3 ms·

QE -> inflation.

josu 12y ago
To expand on that, QE means Quantitative Easing: >An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes. So if suddenly, a new player shows up in the markets buying trillions of dollars worth of securities, due to the law of supply and demand, one can expect price of stocks to go up. You can check out the Feds balance sheet here [1]. Check out "Securities held outright" [2], yeah, that's 4.3 trillion with a "t". This figure used to be on the billions before the financial crisis [3], which means that the Fed flooded secondary markets (stock exchanges among them) with more than 3 trillion dollars, to put this into perspective, this the value of all the goods and services that the US produces in 2 months, or two and a half years in the case of Mexico. So yeah, the causality between QE and inflation of stock prices seems very plausible. Disclaimer: Central banking operations is not one of my main strengths, so you are more than welcome to fact check, correct or complete my comment. [1] Web: http://www.federalreserve.gov/releases/h41/current/ http://www.federalreserve.gov/releases/h41/current/ PDF: http://www.federalreserve.gov/releases/h41/current/h41.pdf http://www.federalreserve.gov/releases/h41/current/h41.pdf [2] The amount of securities held by Federal Reserve Banks. This quantity is the cumulative result of permanent open market operations: outright purchases or sales of securities, conducted by the Federal Reserve. Section 14 of the Federal Reserve Act defines the securities that the Federal Reserve is authorized to buy and sell. [3] http://research.stlouisfed.org/fred2/series/WSECOUT http://research.stlouisfed.org/fred2/series/WSECOUT
- nerfhammer 12y ago
  > a new player shows up in the markets buying trillions of dollars worth of securities, due to the law of supply and demand, one can expect price of stocks to go up. > which means that the Fed flooded secondary markets (stock exchanges among them) with more than 3 trillion dollars QE does not involve buying stocks. QE decreases bond yields making stocks relatively attractive vs. bonds.
  - josu 12y ago
    You are right, however, the Fed did buy almost 2 trillion worth of mortgage-backed securities which trade on the open market.
    - nerfhammer 12y ago
      The Fed virtually always buys and sells securities on open markets.
      - josu 12y ago
        Yeah, but as far as I know, they are usually repo agreements, buying MBS is something new.
- prbuckley 12y ago
  There is a great documentary on Netflix entitled "money for nothing" that does a good job connecting the Feds policies over the past decade, including QE to asset inflation, which is the rise of stocks and real estate but not general consumer goods. Japan's economy went through a cycle of asset inflation and it can be very dangerous.

QE -> inflation.

josu 12y ago

To expand on that, QE means Quantitative Easing: >An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes. So if suddenly, a new player shows up in the markets buying trillions of dollars worth of securities, due to the law of supply and demand, one can expect price of stocks to go up. You can check out the Feds balance sheet here [1]. Check out "Securities held outright" [2], yeah, that's 4.3 trillion with a "t". This figure used to be on the billions before the financial crisis [3], which means that the Fed flooded secondary markets (stock exchanges among them) with more than 3 trillion dollars, to put this into perspective, this the value of all the goods and services that the US produces in 2 months, or two and a half years in the case of Mexico. So yeah, the causality between QE and inflation of stock prices seems very plausible. Disclaimer: Central banking operations is not one of my main strengths, so you are more than welcome to fact check, correct or complete my comment. [1] Web: http://www.federalreserve.gov/releases/h41/current/ http://www.federalreserve.gov/releases/h41/current/ PDF: http://www.federalreserve.gov/releases/h41/current/h41.pdf http://www.federalreserve.gov/releases/h41/current/h41.pdf [2] The amount of securities held by Federal Reserve Banks. This quantity is the cumulative result of permanent open market operations: outright purchases or sales of securities, conducted by the Federal Reserve. Section 14 of the Federal Reserve Act defines the securities that the Federal Reserve is authorized to buy and sell. [3] http://research.stlouisfed.org/fred2/series/WSECOUT http://research.stlouisfed.org/fred2/series/WSECOUT

nerfhammer 12y ago
> a new player shows up in the markets buying trillions of dollars worth of securities, due to the law of supply and demand, one can expect price of stocks to go up. > which means that the Fed flooded secondary markets (stock exchanges among them) with more than 3 trillion dollars QE does not involve buying stocks. QE decreases bond yields making stocks relatively attractive vs. bonds.
- josu 12y ago
  You are right, however, the Fed did buy almost 2 trillion worth of mortgage-backed securities which trade on the open market.
  - nerfhammer 12y ago
    The Fed virtually always buys and sells securities on open markets.
    - josu 12y ago
      Yeah, but as far as I know, they are usually repo agreements, buying MBS is something new.
prbuckley 12y ago
There is a great documentary on Netflix entitled "money for nothing" that does a good job connecting the Feds policies over the past decade, including QE to asset inflation, which is the rise of stocks and real estate but not general consumer goods. Japan's economy went through a cycle of asset inflation and it can be very dangerous.