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http://pragcap.com/hussman-qe-isnt-adding-new-liquidity-to-the-market

I find it amazing how many people still believe that QE is adding all sorts of liquidity to the markets. There is still a widespread belief that QE is inflationary and an addition of net new money (despite the rather simple accounting behind a QE transaction). Well, it looks like a few notable people are finally starting to get it. Some recent commentary by notable central bankers makes it clear that some are beginning to notice that QE has no real relationship with higher inflation ............................

“From the standpoint of prospective investment returns, it is important to recognize that the main effect of quantitative easing has been to suppress the expected return on virtually all classes of investment to unusually weak levels. It’s widely believed that somehow, QE2 has created all sorts of liquidity that is “sloshing” around the economy and “trying to find a home” in stocks, commodities, and other investments. But this is not how equilibrium works.

Here’s how equilibrium does work. Every security that is issued has to be held by someone, in precisely the form in which it was created, until that security is retired. Period. That means that if the Fed creates $2.4 trillion in currency and bank reserves, somebody has to hold that money, in that form, until those liabilities are retired. The money ultimately can’t go anywhere. If someone tries to get rid of their cash in order to buy stock, somebody else has to give up the stock and hold the cash. In the end, every share of stock that has been issued has to be held by somebody. Every money market security that has been issued has to be held by somebody. Every dollar bill that has been created has to be held by somebody. None of these instruments somehow “find a home” by going somewhere else or becoming something else. They are home.

So what is the effect of creating an extra $600 billion dollars of monetary base by having the Fed purchase $600 billion dollars of Treasury debt? The same thing that happens anytime any security is issued. Somebody has to hold it, and the returns on all other assets have to shift by just enough to make everyone in the economy happy, at the margin, to hold the outstanding quantity of all of the securities that have been issued. In practice, the only way you can get people to willingly hold $2.4 trillion in non-interest bearing cash is to depress the return on all close substitutes to next to zero. So short-term Treasury bill yields have been pressed to nearly nothing.

I’ve been hammering on this point for 6 months now, but an increase in reserves has no impact on net financial assets. As Mr. Hussman describes it merely alters the mix of assets. This is not inflationary in the sense that some Friedmanites might have you believe. And it certainly does not increase the odds of some sort of hyperinflationary collapse. There really isn’t new money in the system. And the notion that QE is helping to fund the deficit is beyond nonsensical and displays a terrible lack of understanding when it comes to how the US monetary system functions. The only thing QE is doing is generating a huge amount of confusion, making investors believe the Fed is printing money and altering investor perception so as to to induce a speculative boom in commodities that is now helping contribute to global turmoil….

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http://pragcap.com/h...y-to-the-market

I find it amazing how many people still believe that QE is adding all sorts of liquidity to the markets. There is still a widespread belief that QE is inflationary and an addition of net new money (despite the rather simple accounting behind a QE transaction). Well, it looks like a few notable people are finally starting to get it. Some recent commentary by notable central bankers makes it clear that some are beginning to notice that QE has no real relationship with higher inflation ............................

"From the standpoint of prospective investment returns, it is important to recognize that the main effect of quantitative easing has been to suppress the expected return on virtually all classes of investment to unusually weak levels. It's widely believed that somehow, QE2 has created all sorts of liquidity that is "sloshing" around the economy and "trying to find a home" in stocks, commodities, and other investments. But this is not how equilibrium works.

Here's how equilibrium does work. Every security that is issued has to be held by someone, in precisely the form in which it was created, until that security is retired. Period. That means that if the Fed creates $2.4 trillion in currency and bank reserves, somebody has to hold that money, in that form, until those liabilities are retired. The money ultimately can't go anywhere. If someone tries to get rid of their cash in order to buy stock, somebody else has to give up the stock and hold the cash. In the end, every share of stock that has been issued has to be held by somebody. Every money market security that has been issued has to be held by somebody. Every dollar bill that has been created has to be held by somebody. None of these instruments somehow "find a home" by going somewhere else or becoming something else. They are home.

So what is the effect of creating an extra $600 billion dollars of monetary base by having the Fed purchase $600 billion dollars of Treasury debt? The same thing that happens anytime any security is issued. Somebody has to hold it, and the returns on all other assets have to shift by just enough to make everyone in the economy happy, at the margin, to hold the outstanding quantity of all of the securities that have been issued. In practice, the only way you can get people to willingly hold $2.4 trillion in non-interest bearing cash is to depress the return on all close substitutes to next to zero. So short-term Treasury bill yields have been pressed to nearly nothing.

