Simple Answer To Simple Question Please - What Is Qe?

[Traktion]

Of course QE is inflationary. It's supposed to be. And not surprisingly the inflation numbers have refused to drop down to the target of 2 percent.

Well, you could argue it was about saving the banks, while allowing the government to continue to spending, with price inflation being a positive (in the minds of the centralists) side effect.

Stoking inflation is like poking savers with sticks until they spend. The problem is, when they do start to spend, price inflation can let rip and there is nothing (easily done) to stop them spending, other than raising interest rates on their savings. By the time the price inflation cat is out of the bag though, it can be very difficult to put it back in again - if people go from hoarding money to wanting anything but money, you have massive additional demand for alternatives (which could be goods/services, commodities... who knows). You don't need increased borrowing to trigger this - you just need those who were doing the saving before, to start doing the spending*.

To compound this, the problems which prompted the QE and low base rate in the first place - essentially, too much bad debt - is still there. If rates go up to stop inflation, they better hope people have paid down their debts since last time, or we will just have an even bigger mess - high inflation (if low interest rates remain low) or high defaults (if interest rates increase)

EDIT: * If it ends up being on commodities - from PMs, to oil, to food... prices of said items will rocket. Who cares about debt deflation in houses, when the price of petrol is £5 per litre? Lets hope it goes into investing in companies and staff (wages) instead, but I'm not holding my breath...

Edited September 24, 2010 by Traktion

[Alan B'Stard MP]

I would say there's a variety of reasons for QE.

The most important I think are the asset purchases from the non-bank sector to increase the broad money supply. The monetary authorities have attempted to affect the level of broad money not just by decreasing its headline cost but also its quantity - directly.

Edited September 24, 2010 by Alan B'Stard MP

[Injin]

Qe is printing money, with 3 card monte mechanics added to make it look like something else.

[alexw]

Well, you could argue it was about saving the banks, while allowing the government to continue to spending, with price inflation being a positive (in the minds of the centralists) side effect.

Stoking inflation is like poking savers with sticks until they spend. The problem is, when they do start to spend, price inflation can let rip and there is nothing (easily done) to stop them spending, other than raising interest rates on their savings. By the time the price inflation cat is out of the bag though, it can be very difficult to put it back in again - if people go from hoarding money to wanting anything but money, you have massive additional demand for alternatives (which could be goods/services, commodities... who knows). You don't need increased borrowing to trigger this - you just need those who were doing the saving before, to start doing the spending*.

To compound this, the problems which prompted the QE and low base rate in the first place - essentially, too much bad debt - is still there. If rates go up to stop inflation, they better hope people have paid down their debts since last time, or we will just have an even bigger mess - high inflation (if low interest rates remain low) or high defaults (if interest rates increase)

EDIT: * If it ends up being on commodities - from PMs, to oil, to food... prices of said items will rocket. Who cares about debt deflation in houses, when the price of petrol is £5 per litre? Lets hope it goes into investing in companies and staff (wages) instead, but I'm not holding my breath...

The new money is ending up in the hands of the financiers and not going into the hands of the citizenry. They can do two things with it, lend it out to an already debt saturated populace, or play games with it.

What they have been doing is playing games with it. Hence av wages have not gone up, but banker bonuses have, as have commodity prices. But why would anyone expect any different? The bankers aim is too look after their own interests, it always has been, not do what the BoE wants them to do, or what might be good for society in general.

[Traktion]

The new money is ending up in the hands of the financiers and not going into the hands of the citizenry. They can do two things with it, lend it out to an already debt saturated populace, or play games with it.

What they have been doing is playing games with it. Hence av wages have not gone up, but banker bonuses have, as have commodity prices. But why would anyone expect any different? The bankers aim is too look after their own interests, it always has been, not do what the BoE wants them to do, or what might be good for society in general.

The cash may have ended up in the hands of the financiers, but that isn't the point - it's enabled them to meet their (deposit) liabilities. This has been done by swapping their bad (loan) assets with the BoE and by recapitalisation via the printed money back door (government buying shares in them).

If the banks hadn't been propped up with printed money, when assets started to go bad, bank savings (and bonds) would have taken a hair cut; the assets backing these liabilities would have taken a hit, resulting in liabilities being only partially refundable. Instead, we have savings which shouldn't be there ('late money' as it were) waiting in bank accounts, for an opportunity to be spent and compete with money which should be there (ie. was backed by good assets all along).

