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Not surprising to see a libertarian-oriented site refer to QE as "money printing". It's not. Monetary policy doesn't increase the net financial assets available

by gph1 14y ago

Not surprising to see a libertarian-oriented site refer to QE as "money printing". It's not. Monetary policy doesn't increase the net financial assets available in an economy; that's only achieved by fiscal deficit spending. QE is just an asset swap (reserves for tsy's)--it's shifting the yield curve, but not adding anything new.

CJefferson 14y ago
I think it is. Before the QE, the government doesn't have the money it buys the bank assets for. It creates some more money to buy them?
damiankennedy 14y ago
It is effectively money printing which will lead to inflation but that does not mean it is the wrong thing to do. Inflation over time balances out old debt with new income.
- GrothingFash 14y ago
  Isn't that just a case of input output? Like throwing a bigger boomerang and saying "hey look, a bigger boomerang is coming back, we're making progress!"?
  - damiankennedy 14y ago
    Yes exactly, and that makes the boomerang you borrowed to buy your house seem smaller.
dstanchfield 14y ago
You would have a point if the 'libertarian-oriented site' referred to QE as "asset printing." It didn't though. QE may not increase financial assets in an economy, but it does increase available money. The money used to purchase the bond did not exist prior to the swap. Now if you really wanted to argue that this is not money printing, I might accept the claim that the Fed will at some point unwind this position. But even that is highly dubious.
- gph1 14y ago
  Yes, the Federal Reserve creates the electronic credits that it uses to purchase the bonds. But this is not "money printing" in any meaningful economic sense because it its just swapping one government liability for another one. There is no functional difference from the govt's persepctive between a reserve deposit and a treasury bond other than the term structure and the fact that the treasury bonds pay interest. In fact, you could argue that QE ultimately reduces private sector income because it eliminates this interest income.
- nhaehnle 14y ago
  Your post contains a great example of what was called the Worst Argument in the World on LessWrong: http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/ http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/ To be more precise, you are using the moniker "money printing" to confuse the issue. See, inflation isn't caused by printing money, inflation is caused by spending. If there is too much spending power going around and the productive capacity of the economy cannot keep up, then prices are going to be bid up. QE isn't going to cause much more spending, because as grandparent correctly stated, nobody's total amount of assets is going to be changed by QE. After all, suppose you hold long term treasury bonds. Now the Fed offers to buy them at a higher price. Maybe you will take that offer. And maybe you'll use that money to buy some other class of assets. But will you now actually put that money into the real economy, buying some produced goods or services that you would not otherwise have bought? Most people won't do the latter, and that's why QE isn't going to cause additional spending, and this is why it isn't going to cause inflation. Note that this is very different from historical episodes where money was printed by the government for direct spending, e.g. by the southern US states during the civil war.
  - chii 14y ago
    I m not an economist, so i might've understood your point wrong, but you just argued that the Feds offered to purchase your long term bonds for a higher price - logically this must mean you've made some money (ala, profit). So having made profit, wouldn't you then spend that profit on something that you otherwise wouldn't have afford to spend? Thus, this introduces more spending power, and thus, introduce the inflation that you said wouldn't happen?

by gph1 14y ago

CJefferson 14y ago

I think it is. Before the QE, the government doesn't have the money it buys the bank assets for. It creates some more money to buy them?

damiankennedy 14y ago

It is effectively money printing which will lead to inflation but that does not mean it is the wrong thing to do. Inflation over time balances out old debt with new income.

GrothingFash 14y ago
Isn't that just a case of input output? Like throwing a bigger boomerang and saying "hey look, a bigger boomerang is coming back, we're making progress!"?
- damiankennedy 14y ago
  Yes exactly, and that makes the boomerang you borrowed to buy your house seem smaller.

dstanchfield 14y ago

You would have a point if the 'libertarian-oriented site' referred to QE as "asset printing." It didn't though. QE may not increase financial assets in an economy, but it does increase available money. The money used to purchase the bond did not exist prior to the swap. Now if you really wanted to argue that this is not money printing, I might accept the claim that the Fed will at some point unwind this position. But even that is highly dubious.

gph1 14y ago
Yes, the Federal Reserve creates the electronic credits that it uses to purchase the bonds. But this is not "money printing" in any meaningful economic sense because it its just swapping one government liability for another one. There is no functional difference from the govt's persepctive between a reserve deposit and a treasury bond other than the term structure and the fact that the treasury bonds pay interest. In fact, you could argue that QE ultimately reduces private sector income because it eliminates this interest income.
nhaehnle 14y ago
Your post contains a great example of what was called the Worst Argument in the World on LessWrong: http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/ http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/ To be more precise, you are using the moniker "money printing" to confuse the issue. See, inflation isn't caused by printing money, inflation is caused by spending. If there is too much spending power going around and the productive capacity of the economy cannot keep up, then prices are going to be bid up. QE isn't going to cause much more spending, because as grandparent correctly stated, nobody's total amount of assets is going to be changed by QE. After all, suppose you hold long term treasury bonds. Now the Fed offers to buy them at a higher price. Maybe you will take that offer. And maybe you'll use that money to buy some other class of assets. But will you now actually put that money into the real economy, buying some produced goods or services that you would not otherwise have bought? Most people won't do the latter, and that's why QE isn't going to cause additional spending, and this is why it isn't going to cause inflation. Note that this is very different from historical episodes where money was printed by the government for direct spending, e.g. by the southern US states during the civil war.
- chii 14y ago
  I m not an economist, so i might've understood your point wrong, but you just argued that the Feds offered to purchase your long term bonds for a higher price - logically this must mean you've made some money (ala, profit). So having made profit, wouldn't you then spend that profit on something that you otherwise wouldn't have afford to spend? Thus, this introduces more spending power, and thus, introduce the inflation that you said wouldn't happen?