QE. Does it work?
Discussion
Not a direct answer but read pages 3 onwards here, some interesting theory on QE, liquidity and velocity.
http://www.frontlinethoughts.com/pdf/mwo110510.pdf
rs1952 said:
I seem to recall the story breaking during the Heath administration in the early 70s that this was quietly going on then.
The Opposition then described it as "the government printing money like a banana republic"
Has anything changed?
Yes, we're more of a European Empire satellite than a republic now.The Opposition then described it as "the government printing money like a banana republic"
Has anything changed?
RichardD said:
Not a direct answer but read pages 3 onwards here, some interesting theory on QE, liquidity and velocity.
http://www.frontlinethoughts.com/pdf/mwo110510.pdf
So QE cannot alter the velocity of money, only the supply. But the extent to which money is 'hoarded' can become inelastic - pump ion more QE but households, comanies and - most relevantly - banks, just hoover up whatever cash is there and bung it into their respecitve coffers.
It's a convincing argument - the graphs seem to support it anyway.
Mauldin said:
inflation is primarily a reflection of fiscal policy - specifically, growth in the outstanding quantity of government liabilities, regardless of their form, in order to finance unproductive spending.
Can someone please explain this to Liebour?IC's a bit ropey atm so I'm not able to open the link.
Think I'm right in saying that although QE hasn't worked in the past, it's never been done so quickly and pre-emptively, which may prove to be important. Japan, for instance, had been in deflation for a while (at least a couple of years IIRC) before they started easing.
Think I'm right in saying that although QE hasn't worked in the past, it's never been done so quickly and pre-emptively, which may prove to be important. Japan, for instance, had been in deflation for a while (at least a couple of years IIRC) before they started easing.
Depends what you mean by 'work', and depends what they do with it.
Basically It's the FED (and BoE) printing a bunch of extra money and the government borrows it, at interest from them.
That's it. Imagine you were short of a few bob as you'd spent too much, and went to the bank. Imagine the bank manager was a friend of yours and lent you the money. That's it, but imagine that you borrowed so much that it actually changed the amount of money in existence.
QE (or to give it the technical name 'inflation') is so big it noticeably increases the number of notes in circulation. Say there was $100tn in the system, and the bank printed another $1tn. Nothing else has changed so now everything has to be valued as a fraction of £101tn instead of $100tn: i.e. each $ note that bought something now required $1.01 to buy the same thing.
The problem of 'usage' is the second issue here. Instead of cutting spending, government spending (of our money) has actually increased. In the UK by £40bn this year. With falling tax revenues this gives them a deficit (a shortage), so they seem to just get buy with newly printed borrowed money. This means they can a) keep overspending, b) keep the debt with the BoE growing and c) rob us by inflation.
While governments spend too much there is really no other choice. In fact if you use the euro there is not even that choice, as like Ireland, Greece, Portugal etc you would have gone bust with the private foreign ECB bank (Technically known as 'The Bundesbank') so you can't steal from your people with inflation, so you beg from the EU who steals from everyone in the EU on your behalf, as long as you do exactly as they say.
It still doesn't work though as there simply isn't enough money. Take Greece for example, and imagine it ran the euro for 10 years at 3% interest. Your initial loan from the ECB has therefore attracted compound interest at 1.03^10 = 1.34, so Greece, even if it didn't borrow a single penny extra from the ECB now owes them 1.34x the amount it borrowed.
Interest bearing FIAT currencies always die in the end, due to mathematics. The Exponential function is let loose on the debtors as soon as they charge interest and there is only one logical end-game: The central bankers own all your stuff, and you own nothing. Lucky for them most people don't believe in math. I guess that's why we have socialists..
Basically It's the FED (and BoE) printing a bunch of extra money and the government borrows it, at interest from them.
That's it. Imagine you were short of a few bob as you'd spent too much, and went to the bank. Imagine the bank manager was a friend of yours and lent you the money. That's it, but imagine that you borrowed so much that it actually changed the amount of money in existence.
QE (or to give it the technical name 'inflation') is so big it noticeably increases the number of notes in circulation. Say there was $100tn in the system, and the bank printed another $1tn. Nothing else has changed so now everything has to be valued as a fraction of £101tn instead of $100tn: i.e. each $ note that bought something now required $1.01 to buy the same thing.
The problem of 'usage' is the second issue here. Instead of cutting spending, government spending (of our money) has actually increased. In the UK by £40bn this year. With falling tax revenues this gives them a deficit (a shortage), so they seem to just get buy with newly printed borrowed money. This means they can a) keep overspending, b) keep the debt with the BoE growing and c) rob us by inflation.