The financiers may be playing games with the money, but there are now also savings (bank credit) which exist, which shouldn't. When people start to spend this money, perhaps under threat of it being inflated away, velocity could go north very quickly, sending prices sky high.

In short, it's not the saturated debtors that we have to worry about - they can't do any more borrowing - it's the creditors, bloated with the matching bank credit, that are the concern.

[lets get it right]

The bankers aim is too look after their own interests, it always has been, not do what the BoE wants them to do, or what might be good for society in general.

Given that is now crystal clear - why isn't banking run by the government. It strikes me that, in a sense, it is so vital for the functioning of the economy and affects people's lives in so many ways that it is too important to be left to private hucksters.

[Alan B'Stard MP]

The cash may have ended up in the hands of the financiers, but that isn't the point - it's enabled them to meet their (deposit) liabilities. This has been done by swapping their bad (loan) assets with the BoE and by recapitalisation via the printed money back door (government buying shares in them).

If the banks hadn't been propped up with printed money, when assets started to go bad, bank savings (and bonds) would have taken a hair cut;

How much recapitalization was necessitated by the buying back of MBSs from the respective bank holding companies?

How many of these securities are actually "bad"?

[Alan B'Stard MP]

Given that is now crystal clear - why isn't banking run by the government. It strikes me that, in a sense, it is so vital for the functioning of the economy and affects people's lives in so many ways that it is too important to be left to private hucksters.

It's too important to be left to public hucksters.

[Traktion]

How much recapitalization was necessitated by the buying back of MBSs from the respective bank holding companies?

How many of these securities are actually "bad"?

Who knows, but the government sure owns a lot of shares in banks now, with money provided by Merv's magic printing press. That much we do know.

EDIT: To add, does it matter? If we have record levels of debt, we have record levels of matching credit. Even without the printing, if demand for money falls (ie. demand for 'stuff' picks up), velocity could spike rather quickly too - the printed money will just make this even (much?) worse.

BTW, I thought this passage from Scepticus was interesting too and re-iterates an important point a few of us have made here:

Therefore broad money, which is debt money (in the form of commercial bank debt) is created as a record of the past circulation of base money. The broad money supply is effectively a record of the circulation of real money, aka base money. At some point in the future the base money circulation is expected to revisit these 'records' of prior base money ownership in order to discharge them.

The only reason Broad Money exceeds Base Money is that the circulation of bank reserves via the process described above leaves records (in the form of deposit and other account balances) of the movement of base money, with the broad money supply representing the liabilities that banks have accumulated as a result.

I've referred to these as 'chains of credit' (or rather 'chains of promises') before, with the 'record of past circulation of base money' being like the links. I think people have a funny and differing view of what broad money is.

I find the monetarists who consider M to be broad money, to be misunderstanding this relationship. The claim that base money has to fill the void left by whole chains of collapsing credit seems, to me, a fallacy; you only need to make good the weak links, for the whole chain to remain in tact.

It also illustrates that base money and broad money are two very different things.

Edited September 24, 2010 by Traktion

[Traktion]

Given that is now crystal clear - why isn't banking run by the government. It strikes me that, in a sense, it is so vital for the functioning of the economy and affects people's lives in so many ways that it is too important to be left to private hucksters.

They can't even balance a budget and you want to give them control over the whole banking sector?!

[Alan B'Stard MP]

Who knows, but the government sure owns a lot of shares in banks now, with money provided by Merv's magic printing press. That much we do know.

BTW, I thought this passage from Scepticus was interesting too and re-iterates an important point a few of us have made here:

I've referred to these as 'chains of credit' (or rather 'chains of promises') before, with the 'record of past circulation of base money' being like the links. I think people have a funny and differing view of what broad money is.

I find the monetarists who consider M to be broad money, to be misunderstanding this relationship. The claim that base money has to fill the void left by whole chains of collapsing credit seems, to me, a fallacy; you only need to make good the weak links, for the whole chain to remain in tact.

It also illustrates that base money and broad money are two very different things.

They most definitely are.

Base money is not called "supply" because it is not being supplied - it is not money "in supply" to the wider economy.

The broad money metric is called the broad money "supply" becomes it denotes the circulation of money.

People too readily confuse "money supply" with a stock. It is not - it is an attempt at describing a flow.

Unfortunately the descriptive is a nominal figure - assuming a constant flow. It's not a good metric when the typical flow is non-normal.

I cite "cash" in public circulation - being included in the broad money metric as evidence.

Sceppy is stretching the empirical evidence in describing broad money as the foot prints of base money movement. A 3 tiered banking sector shows it to be false - but it's a good rule of thumb.

