4 ms·

I'm not an economist, but my understanding is that the quantitative easing that Bernanke has been using over the last few years is more or less equivalent to ra

I'm not an economist, but my understanding is that the quantitative easing that Bernanke has been using over the last few years is more or less equivalent to raining money from his helicopter, only into financial markets. Runaway inflation has not resulted because there are sufficient downward pressures on prices to counterbalance the easing.

onebaddude 13y ago
>"Runaway inflation has not resulted" Runaway inflation has not occurred because something like $3TT in wealth evaporated from the balance sheets of (mostly) the shadow banking system during 2007/2008. That's massively deflationary. The printing of money has filled that void.
- tesseractive 13y ago
  Which is a sort of capacity to absorb the extra spending and acts as a downward pressure on prices.
- marvin 13y ago
  This makes my head spin. Is there an ELI5 explanation of this somewhere? How can 3 trillion dollars suddenly evaporate, and how can newly printed money fill this void as if nothing had happened?
  - onebaddude 13y ago
    I'm not very good at ELI5, but briefly: all debt is a liability on one balance sheet, and is therefore an asset on someone else's balance sheet. That's an accounting identity. If you go belly-up and can't pay your debt, then the financial asset disappears from the other balance sheet as well. Poof. Picture owning $100,000 in bonds of a company that goes bankrupt. One day you have a net worth of $100,000, the next day it's gone.
  - tesseractive 13y ago
    Here's a second try. Imagine that lots and lots of people own shares in the mineral rights to various oil fields. Oil is at a really high price, all those rights are being traded for tons of money, and they're assets collectively valued at billions of dollars. All of the sudden, the value of oil plummets to a fraction of its former price. So cheap, in fact, that it costs more to get the oil out of the ground than you can sell it for. So all these mineral rights aren't worth anything anymore, there's no more income coming in from selling the oil, the fancy drilling and exploration equipment is being auctioned off for pennies on the dollar, and all the people depending on that money go broke. Then their employees, accountants, lawyers, dentists, real estate agents, grocery stores, furniture stores, and everyone else that depended on that cash flowing go broke. And, of course, a lot of people bought those oil rights or that expensive equipment on borrowed money that they can't pay back. So now the banks go under, and hurt anyone depending on those banks. That's a brief synopsis of how billions of dollars vanished in the blink of an eye in the Texas oil boom collapse (and then the Savings and Loan collapse) in the 80s. The real estate thing is more or less the same thing, but with mortgage backed securities. Once it turned out that people couldn't pay back all those ridiculous mortgages they'd been getting, suddenly the right to collect those mortgage payments was worth a fraction of what it had been. And all the high-flying companies that were getting rich off of owning, trading, and packaging those securities suddenly were left holding little pieces of paper that went from being worth billions to being worth a tiny fraction of that. Because it turned out that those mortgages were worth way less than everyone had thought they were worth, all that money effectively just vanished.
kaonashi 13y ago
Not really. QE is a swap. Bonds (or other financial assets) for cash. If I take a bond from you and give you cash, are you going to interpret it as a windfall and go on a spending spree?
- tesseractive 13y ago
  Adding demand and thereby liquidity to a market creates a windfall that wouldn't have been there otherwise. Whether it's because you were sitting on a bond that was impossible to sell and now you have money because you sold it, or because you would have gotten $1000 for it and now you got $1200, that's a windfall. Whether that money goes into buying groceries or buying other securities, I assume most of it will continue to circulate in the economy. If it doesn't, then it's pretty much a failure as a quantitative easing.
  - kaonashi 13y ago
    Nobody is ever involuntarily sitting on bonds, they are easily liquidated at any point; you sit on bonds because you don't want to spend the money. >If it doesn't, then it's pretty much a failure as a quantitative easing. It doesn't do much of anything, true.
    - wintersFright 13y ago
      Central Banks sit on bonds because holding USD in their reserve banks does not earn interest.
      - kaonashi 13y ago
        Central banks sit on bonds because they buy them as part of their open market operations, and they are legally required to make a market for treasuries so the government is funded.
- wintersFright 13y ago
  normal people, no. USG yes.