While governments spend too much there is really no other choice. In fact if you use the euro there is not even that choice, as like Ireland, Greece, Portugal etc you would have gone bust with the private foreign ECB bank (Technically known as 'The Bundesbank') so you can't steal from your people with inflation, so you beg from the EU who steals from everyone in the EU on your behalf, as long as you do exactly as they say.
It still doesn't work though as there simply isn't enough money. Take Greece for example, and imagine it ran the euro for 10 years at 3% interest. Your initial loan from the ECB has therefore attracted compound interest at 1.03^10 = 1.34, so Greece, even if it didn't borrow a single penny extra from the ECB now owes them 1.34x the amount it borrowed.
Interest bearing FIAT currencies always die in the end, due to mathematics. The Exponential function is let loose on the debtors as soon as they charge interest and there is only one logical end-game: The central bankers own all your stuff, and you own nothing. Lucky for them most people don't believe in math. I guess that's why we have socialists..
My logic is,
Money can only represent stuff; the pound note or coin has no intrinsic value.
If by doing work you create more stuff in the country then the real world value of £1 must go up.
If you print more money without creating any more stuff you MUST have inflation, because each £1 represents less stuff.
But if the government starts out with debt of, say, 100Bn and decides to double the amount of money in circulation it still has debt of 100Bn - but the VALUE of that debt seems to have miraculously halved. And as long as the govenment has tax revenues based on the "new rate" and debt based on the "old rate" it's away and laughing.
So presumably governments like inflation?? And presumably this means they're happy to do some QE so long as it doesn't devalue the whole economy too much. But you'll never know until afterwards whether it was "too much"!
Money can only represent stuff; the pound note or coin has no intrinsic value.
If by doing work you create more stuff in the country then the real world value of £1 must go up.
If you print more money without creating any more stuff you MUST have inflation, because each £1 represents less stuff.
But if the government starts out with debt of, say, 100Bn and decides to double the amount of money in circulation it still has debt of 100Bn - but the VALUE of that debt seems to have miraculously halved. And as long as the govenment has tax revenues based on the "new rate" and debt based on the "old rate" it's away and laughing.
So presumably governments like inflation?? And presumably this means they're happy to do some QE so long as it doesn't devalue the whole economy too much. But you'll never know until afterwards whether it was "too much"!
Globulator said:
Interest bearing FIAT currencies always die in the end, due to mathematics. The Exponential function is let loose on the debtors as soon as they charge interest and there is only one logical end-game: The central bankers own all your stuff, and you own nothing. Lucky for them most people don't believe in math. I guess that's why we have socialists..
Which is not necessarily relevant today, with the fact that, for commerce, especially international, to continue, there needs to be acceptable "notes".
Now, in times past I might have been able to persuade the local chariot builder to take a bit of gold, or several wagons of wheat in exchange for one of his track specials.
Today, I doubt my local Ford Dealer would be so accepting.
Why would the central bankers want to own "all your stuff"?
Commercial banks, now, they might.
A successful parisite doesn't want to kill the host.
You could say that, today, many central banks are "socialists".
Providing the means for the Governments they act under.
WhoseGeneration said:
Globulator said:
Interest bearing FIAT currencies always die in the end, due to mathematics. The Exponential function is let loose on the debtors as soon as they charge interest and there is only one logical end-game: The central bankers own all your stuff, and you own nothing. Lucky for them most people don't believe in math. I guess that's why we have socialists..
Which is not necessarily relevant today, with the fact that, for commerce, especially international, to continue, there needs to be acceptable "notes".
I dont really understand and im struggling to get decent information on the greenback, what with AL being a "terrorist"
So another £50Bn in QE today.
I just dont get it TBH.
'We' use the money to buy bank bonds in the hope the banks will lend more money out? Dont the banks just use the 'money' to improve their balance sheets?
Wouldn't a better idea be to fund some massive infrastructure schemes which would essentially disseminate the funds directly into the economy?
Anybody care to explain to me why/how this works?
I just dont get it TBH.
'We' use the money to buy bank bonds in the hope the banks will lend more money out? Dont the banks just use the 'money' to improve their balance sheets?
Wouldn't a better idea be to fund some massive infrastructure schemes which would essentially disseminate the funds directly into the economy?
Anybody care to explain to me why/how this works?
jules_s said:
So another £50Bn in QE today.
I just dont get it TBH.
'We' use the money to buy bank bonds in the hope the banks will lend more money out? Dont the banks just use the 'money' to improve their balance sheets?
Wouldn't a better idea be to fund some massive infrastructure schemes which would essentially disseminate the funds directly into the economy?
Anybody care to explain to me why/how this works?
It would be better (much better) to give it out to us in the form of VAT cuts, VAT being one of the worst taxes on the poor.I just dont get it TBH.
'We' use the money to buy bank bonds in the hope the banks will lend more money out? Dont the banks just use the 'money' to improve their balance sheets?
