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Quantitative easing (sometimes mistaking called "money printing") isn't directly inflationary. Because when central banks buy bonds, they do not pay with normal

by amin 4y ago

Quantitative easing (sometimes mistaking called "money printing") isn't directly inflationary. Because when central banks buy bonds, they do not pay with normal money. Instead, they pay with a special type of money that can never enter the real economy (as to not create inflation). This special type of money are called "bank reserves". And bank reserves can only be used to 1) settle interbank transfers and 2) buy more bonds. They can never leave the loop of the banking system. So the next time you see scary looking charts showing that the total amount of money increased a lot in the last two years, keep in mind that that "money" includes bank reserves that are stuck in a closed loop. This is also why Japan, who is the king of QE and "money printing", barely has any inflation. Thanks for coming to my TED talk.

tomcam 4y ago
So why don’t we just put $100 trillion of that money into the economy? Why not just pay for everyone’s houses and college debt and personal debt this way?
- sleightofmind 4y ago
  There you go again. Asking a straightforward question in clear, comprehensible language, without any hand waving. How can you possibly expect the economic sophists to engage with you if you persist in this behavior?
SemanticStrengh 4y ago
If the loop is closed then this money has no use, it is not money. If it's not closed it cause inflation. It's binary. How can you instead define a spectrum of cross talk between real money and sandboxed money?
User23 4y ago
And yet it spends.
adtac 4y ago
Buy more bonds from who? What can the seller of those bonds do with this money?
- deleted 4y ago
  [deleted]
tungle 4y ago
I doubt point 1), pls enlighten me. When a commercial bank receive interest from bonds from a central bank, it can then take out the proportion of 'real money' it put in before. Say, I'm BofA, I put in 10b as compulsory lock (my laymen term), I use some other money to buy bonds and receive interest, say, 200m. Then if that 200m goes to my reserve, I'd have 10.2b, which is 200m above the compulsory lock, then I can take that 200m out and use for business. Money doesn't have the label 'old money, can use' vs 'newly-printed money, can't use', does it? Minor edit: adding missing 'take' (in 'take that')
arc-in-space 4y ago
"Not directly inflationary" does not seem like a very useful thing to say, since QE causally leads to higher inflation. Japan barely had any inflation for a while because their QE program was temporary, and when it looked like inflation might go above zero, BoJ immediately hiked rates, contracting the economy(2000, 20006). This is how you achieve no inflation. By the way, recently they've began trying a more expansionary policy once again. Using QE. It is working, so far. It might stop if they dive their head back in the sand!
- ffggvv 4y ago
  the yen is rapidly devaluing compared to the dollar right now too
ls-lah_33 4y ago
Recently the fed has been buying corporate debt etfs[1]. Not an expert, but I assume that must increase the money supply in the general economy? QE also pushes down the interest rate, making it easier for banks to lend to the general public. I think QE usually doesn't lead to inflation if your employment drops at the same time or your population size is shrinking (i.e. Japan). In such a situation consumer demand decreases, balancing out the additional money supply. As evidence of this notice how QE in the US did not lead to high inflation until employment started picking up. [1] https://www.investopedia.com/the-fed-s-corporate-bond-portfolio-5069989 https://www.investopedia.com/the-fed-s-corporate-bond-portfo...
rmbyrro 4y ago
Throwing Japan as an example you want to generalize defeats your purpose. As has been famously said, there are only three types of economies: Japan, Argentina, and the rest of the world. So, next time, pick an example from the rest of the world. Is there many where QE did not lead to inflation?
- FrenchAmerican 4y ago
  The link between monetary inflation and price inflation has been "demonstrated" by the Chicago Boys, with Milton Friedman as their guru. It led to the "monetarist" school of thought - which has been the reigning paradigm in economics since. There is no such thing as "inflation" in general. There are different types of inflation, such as the rise of the valuations of stocks, the rise of real estate price and day-to-day prices such as food. And monetary inflation. QE has led to various effects in various countries at different times. There is no absolute correlation "always and everywhere". The funny thing is that a rise in stock market is always interpreted as a positive thing - despite everybody knowing that bubbles happen very regularly. Otherwise, inflation is seen as bad - which is ridiculous since the extraordinary low interest rates kept by the FED for years ("printing money") has sustained the economic growth and avoided recession. Economists are historians of the economy. They are able to explain what happened - and if they agree on the general picture, they disagree on many points. Which is normal, that is a research field, so there are debates. Some say lessons should be learned from History... well, for sure, all other things being equal, stuff tend to repeat, but as time goes by, the other things are not equal at all - or only to a certain point. I majored in History but historians are not my first sources to predict the future. Despite having repeatedly failed at predicting anything, we can't help but ask economists to be oracles and ask them to set-up policies.
neximo64 4y ago
So the person who sold those bonds after buying them from the government gets that money - in effect the government gets that money. In a puritan world sure, but if you expect the Fed will buy the bonds you can just buy them from the government and then sell to the Fed. And because there were negative interest rates for a time, that is exactly what happened as any other reason would be irrational. So it's not a closed loop - it's just printing with more steps. Likewise now its destruction with the removal of these reserves.
mmcconnell1618 4y ago
Doesn't the US have a fractional reserve banking system? For every $1 in bank reserves, the bank can loan out $9. So even if the special money of the Fed can't be used directly, it has the effect of allowing banks to have a larger base of reserves which means the banks can create money by loaning it out to others.
cheeselip420 4y ago
This is a dumb take. By using "reserves" to buy bonds, it means cash that WOULD have purchased those bonds (like a pension fund or your vanguard fund) is now going... somewhere else. Like stocks. If that money goes to stocks instead, then the price will rise. So while it may not be DIRECTLY inflationary, its only like 1 level removed.

by amin 4y ago

tomcam 4y ago

So why don’t we just put $100 trillion of that money into the economy? Why not just pay for everyone’s houses and college debt and personal debt this way?

sleightofmind 4y ago
There you go again. Asking a straightforward question in clear, comprehensible language, without any hand waving. How can you possibly expect the economic sophists to engage with you if you persist in this behavior?