onebaddude 13y ago

>"Runaway inflation has not resulted" Runaway inflation has not occurred because something like $3TT in wealth evaporated from the balance sheets of (mostly) the shadow banking system during 2007/2008. That's massively deflationary. The printing of money has filled that void.

tesseractive 13y ago
Which is a sort of capacity to absorb the extra spending and acts as a downward pressure on prices.
marvin 13y ago
This makes my head spin. Is there an ELI5 explanation of this somewhere? How can 3 trillion dollars suddenly evaporate, and how can newly printed money fill this void as if nothing had happened?
- onebaddude 13y ago
  I'm not very good at ELI5, but briefly: all debt is a liability on one balance sheet, and is therefore an asset on someone else's balance sheet. That's an accounting identity. If you go belly-up and can't pay your debt, then the financial asset disappears from the other balance sheet as well. Poof. Picture owning $100,000 in bonds of a company that goes bankrupt. One day you have a net worth of $100,000, the next day it's gone.
- tesseractive 13y ago
  Here's a second try. Imagine that lots and lots of people own shares in the mineral rights to various oil fields. Oil is at a really high price, all those rights are being traded for tons of money, and they're assets collectively valued at billions of dollars. All of the sudden, the value of oil plummets to a fraction of its former price. So cheap, in fact, that it costs more to get the oil out of the ground than you can sell it for. So all these mineral rights aren't worth anything anymore, there's no more income coming in from selling the oil, the fancy drilling and exploration equipment is being auctioned off for pennies on the dollar, and all the people depending on that money go broke. Then their employees, accountants, lawyers, dentists, real estate agents, grocery stores, furniture stores, and everyone else that depended on that cash flowing go broke. And, of course, a lot of people bought those oil rights or that expensive equipment on borrowed money that they can't pay back. So now the banks go under, and hurt anyone depending on those banks. That's a brief synopsis of how billions of dollars vanished in the blink of an eye in the Texas oil boom collapse (and then the Savings and Loan collapse) in the 80s. The real estate thing is more or less the same thing, but with mortgage backed securities. Once it turned out that people couldn't pay back all those ridiculous mortgages they'd been getting, suddenly the right to collect those mortgage payments was worth a fraction of what it had been. And all the high-flying companies that were getting rich off of owning, trading, and packaging those securities suddenly were left holding little pieces of paper that went from being worth billions to being worth a tiny fraction of that. Because it turned out that those mortgages were worth way less than everyone had thought they were worth, all that money effectively just vanished.

kaonashi 13y ago

Not really. QE is a swap. Bonds (or other financial assets) for cash. If I take a bond from you and give you cash, are you going to interpret it as a windfall and go on a spending spree?

tesseractive 13y ago
Adding demand and thereby liquidity to a market creates a windfall that wouldn't have been there otherwise. Whether it's because you were sitting on a bond that was impossible to sell and now you have money because you sold it, or because you would have gotten $1000 for it and now you got $1200, that's a windfall. Whether that money goes into buying groceries or buying other securities, I assume most of it will continue to circulate in the economy. If it doesn't, then it's pretty much a failure as a quantitative easing.
- kaonashi 13y ago
  Nobody is ever involuntarily sitting on bonds, they are easily liquidated at any point; you sit on bonds because you don't want to spend the money. >If it doesn't, then it's pretty much a failure as a quantitative easing. It doesn't do much of anything, true.
  - wintersFright 13y ago
    Central Banks sit on bonds because holding USD in their reserve banks does not earn interest.
    - kaonashi 13y ago
      Central banks sit on bonds because they buy them as part of their open market operations, and they are legally required to make a market for treasuries so the government is funded.
wintersFright 13y ago
normal people, no. USG yes.