Wouldn't a better idea be to fund some massive infrastructure schemes which would essentially disseminate the funds directly into the economy?
Anybody care to explain to me why/how this works?
Instead it makes the banks happy and the people retiring during QE broke.
jules_s said:
So another £50Bn in QE today.
I just dont get it TBH.
'We' use the money to buy bank bonds in the hope the banks will lend more money out? Dont the banks just use the 'money' to improve their balance sheets?
Wouldn't a better idea be to fund some massive infrastructure schemes which would essentially disseminate the funds directly into the economy?
Anybody care to explain to me why/how this works?
The economy is a pike of kak. Out of balance. There is too much dead spending holding it back. Benefits and the interest on the national debt being the "cost of failure" (wasn't it Thatcher who used that term?)I just dont get it TBH.
'We' use the money to buy bank bonds in the hope the banks will lend more money out? Dont the banks just use the 'money' to improve their balance sheets?
Wouldn't a better idea be to fund some massive infrastructure schemes which would essentially disseminate the funds directly into the economy?
Anybody care to explain to me why/how this works?
The gubberment has to continuously borrow money to pay for this failure. So borrowing money to pay for interest on borrowing. Nice. Not.
So rather than borrow from investors who want reward (interest) for lending, the gobberment borrows from the Bank of England. Which (although Globs disagrees here) is owned (as far as I can tell) by the gubberment.
Hence QE is borrowing from yourself to reduce the interest bill!
It looks like it is going to be a regular thing, £50b every 3 months.
In the context of investment though, the big fuss over that high speed rail link. What is the cost. A few seconds to type a number into a computer at the BofE ?
The real key to QE is that it allows a govt to continue 'borrowing' and spending without impacting on the total 'debt' figure.
So in essence, the govt prints 50bn. That money is used to buy existing govt debt from domestic third parties. This in turn allows the govt to issue more new debt which is sold to third parties.
The money raised is then spent.
So arguably it has allowed banks to rebuild cash reserves to meet new tier 1 requirements and to also continue lending and it has allowed the govt to keep issuing debt as it creates a false demand.
The reality is that it will almost certainly deliver an inflation spike at some point in the future.
In the first instance this will be good as it will erode national and retail debt but the big question is whether the govt will act fast enough to curtail it. As Govts operate for the short horizon one has to assume that they will not and we will see strong, well above the medium term average base rates at some point in the not too distant future.
So in essence, the govt prints 50bn. That money is used to buy existing govt debt from domestic third parties. This in turn allows the govt to issue more new debt which is sold to third parties.
The money raised is then spent.
So arguably it has allowed banks to rebuild cash reserves to meet new tier 1 requirements and to also continue lending and it has allowed the govt to keep issuing debt as it creates a false demand.
The reality is that it will almost certainly deliver an inflation spike at some point in the future.
In the first instance this will be good as it will erode national and retail debt but the big question is whether the govt will act fast enough to curtail it. As Govts operate for the short horizon one has to assume that they will not and we will see strong, well above the medium term average base rates at some point in the not too distant future.
I guess the down side is that you don’t want people to repay debt…well you do want people to repay debt but not right now…right now you should spend more and save/invest in the future…obviously we do want people to invest now because making valuable shiny things that people who don’t live in England want is one of the things that will get us out of this mess. There is no silver bullet either way in other words.
The advantages of QE seem many fold to me.
- Inflation without the nasty side effects of extremely low interest rates tend to have (asset bubbles etc.).
- Whereas interest rates are slow to take effect you can make money as fast as you desire and push it into the economy via QE to ramp up inflation making industry more competitive.
- It’s a tax on wealth via devaluation of currency to buy government assets so has some “Robin Hood” sort of effect, people without money lose less.
- It lowers the interest rate that governments will pay in the future by driving down bond yields which allows governments to feasibly invest in infrastructure, education, innovation etc. which will add real economic value.
Actually perhaps given the advantages of QE perhaps the most astonishing thing is that interest rates are widely considered a much better way of influencing economic growth.
The advantages of QE seem many fold to me.
- Inflation without the nasty side effects of extremely low interest rates tend to have (asset bubbles etc.).
- Whereas interest rates are slow to take effect you can make money as fast as you desire and push it into the economy via QE to ramp up inflation making industry more competitive.
- It’s a tax on wealth via devaluation of currency to buy government assets so has some “Robin Hood” sort of effect, people without money lose less.
- It lowers the interest rate that governments will pay in the future by driving down bond yields which allows governments to feasibly invest in infrastructure, education, innovation etc. which will add real economic value.
Actually perhaps given the advantages of QE perhaps the most astonishing thing is that interest rates are widely considered a much better way of influencing economic growth.
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