etc)
  - neilwilson 5y ago
    Ever dollar in existence represents future tax revenue. It quite literally wouldn't be there otherwise. And spending that dollar causes the tax revenue to arise, which means all dollars and all bonds are the source of their own funding. It's basic monetary maths. https://new-wayland.com/blog/why-tax-matches-spending/ https://new-wayland.com/blog/why-tax-matches-spending/
    - nly 5y ago
      This math just showing that total State/Government nominal spend must equal the total take through taxation, which is obviously correct and fine. However, currency is a medium of exchange that facilitates trade in place of barter. It's the oil in the engine, not the fuel. It's important to remember that transactions aren't just abstract financial events, they involve the exchange of time (labour) for some good or service. If you assume that all transactions in the economy ultimately deliver some fractional quantity of 'real wealth' (production of new goods and services, entertainment, knowledge, infrastructure etc), at some rate, then a similar geometric progression can be calculated for that. The thing is that a lot of that wealth creation depends on things that don't scale with the money supply. Simply put, no matter how many trillions of $'s you create there's only one Apple to buy with them. Tax on the other hand scales perfectly since it's just another economic lever. Low rates/yields are still a wealth inequality problem because bank deposits and, to a lesser extent, public equities are ways average people have been able to reallocate some of their idle funds to capture some of that value. Right now it seems an excessive amount of money is flowing to the few with the big ideas, good or bad, in desperation to spur further growth and there's lots of discussion about the 'everything bubble' because most assets are inflated.
      - neilwilson 5y ago
        Trade has never had anything to do with barter. It’s always promises “Here’s a chicken, owe me one” Until you get that clear, you’ll not realise that the monetary circuit and the real circuit are only inductively connected. Money is the charger. Production is the toothbrush
  - mdavidn 5y ago
    The majority are Treasury securities but the Fed has also purchased other assets under quantitative easing, like mortgage-backed securities.
imtringued 5y ago
> But it absolutely does inject money into the system, which is ultimately backed by "reserves" which are created out of nothing. Well, here is the kicker. The system is not the real economy, just a mechanism that lets banks borrow from each other to maintain sufficient reserves. If you want to inject money into the real economy you need to actually borrow money and do fiscal stimulus. If the government does the obvious and borrows for investments like education or infrastructure then the government not only has a liability (the debt) but also an asset (the infrastructure). If the government cuts taxes instead then it not only fails to create an asset equal to the debt it also diminishes the value of their most important asset. The ability to charge taxes. Practically speaking there are two problems here. First, the economy has to have room for government spending and second the money actually has to be spent in a way that benefits the economy. If neither are true you get inflation. I'd say the stimulus checks didn't really benefit the economy. The spending spree that so many people expected didn't happen. The unemployment benefits had the advantage that they are primarily given to people who have no income. I'm sure they contributed to inflation but the supply chains don't look great either. The explosion in energy prices cannot be explained by fiscal stimulus alone.

by titzer 5y ago

mdavidn 5y ago

Well, strictly speaking, the money is backed by the promise to repay the bond with interest. At that point in the future, the money will disappear from existence.

nly 5y ago
The bonds in question are Treasuries, so when the money is repaid it is repaid by the Treasury. Every one of these bonds represents future borrowing (if rolling over the debt) or future tax revenue. It's the secondary effects of buying these bonds that is stimulative. Lower treasury yields means investors seek higher yields elsewhere (e.g. in stocks, corporate bonds etc etc.). They buy those, driving up prices, which in turn drives down yields there too. In any case, bond yields have been falling for decades, so if anything the GFC and COVID have just nudged things along. People are now questioning whether it's even worth owning investment grade bonds. People who want a hedge against the stock market are beginning to look at other asset classes. The wealthy are moving in to increasingly exotic and diversified asset classes. Things like forestry, commodities, private equity etc are now becoming accessible to the moderately well off and not just the super wealthy. Money managers are pushing ever more speculative investments to retail (crypto, ARK funds etc)
- neilwilson 5y ago
  Ever dollar in existence represents future tax revenue. It quite literally wouldn't be there otherwise. And spending that dollar causes the tax revenue to arise, which means all dollars and all bonds are the source of their own funding. It's basic monetary maths. https://new-wayland.com/blog/why-tax-matches-spending/ https://new-wayland.com/blog/why-tax-matches-spending/
  - nly 5y ago
    This math just showing that total State/Government nominal spend must equal the total take through taxation, which is obviously correct and fine. However, currency is a medium of exchange that facilitates trade in place of barter. It's the oil in the engine, not the fuel. It's important to remember that transactions aren't just abstract financial events, they involve the exchange of time (labour) for some good or service. If you assume that all transactions in the economy ultimately deliver some fractional quantity of 'real wealth' (production of new goods and services, entertainment, knowledge, infrastructure etc), at some rate, then a similar geometric progression can be calculated for that. The thing is that a lot of that wealth creation depends on things that don't scale with the money supply. Simply put, no matter how many trillions of $'s you create there's only one Apple to buy with them. Tax on the other hand scales perfectly since it's just another economic lever. Low rates/yields are still a wealth inequality problem because bank deposits and, to a lesser extent, public equities are ways average people have been able to reallocate some of their idle funds to capture some of that value. Right now it seems an excessive amount of money is flowing to the few with the big ideas, good or bad, in desperation to spur further growth and there's lots of discussion about the 'everything bubble' because most assets are inflated.
    - neilwilson 5y ago
      Trade has never had anything to do with barter. It’s always promises “Here’s a chicken, owe me one” Until you get that clear, you’ll not realise that the monetary circuit and the real circuit are only inductively connected. Money is the charger. Production is the toothbrush
- mdavidn 5y ago
  The majority are Treasury securities but the Fed has also purchased other assets under quantitative easing, like mortgage-backed securities.

imtringued 5y ago

> But it absolutely does inject money into the system, which is ultimately backed by "reserves" which are created out of nothing. Well, here is the kicker. The system is not the real economy, just a mechanism that lets banks borrow from each other to maintain sufficient reserves. If you want to inject money into the real economy you need to actually borrow money and do fiscal stimulus. If the government does the obvious and borrows for investments like education or infrastructure then the government not only has a liability (the debt) but also an asset (the infrastructure). If the government cuts taxes instead then it not only fails to create an asset equal to the debt it also diminishes the value of their most important asset. The ability to charge taxes. Practically speaking there are two problems here. First, the economy has to have room for government spending and second the money actually has to be spent in a way that benefits the economy. If neither are true you get inflation. I'd say the stimulus checks didn't really benefit the economy. The spending spree that so many people expected didn't happen. The unemployment benefits had the advantage that they are primarily given to people who have no income. I'm sure they contributed to inflation but the supply chains don't look great either. The explosion in energy prices cannot be explained by fiscal stimulus alone.