Is Quantitative Easing a con or an IOU? Does it benefit the poor or does it benefit the rich? What will be consequences of ending QE? Does QE need to end? Will there be a hard landing? Will QE become important in balancing budgets?
I would like to get some thoughts. I have some thoughts on it but I am still fine tuning them. Will post my comments later.
Re: Quantitative Easing
Is Quantitative Easing a con or an IOU? Does it benefit the poor or does it benefit the rich? What will be consequences of ending QE? Does QE need to end? Will there be a hard landing? Will QE become important in balancing budgets?
I would like to get some thoughts. I have some thoughts on it but I am still fine tuning them. Will post my comments later.
Am not a macro guy. But what the heck. By buying bonds the interest rates are kept artificially low. Creates artificial demand for bonds - so US Govt can fund its yearly deficits with borrowed money.
If I am not mistaken The Fed prints money to pay for the bonds. Ultimately this can stoke inflation. Yield curve already steepening - 10 yr bond had slight sell off.
Right now banks pay close to 0% to borrow money from th Fed (?) And make money on the spread by lending. So this has benefitted banks. But going forward, banks wont get high interest when theylend since interest rates have come way down.
The poor and middle class get shafted. Get very low interest rates. Same time borrowing costs from bank higher compared to interest they receive. Due to larger spread.
Rich have benefitted due to market rally stoked by low interest rate.
Re: Quantitative Easing
It seems to me that to understand QE we have to first understand Bonds. Will post later when I get some time.
Re: Quantitative Easing
Bond is a loan to the government for a fixed period paying regular income until the term comes to an end. At the end of the term you get back the principal amount back, however before that it can be sold in the market.
e.g $100 Bond for 10 years paying 3% interest per annum.
In this case the financial institution loans $100 to the government for 10 years, after which time the government will repay the $100. During the term of the bond the government will pay the holder of the bond interest at 3% a year. The holder of the bond may sell the bond at any time ibefore its maturity at the market rate which may be more or less than $100.
With QE instead of selling bonds to raise money, the government raises money by increasing the money in circulation in the economy, which means printing more banknotes.
Say that there is $1,000 in circulation in the economy including $100 of bonds after QE you may have $1,050 circulating in the economy including $50 of bonds.
I think from herafter it gets complicated.
Re: Quantitative Easing
Thanks. What would you call the Fed 's action of buying Treasuries. I thought that WAS QE.
Re: Quantitative Easing
Something vital the European countries voted out in the Maastricht treaty was the ability to use quantitative easing as a method to create stability. Now they regret that as they could have off set their high debt servicing level by issuing european bond piggybacked on the strong German economy.
To answer your question it has many benefits and is an important tool however it should be combined with other policy to be effective.
Re: Quantitative Easing
Thanks. What would you call the Fed 's action of buying Treasuries. I thought that WAS QE.
QE is not the actual buying of the bonds, but it is about where the money to buy the bonds comes from. The answer is printing banknotes. Therefore buying bonds is just a way to circulate more money into the economy.
Re: Quantitative Easing
Quantitative easing is done to increase the money supply by flooding FIs with capital, in an effort to promote increased lending and liquidity. The way this is done is by buying government securities or other securities from the market.
Its normally done when the interest rates have already been reduced to zero (or close to it) and further stimulus is required.
In the short run, there is a benefit because banks are more willing to lend. In the long run, a drawback of QE is that it could lead to inflation which impacts the poor more than the rich.
Re: Quantitative Easing
The first part was the easy bit (what is QE) now let me move on to the second part which involves looking at the consequences of QE, this is the complex bit.
Before I look at the consequences of QE, and try to answer some of the questions in my original post at the start of this thread, I shall first look at what should happen as a result of QE in a normal environment.
We already know what QE is, i.e injecting money into the economy. Normally when you inject extra money into the economy it would lead to inflation, inflation would lead to depreciation of the currency, which would in turn lead to everything being imported costing more e.g oil and goods from China etc. This would then further increase inflation and the cycles would repeat again, if the trend is not stopped quickly then you will have stagflation. Your exports would become expensive, there would be low economic growth, interest rates would increase, businesses would struggle to get loans and inflation would be high.
Therefore normally too much money cannot be injected into the economy and even if it is the government will try to control the flow of money in such a way that it can be mopped up, or the economic environment has to be negative.
Re: Quantitative Easing
Interesting.
Re: Quantitative Easing
Only countries that can print their own money are benefiting from QE. Some countries in EU are struggling because they cannot directly inject money into their country.
Currently injecting money is not leading to inflation, due to the fact that
a) money is injected is largely being used to bolster the financial institutions with only some trickling down to the general public.
b) the countries are in recession.
