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Scott Sumner is wrong about the impact of QE. Read Winterspeak and Warren Mosler. Or just use simple logic. How does QE improve the balance sheet of the average

Scott Sumner is wrong about the impact of QE. Read Winterspeak and Warren Mosler. Or just use simple logic. How does QE improve the balance sheet of the average person? All it does is swap one piece of government paper for another piece. If my balance sheet is not improved, why would I spend more money and drive up the prices of goods? QE does lower interest rates. If lending is limited by interest rates, than QE could increasing lending. But at a certain point, interest rates are low enough that lending is limited by the lack of creditworthy borrowers or by bank capital requirements, and so further reductions will have very limited impact.

YZF 12y ago
As long as interest rates are above 0% QE pumps money into the system. If you bought a 10% yield 10-year bond last year and that yield went to 0% it means you can sell that bond today for the same price you'd get in maturity. So that's a pretty good deal. The government or the central bankers are basically giving free money to bond holders on the assumption they will go use that money to stimulate the real economy. I think the last few years prove that it works to some degree but definitely a lot of that money gets stuck in various places, e.g. the banks. During QE the central bank can also acquire other assets that are riskier than bonds and take risk off other people's balance sheet, again hoping that money will be used to stimulate the real economy. At 0% it pretty much stops working. Up to 0% some bond holders are still holding on because they are betting on that being the better investment. The other problem is how do you exit QE. We're going to find out how that works over the next few years...
- dllthomas 12y ago
  QE pumps money into the system, but in exchange removes something that's very nearly money. I honestly have no clue as to the overall size of the effect - really big X times a really small y could wind up just about anywhere.
yummyfajitas 12y ago
QE is not intended to "improve the balance sheet of the average person". I have no idea why you think it should. But at a certain point, interest rates are low enough that lending is limited by the lack of creditworthy borrowers or by bank capital requirements, and so further reductions will have very limited impact. You are correct - at a certain point there are no investments with a positive real rate of return. At this point all further resources should be devoted to consumption regardless of time preferences (interest rates). If consumption desires are also completely satisfied, then you are in a post-scarcity economy. Almost by definition [1], when you reach that point, you are NOT in a recession. What's the relevance? [1] The technical definition of a recession is 2 quarters of negative growth, but for theoretical purposes it generally means a period when real resources are not fully utilized.
- bokonist 12y ago
  The purpose of QE is to create inflation. Inflation means that prices of goods and labor go up. The only reason prices go up is if consumers or employers bid up prices. What has never been explained in a satisfying way to me, is how QE results in consumers or employers deciding to bid up the price of goods, in a situation where interest rates are not the limiting reagent in lending decisions at the margin. At a certain point there are no investments with a positive real rate of return. If consumption desires are also completely satisfied, then you are in a post-scarcity economy. Almost by definition [1], when you reach that point, you are NOT in a recession. You don't have to be in a post-scarcity economy to have no lending opportunities at the margin. It is also very possible to have no additional lending opportunities, at any positive interest rate during a recession. This is especially so with the way that capital requirements work. If a bank doesn't have adequate capital ratios, they cannot lend, no matter what the rates.

YZF 12y ago

As long as interest rates are above 0% QE pumps money into the system. If you bought a 10% yield 10-year bond last year and that yield went to 0% it means you can sell that bond today for the same price you'd get in maturity. So that's a pretty good deal. The government or the central bankers are basically giving free money to bond holders on the assumption they will go use that money to stimulate the real economy. I think the last few years prove that it works to some degree but definitely a lot of that money gets stuck in various places, e.g. the banks. During QE the central bank can also acquire other assets that are riskier than bonds and take risk off other people's balance sheet, again hoping that money will be used to stimulate the real economy. At 0% it pretty much stops working. Up to 0% some bond holders are still holding on because they are betting on that being the better investment. The other problem is how do you exit QE. We're going to find out how that works over the next few years...

dllthomas 12y ago
QE pumps money into the system, but in exchange removes something that's very nearly money. I honestly have no clue as to the overall size of the effect - really big X times a really small y could wind up just about anywhere.

yummyfajitas 12y ago

QE is not intended to "improve the balance sheet of the average person". I have no idea why you think it should. But at a certain point, interest rates are low enough that lending is limited by the lack of creditworthy borrowers or by bank capital requirements, and so further reductions will have very limited impact. You are correct - at a certain point there are no investments with a positive real rate of return. At this point all further resources should be devoted to consumption regardless of time preferences (interest rates). If consumption desires are also completely satisfied, then you are in a post-scarcity economy. Almost by definition [1], when you reach that point, you are NOT in a recession. What's the relevance? [1] The technical definition of a recession is 2 quarters of negative growth, but for theoretical purposes it generally means a period when real resources are not fully utilized.

bokonist 12y ago
The purpose of QE is to create inflation. Inflation means that prices of goods and labor go up. The only reason prices go up is if consumers or employers bid up prices. What has never been explained in a satisfying way to me, is how QE results in consumers or employers deciding to bid up the price of goods, in a situation where interest rates are not the limiting reagent in lending decisions at the margin. At a certain point there are no investments with a positive real rate of return. If consumption desires are also completely satisfied, then you are in a post-scarcity economy. Almost by definition [1], when you reach that point, you are NOT in a recession. You don't have to be in a post-scarcity economy to have no lending opportunities at the margin. It is also very possible to have no additional lending opportunities, at any positive interest rate during a recession. This is especially so with the way that capital requirements work. If a bank doesn't have adequate capital ratios, they cannot lend, no matter what the rates.