Edited September 24, 2010 by Alan B'Stard MP

[nixy]

Qe is printing money, with 3 card monte mechanics added to make it look like something else.

Please try again, only this time please at least attempt to make it all a bit more complex.

You don't want the man in the street to understand do you?

[alexw]

The cash may have ended up in the hands of the financiers, but that isn't the point - it's enabled them to meet their (deposit) liabilities. This has been done by swapping their bad (loan) assets with the BoE and by recapitalisation via the printed money back door (government buying shares in them).

If the banks hadn't been propped up with printed money, when assets started to go bad, bank savings (and bonds) would have taken a hair cut; the assets backing these liabilities would have taken a hit, resulting in liabilities being only partially refundable. Instead, we have savings which shouldn't be there ('late money' as it were) waiting in bank accounts, for an opportunity to be spent and compete with money which should be there (ie. was backed by good assets all along).

The financiers may be playing games with the money, but there are now also savings (bank credit) which exist, which shouldn't. When people start to spend this money, perhaps under threat of it being inflated away, velocity could go north very quickly, sending prices sky high.

In short, it's not the saturated debtors that we have to worry about - they can't do any more borrowing - it's the creditors, bloated with the matching bank credit, that are the concern.

They are two sides of the same coin. You can either put more money into the hands of the debtors so they can pay of their debts, or the creditors can take a haircut. What they have done is give money to the creditors while leaving the debts untouched, the worst of both worlds.

[Alan B'Stard MP]

They are two sides of the same coin. You can either put more money into the hands of the debtors so they can pay of their debts, or the creditors can take a haircut. What they have done is give money to the creditors while leaving the debts untouched, the worst of both worlds.

The banks aren't the creditors - they are the intermediaries.

[lets get it right]

It's too important to be left to public hucksters.

I guess so. I read things like 4 times the globe's GDP is traded on currency exchanges once a fortnight (something like that) and, out of that action the lads are still walking off with multi-million pound bonuses, and think - why do we allow THEM to ru(i)n US.

[alexw]

It's too important to be left to public hucksters.

Tbh with the incoming holocaust i doubt they could do much worse than the banksters. If they were kept at arms length away from short term political pressure, i'd be willing to give some bunch of techocrats the chance.

[the flying pig]

If I were explaining it to a child I would say something like:

1. The BoE prints a load of money;

2. And uses it to buy a load of stuff from banks;

3. The banks will then have a lot of money on their hands. The hope is that they will use it to start lending more. This is the mechanism by which printed money finds it way into the economy.

4. The reason why countries don’t do this all the time is that it can cause inflation (don’t worry about why or how). That wasn’t a big worry for the BoE this time around because inflation was low and even briefly negative. The BoE thought that deflation would be a very bad thing.

5. So did it work? Did it lead to more lending and higher inflation? The honest to goodness answer is that no-one knows for sure.

[alexw]

The banks aren't the creditors - they are the intermediaries.

It seems nowadays that they are both. They are 100% not pure lenders anymore.

[Traktion]

They are two sides of the same coin. You can either put more money into the hands of the debtors so they can pay of their debts, or the creditors can take a haircut. What they have done is give money to the creditors while leaving the debts untouched, the worst of both worlds.

Indeed - it's not solved the problem, but just kicked it down the road (typically!), lining us up for a bigger crisis in the not so distant future.

The government has barely started to understand (or at least acknowledge) that it's a problem of balance, both on the national and international levels.

[Traktion]

They most definitely are.

Base money is not called "supply" because it is not being supplied - it is not money "in supply" to the wider economy.

The broad money metric is called the broad money "supply" becomes it denotes the circulation of money.

People too readily confuse "money supply" with a stock. It is not - it is an attempt at describing a flow.

Unfortunately the descriptive is a nominal figure - assuming a constant flow. It's not a good metric when the typical flow is non-normal.

I cite "cash" in public circulation - being included in the broad money metric as evidence.

Sceppy is stretching the empirical evidence in describing broad money as the foot prints of base money movement. A 3 tiered banking sector shows it to be false - but it's a good rule of thumb.

3 tiers? What are they then and how do they change the above?

[DabHand]

Can l suggest the OP edits their starting post with a running summary of what they think QE is based on the answers to this thread. It could be then pinned as the de facto explanation of QE as understood by the HPC community.

It seems to me that no ONE poster has all the cards, l had a stab but for example forgot/never knew that QE money went first to the banks, l thought that was one of the other schemes like the SLS. Hey maybe we need another thread on SLS.