SemanticStrengh 4y ago

If the loop is closed then this money has no use, it is not money. If it's not closed it cause inflation. It's binary. How can you instead define a spectrum of cross talk between real money and sandboxed money?

User23 4y ago

And yet it spends.

adtac 4y ago

Buy more bonds from who? What can the seller of those bonds do with this money?

deleted 4y ago
[deleted]

tungle 4y ago

I doubt point 1), pls enlighten me. When a commercial bank receive interest from bonds from a central bank, it can then take out the proportion of 'real money' it put in before. Say, I'm BofA, I put in 10b as compulsory lock (my laymen term), I use some other money to buy bonds and receive interest, say, 200m. Then if that 200m goes to my reserve, I'd have 10.2b, which is 200m above the compulsory lock, then I can take that 200m out and use for business. Money doesn't have the label 'old money, can use' vs 'newly-printed money, can't use', does it? Minor edit: adding missing 'take' (in 'take that')

arc-in-space 4y ago

"Not directly inflationary" does not seem like a very useful thing to say, since QE causally leads to higher inflation. Japan barely had any inflation for a while because their QE program was temporary, and when it looked like inflation might go above zero, BoJ immediately hiked rates, contracting the economy(2000, 20006). This is how you achieve no inflation. By the way, recently they've began trying a more expansionary policy once again. Using QE. It is working, so far. It might stop if they dive their head back in the sand!

ffggvv 4y ago
the yen is rapidly devaluing compared to the dollar right now too

ls-lah_33 4y ago

Recently the fed has been buying corporate debt etfs[1]. Not an expert, but I assume that must increase the money supply in the general economy? QE also pushes down the interest rate, making it easier for banks to lend to the general public. I think QE usually doesn't lead to inflation if your employment drops at the same time or your population size is shrinking (i.e. Japan). In such a situation consumer demand decreases, balancing out the additional money supply. As evidence of this notice how QE in the US did not lead to high inflation until employment started picking up. [1] https://www.investopedia.com/the-fed-s-corporate-bond-portfolio-5069989 https://www.investopedia.com/the-fed-s-corporate-bond-portfo...

rmbyrro 4y ago

Throwing Japan as an example you want to generalize defeats your purpose. As has been famously said, there are only three types of economies: Japan, Argentina, and the rest of the world. So, next time, pick an example from the rest of the world. Is there many where QE did not lead to inflation?

FrenchAmerican 4y ago
The link between monetary inflation and price inflation has been "demonstrated" by the Chicago Boys, with Milton Friedman as their guru. It led to the "monetarist" school of thought - which has been the reigning paradigm in economics since. There is no such thing as "inflation" in general. There are different types of inflation, such as the rise of the valuations of stocks, the rise of real estate price and day-to-day prices such as food. And monetary inflation. QE has led to various effects in various countries at different times. There is no absolute correlation "always and everywhere". The funny thing is that a rise in stock market is always interpreted as a positive thing - despite everybody knowing that bubbles happen very regularly. Otherwise, inflation is seen as bad - which is ridiculous since the extraordinary low interest rates kept by the FED for years ("printing money") has sustained the economic growth and avoided recession. Economists are historians of the economy. They are able to explain what happened - and if they agree on the general picture, they disagree on many points. Which is normal, that is a research field, so there are debates. Some say lessons should be learned from History... well, for sure, all other things being equal, stuff tend to repeat, but as time goes by, the other things are not equal at all - or only to a certain point. I majored in History but historians are not my first sources to predict the future. Despite having repeatedly failed at predicting anything, we can't help but ask economists to be oracles and ask them to set-up policies.

neximo64 4y ago

So the person who sold those bonds after buying them from the government gets that money - in effect the government gets that money. In a puritan world sure, but if you expect the Fed will buy the bonds you can just buy them from the government and then sell to the Fed. And because there were negative interest rates for a time, that is exactly what happened as any other reason would be irrational. So it's not a closed loop - it's just printing with more steps. Likewise now its destruction with the removal of these reserves.

mmcconnell1618 4y ago

Doesn't the US have a fractional reserve banking system? For every $1 in bank reserves, the bank can loan out $9. So even if the special money of the Fed can't be used directly, it has the effect of allowing banks to have a larger base of reserves which means the banks can create money by loaning it out to others.

cheeselip420 4y ago

This is a dumb take. By using "reserves" to buy bonds, it means cash that WOULD have purchased those bonds (like a pension fund or your vanguard fund) is now going... somewhere else. Like stocks. If that money goes to stocks instead, then the price will rise. So while it may not be DIRECTLY inflationary, its only like 1 level removed.