5 ms·

Fractional reserve banking is only one way the fed can create inflation, POMO is another. I'm sure you've heard of quantitative easing. And while excessive mone

by lmg643 13y ago

Fractional reserve banking is only one way the fed can create inflation, POMO is another. I'm sure you've heard of quantitative easing. And while excessive money demanding "stuff" is the mechanism by which prices go up, first there has to be a lot of cash, which is the purview of the fed. They can't mandate how banks lend, which is why consumer inflation isn't out of control, but the fed can directly influence asset markets, and the signs of which are everywhere. Fear of the "fed taper" tells us how important this support is to asset prices.

Retric 13y ago
Long term QE can destroy money just as easily as create it. The FED only has two ways to create money long term buy loans that area not going to be paid back or rescue depositors from failed banks which is effectively buying already failed loans. QE often buys assets which may be worth more in the future and is thus a temporary measure like lowering banks reserve requirements. Edit: OK, they can also make negative interest loans but that's both rediculusly rare and creates tiny amounts of currency relative to the amount loaned. PS: Consider what happens when they buy a US treasury note it's worth say 100million now while they hold the bond there is extra 100 million floating around. However if they sell it in a year they just removed 102 million from circulation net result 2 million is forever gone.
- roblev 13y ago
  There are a few misconceptions about money here. - QE is about creating new money. The buying of loans is merely a way to distribute it; instead of just giving the money away, the central banks buys an asset (any asset would do) so nobody gets an unfair advantage through distributing the new money. - all loans can be repaid. At the end, people would just own dollar bills which in turn don't depend on anything else for their value. - a lot of the confusion around money comes from confusing different sorts of money as being the same thing. We commonly use two sorts of money: Base money (e.g. dollar bills) that depend on nothing. This form of money can only be (legally) created and destroyed by the central bank. The second form of money is Bank money which is a loan of Base money. THis form of money can be created or destroyed by many individuals and banks. - As an example of Base money vs Bank money, when I pay $100 into a bank, I have really loaned the money to the bank - it owes me $100. Yet I can "spend" this loan with my bank card and by goods from a shop, now the shop is owed $100 by the bank. The loan is a form of money; I really did have some Bank money. But the original $100 bills were sat in the bank vault, and they are definitely still (Base) money.
  - Retric 13y ago
    I generally agree with what your saying, but... As I said QE is about creating money in the short term. However, there are vary good reasons why the FED buys bonds vs say Gold. A major goal is to reduce the interest rate on long term loans. But, this means that the asset they acquire is generally worth more nominal dollars in the future. So when sold or simply paid back the money supply shrinks. That's not to say the FED can't purchase more assets to make up for the lost money. But, the temperary nature of QE is seen as a benifit that helps avoid inflation.
    - btilly 13y ago
      I'm curious. By what mechanism and on what timeline do you think that QE will end? Yes, I'm aware that it is promised to be temporary. I'm also aware of how the markets freaked out not long ago when Bernanke hinted that the Fed might consider exiting QE2 ahead of schedule if the economy continued to recover faster than expected. (This very innocuous statement was quickly retracted.) It is therefore clear that the markets have no expectation that there will be an exit from the policy any time soon. And people that I've talked to on Wall St do not see a viable way to do it short of currency collapse.
- eru 13y ago
  > PS: Consider what happens when they buy a US treasury note it's worth say 100million now while they hold the bond there is extra 100 million floating around. However if they sell it in a year they just removed 102 million from circulation net result 2 million is forever gone. No, the 2 millions are paid out as dividends to the government.

by lmg643 13y ago

Retric 13y ago

Long term QE can destroy money just as easily as create it. The FED only has two ways to create money long term buy loans that area not going to be paid back or rescue depositors from failed banks which is effectively buying already failed loans. QE often buys assets which may be worth more in the future and is thus a temporary measure like lowering banks reserve requirements. Edit: OK, they can also make negative interest loans but that's both rediculusly rare and creates tiny amounts of currency relative to the amount loaned. PS: Consider what happens when they buy a US treasury note it's worth say 100million now while they hold the bond there is extra 100 million floating around. However if they sell it in a year they just removed 102 million from circulation net result 2 million is forever gone.

roblev 13y ago
There are a few misconceptions about money here. - QE is about creating new money. The buying of loans is merely a way to distribute it; instead of just giving the money away, the central banks buys an asset (any asset would do) so nobody gets an unfair advantage through distributing the new money. - all loans can be repaid. At the end, people would just own dollar bills which in turn don't depend on anything else for their value. - a lot of the confusion around money comes from confusing different sorts of money as being the same thing. We commonly use two sorts of money: Base money (e.g. dollar bills) that depend on nothing. This form of money can only be (legally) created and destroyed by the central bank. The second form of money is Bank money which is a loan of Base money. THis form of money can be created or destroyed by many individuals and banks. - As an example of Base money vs Bank money, when I pay $100 into a bank, I have really loaned the money to the bank - it owes me $100. Yet I can "spend" this loan with my bank card and by goods from a shop, now the shop is owed $100 by the bank. The loan is a form of money; I really did have some Bank money. But the original $100 bills were sat in the bank vault, and they are definitely still (Base) money.
- Retric 13y ago
  I generally agree with what your saying, but... As I said QE is about creating money in the short term. However, there are vary good reasons why the FED buys bonds vs say Gold. A major goal is to reduce the interest rate on long term loans. But, this means that the asset they acquire is generally worth more nominal dollars in the future. So when sold or simply paid back the money supply shrinks. That's not to say the FED can't purchase more assets to make up for the lost money. But, the temperary nature of QE is seen as a benifit that helps avoid inflation.
  - btilly 13y ago
    I'm curious. By what mechanism and on what timeline do you think that QE will end? Yes, I'm aware that it is promised to be temporary. I'm also aware of how the markets freaked out not long ago when Bernanke hinted that the Fed might consider exiting QE2 ahead of schedule if the economy continued to recover faster than expected. (This very innocuous statement was quickly retracted.) It is therefore clear that the markets have no expectation that there will be an exit from the policy any time soon. And people that I've talked to on Wall St do not see a viable way to do it short of currency collapse.
eru 13y ago
> PS: Consider what happens when they buy a US treasury note it's worth say 100million now while they hold the bond there is extra 100 million floating around. However if they sell it in a year they just removed 102 million from circulation net result 2 million is forever gone. No, the 2 millions are paid out as dividends to the government.