I know my regular readers are in that 27%, so for the rest of you, QE - quantitative easing - is the creation of money out of thin air. It increases "liquidity", the total amount of money in circulation, thus allowing banks and the Fed.gov to buy things they ordinarily wouldn't have money for. In the current version, QE3 or QE4 or QE to infinity and beyond!, the money buys US bonds financing the deficit spending. We currently buy about 90% of our bonds. Notice that 90% figure means that the vast majority of our debt isn't being bought by China or Japan or the EU or the Saudis. We're buying our own bonds - loaning money to ourselves. The Chinese in particular have been getting rid of US denominated assets as quickly as they can, without panicking the world. (Note to other anal retentives: substitute the word "currency" for every instance of "money" in that paragraph. Dollar bills are not "money" in the strict sense; they are currency. Gold is money. Silver is money. Ammo could be money. Oil could be money. Paper could not).
Since QE3 started in 2012, the Fed has created $85 Billion per month - over $1 Trillion so far.
If the First Law of Economics is "TANSTAAFL - there ain't no such thing as a free lunch" (as Heinlein put it) we should conclude there must be a cost to QE. The cost is that it creates vast amounts of currency in circulation, which tends to raise the prices of everything. That is, QE causes inflation. It's not that they don't know they're causing inflation, that's one reason why they're doing QE. They're deathly afraid of deflation because that hurts banks so they're striving to create inflation in the limited (fake) way they measure it. Inflation hurts individuals, especially savers like retirees and others living off savings. It encourages the use of credit, inflationary in itself. QE causes the cost of living to go up, as Ronnie Dunn sings.
QE is the reason the prices on the stock markets are being bid up as well as the prices for oil, gas, food and all the essentials of life are being bid up. It's responsible for the claimed economic growth, and virtually everything the government claims that's going well.
If you have time to kill, just click on the "Economics" tag just below this post and you'll get page after page of everything I've written with that tag. Or go to the search bar at top left and enter QE3 or QE.
It is better to make an investment looking the current trend in market to avoid bankrupt.Focus which company is going to pay you a constant profit and how.
ReplyDeleteThanks
Charlie Electra
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I really like the site and appreciate your writing. That being said, I think you may not be one of the 27%. I would say 99% of people don't understand QE because of a lack of economic knowledge. The federal QE program is not increasing the amount of money in circulation. They are buying bonds from banks once they have already bought the bonds from the government. This leads to a net 0 increase in circulating currency. It's only function is to drive down interest rates and thereby stimulate borrowing and loans.
ReplyDeleteThe bank buys the bond from the government.
The federal reserve then buys the bond from the bank.
The bank simply gets the money they bought the bond from the government with back in the form of reserve credit.
Net increase in money and net worth to the bank $0.
http://pragcap.com/understanding-quantitative-easing
This article sums up QE nicely.
I really like the site and appreciate your writing. That being said, I think you may not be one of the 27%. I would say 99% of people don't understand QE because of a lack of economic knowledge. The federal QE program is not increasing the amount of money in circulation. They are buying bonds from banks once they have already bought the bonds from the government. This leads to a net 0 increase in circulating currency. It's only function is to drive down interest rates and thereby stimulate borrowing and loans.
ReplyDeleteThe bank buys the bond from the government.
The federal reserve then buys the bond from the bank.
The bank simply gets the money they bought the bond from the government with back in the form of reserve credit.
Net increase in money and net worth to the bank $0.
http://pragcap.com/understanding-quantitative-easing
This article sums up QE nicely.
You're saying the velocity of money is zero; the money the banks get goes nowhere else. I see evidence of that money everywhere I look along with evidence of non-zero velocity. The Fed's own data shows that M1, M2 and M3 are all increasing. Where's that money coming from? Where did the extra money that started around '08 in this St. Louis Fed chart come from? That's more than an 8-fold increase. Are you honestly going to argue that we've had economic growth of over 8x?
DeleteSorry - I ain't buying it. Inflation, if measured with any of the traditional yardsticks, is running around 10% per year and has been for a long time. It's deliberate. They say they're trying to create inflation, and they exclude core expenses in everyone's life (food and energy) along with hedonics and other adjustments to come up with the <2% inflation they say we're undergoing.
Why would a bank go through all those transactions and contortions for 0? I'll admit I don't know a lot about banks. But I do know that they work it so that they always make money. And I thinking this time, "make" applies in at least two senses of the word.
DeleteI'm not buying your point, either, anon.
Umm, credit (aka easing)spends just as well - no better than "currency".
DeleteExample -
Me with currency- bidding against you with unlimited credit - who is likely to prevail?
THE majority of "money" is credit.
Increasing lending increase credit, otherwise - what is the point?
itor
The problem is very simple: In 2009 we had a choice to allow failing banks, businesses and mortgages go belly up and assets sold for pennies on the dollar followed by reopening of those banks and businesses, repurchase of those homes that had defaulted mortgages and a recovery. OR we could borrow and print vast amounts of money to prop up these failing entities (and of course siphon off about half to congressional districts to pay off friends and family) and make the problem far worse with each passing year and each additional borrowed trillion until the inevitable time when the scam must fail and we face a economic collapse made a hundred times worse by our head in the sand policies. We choose the worst choice and now we all await the inevitable collapse of Western society. No really! Even if you are in the 27% and understand how bad it is you do not yet understand how bad it will get. Not just for us here in the U.S. but for most of the world. Maybe not quite as bad in Canada and Australia because of their relatively small populations when compared with their enormous natural resources but much worse in Europe, the U.S. and third world countries. That uneasy feeling you have had in the pit of your stomach is for what you fear will happen and not for what you have seen happen so far...
ReplyDeleteExceptionally well said.
DeleteWe're in the position where we're almost guaranteed to cause trouble for the rest of the world, not just Western society. More than we've already caused by making corn into ethanol rather than exporting it for food.
As I've said many times, infinity is a great concept in math, but a hell of a bad way to run an economy. Things that can't go on forever won't go on. Keynes famously said, "in the long run, we're all dead" (when told his ideas can't work in the long term). He's partially right. He's dead. We all will be dead some day, but it's going to be hell to pay when it all comes crashing down.