The money is largely being injected into banks and financial institutions. This bolsters their finances, it reduces the interest rates, which improves their mark-up and it stops many people defaulting on their loans.
This stops the economies of the countries from crashing. So instead of having a hard landing you get a soft landing.
Low interest rates shoould in due course encourage people and companies to start looking at higher yielding investments rather than just parking their money.
Re: Quantitative Easing
Would you say in the short term QE to a large degree to be ineffective due the majority of European countries being in recession? How would one combat such an issue?
Thanks for the thread. I'm studying Economics, final year and this thread has helped, haha.
Re: Quantitative Easing
Only countries that can print their own money are benefiting from QE. Some countries in EU are struggling because they cannot directly inject money into their country.
Currently injecting money is not leading to inflation, due to the fact that a) money is injected is largely being used to bolster the financial institutions with only some trickling down to the general public. b) the countries are in recession.
The money is largely being injected into banks and financial institutions. This bolsters their finances, it reduces the interest rates, which improves their mark-up and it stops many people defaulting on their loans. This stops the economies of the countries from crashing. So instead of having a hard landing you get a soft landing. Low interest rates shoould in due course encourage people and companies to start looking at higher yielding investments rather than just parking their money.
Very well explained. This post very useful for people like me who are weak in macroeconomics.
Re: Quantitative Easing
Would you say in the short term QE to a large degree to be ineffective due the majority of European countries being in recession? How would one combat such an issue?
Thanks for the thread. I'm studying Economics, final year and this thread has helped, haha.
I mentioned in my post that with QE economic crashes are avoided and you get a soft landing. I also mentioned that you can only benefit from QE if you can print your own money. The problem with EU is that a lot of countries in the EU have Euro as their currencies over which they have no control. The Euro is printed by the European Central Bank which has to look at the Eurozone as a whole as opposed to individual countries, it has to juggle with competing goals, so therefore you do not have the same flexibility as you have with countries that can print their own money. QE does not necessarily avoid a recession but it stops the recession from being a depression. The countries that are badly affected aren't the ones that have their own national currencies. For these countries to come out of the recession it will take longer and you just have to keep doing more of the same until the economy starts picking up again. The economies will only start to improve when the money actually starts going to the general public of these countries, and consumption increases again. QE is a drug that is best used in small doses otherwise it can be dangerous. That is why we have Q1, Q2 and Q3.
Re: Quantitative Easing
Capitalist system is based on consumption, therefore central banks encourage the growth of an economy beyond its natural growth, which results in a boom followed by a bust or a boom and bust cycle. However with QE instead of having a bust you still have the Central Banks encouraging the growth of the economy even in the bust phase.
Re: Quantitative Easing
So is QE good always during busts?
Re: Quantitative Easing
If QE is keeping the economy afloat then it means that the economy is in a decline.
If in the past excessive credit enabled the economy to grow, then that means the economic growth of the past was an illusion and not real.
Effectively what has been happening and is happening is that the rich are getting richer and the poor are getting poorer.
Normally governments need to raise money through reducing expenditure or increasing taxes which are both unpopular. However QE allows government to pay for unpopular wars like Iraq and Afghanistan, and in the name of WOT it allows the government to spending billions spying on everyone, without being unpopular with the public.
Re: Quantitative Easing
Nice explanation.
So what is soon during a bust? I though raiding taxes and cutting spending could further plunge economy.
Re: Quantitative Easing
Yes raising taxes or cutting expenditure would plunge the economy further in recession. But for most of us money is in limited supply and we have to prioritise our expenditure, when you start printing your money you could use the money on wars and other things that if the public could choose then they would not approve of e.g they would rather have lower taxes and better heathcare and better education instead of wars in far away places of little interest to them. It sets a dangerous precedent if you can keep the taxes low, you can provide all the facilities to your citizens and still indulge in all your wars across the globe through printing money.
Normally printing money leads to inflation and devaluation of your currency, but if you are in a recession then inflationatory pressure would be avoided. Devaluation of currecy would mean that your imports would become expensive e.g oil and goods from China. With oil you are a superpower and call the shots and can keep oil prices down. With imported goods you can say to China and other countries "hey we cannot afford to pay what you want but beside me you don't really have that many other customers so you'll have to sell to me for a lower amount".
It will be interesting to see how this plays out. When the economy starts to pick up the reduction in expenditure may still take place, it may just have been postponed. Inflationary pressures may also increase and taxes may still increase later.
Re: Quantitative Easing
Slight deviation.
How would you link globalisation to inequality?