I've been hammering on this point for 6 months now, but an increase in reserves has no impact on net financial assets. As Mr. Hussman describes it merely alters the mix of assets. This is not inflationary in the sense that some Friedmanites might have you believe. And it certainly does not increase the odds of some sort of hyperinflationary collapse. There really isn't new money in the system. And the notion that QE is helping to fund the deficit is beyond nonsensical and displays a terrible lack of understanding when it comes to how the US monetary system functions. The only thing QE is doing is generating a huge amount of confusion, making investors believe the Fed is printing money and altering investor perception so as to to induce a speculative boom in commodities that is now helping contribute to global turmoil….

the fed has monetised these bonds with money it doesnt have.

Thats what money issuers do.

there is no reserve to back up the purchse...literally, just numbers on a screen.

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I just don't believe that's correct.

Bank A holds $100 in bonds

Central Bank swaps this for a 'new' $100,

Bank A buys $100 in bonds.

Bank A started with and ended with $100 in bonds.

Central Bank started with nothing, printed $100 and now has $100 in bonds.

Govt creates $100 new bonds, which it sell for $100 it can now spend.

I can't see this as anything other than the Central Bank printing $100 and giving it to the Govt.

Yes, the bond liability still exists in Central Bank, but until it's reversed, it's simply increasing

the narrow money supply and giving it to the Govt.

If reversed, then there no difference to before, but if the bonds are simply destroyed, it's monetising

the Govt debt.

.... am I missing something?

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Aren't these assets being held as collateral so that other assets can be used in the market? That is with a larger collateral base you can extend your counterparty risk.

So not surprising that this results in commodity bubbling is it? Which "feels like" inflation to local economies.

Said yourself "the main effect of quantitative easing has been to suppress the expected return on virtually all classes of investment to unusually weak levels" - which is also encouraging reckless speculation in the search for alpha.

Big blowout on its way soon I think.

Edited by TwoWolves

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the fed has monetised these bonds with money it doesnt have.

Thats what money issuers do.

there is no reserve to back up the purchse...literally, just numbers on a screen.

The Fed already holds more US Bonds than the second biggest holder, China (Japan is third place, UK is fourth at around £500Bn BTW). Surely the Fed creating money from thin air to buy bonds, means that freshly created money will be spent straight into the US economy by the US Govt., as money is created and then immediately spent?

The Fed may be holding a counterbalancing 'asset' on it's books, but the chances of the bond ever being paid back in real terms are close to zero. So, surely this is inflationary.

Also the FED is pumping money into the economy that otherwise wouldn't exist in the world, as it isn't available via taxes or as a loan from another nation. This Fed generated cash keeps the economy rolling where it otherwise wouldn't be, thereby lining the pockets of individual US citizens, corporations and banks (via increased commerce), who can then use the extra money to speculate in the markets, driving up commodity prices.

Please tell me why I am wrong?

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Meanwhile in UK the BoE created £200bn from nothing and mainly used it to buy gilts. Thus they both paid for government capital expenditure and propped up the gilt market so that others would want to buy as well.

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The Fed already holds more US Bonds than the second biggest holder, China (Japan is third place, UK is fourth at around £500Bn BTW). Surely the Fed creating money from thin air to buy bonds, means that freshly created money will be spent straight into the US economy by the US Govt., as money is created and then immediately spent?

The Fed may be holding a counterbalancing 'asset' on it's books, but the chances of the bond ever being paid back in real terms are close to zero. So, surely this is inflationary.

Also the FED is pumping money into the economy that otherwise wouldn't exist in the world, as it isn't available via taxes or as a loan from another nation. This Fed generated cash keeps the economy rolling where it otherwise wouldn't be, thereby lining the pockets of individual US citizens, corporations and banks (via increased commerce), who can then use the extra money to speculate in the markets, driving up commodity prices.

Please tell me why I am wrong?

A central bank creates money by Lending.

a central bank prints money by buying

The FED is buying.

Edited by Bloo Loo

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Aren't these assets being held as collateral so that other assets can be used in the market? That is with a larger collateral base you can extend your counterparty risk.

So not surprising that this results in commodity bubbling is it? Which "feels like" inflation to local economies.

Said yourself "the main effect of quantitative easing has been to suppress the expected return on virtually all classes of investment to unusually weak levels" - which is also encouraging reckless speculation in the search for alpha.

Big blowout on its way soon I think.

not collateral....bought.

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If you read through the comments, the author seems to be agreeing that M1 is increased (which is printing money as far as I'm concerned), but this is offset by the banks holding onto the money to increase their capital reserves.

In which case I agree. The total is not necessarily inflationary, but I'd argue that:

- QE is inflationary (and printing money)

- Banks increasing capital reserve ratios is deflationary.

Which is not what he's saying in the article.

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If you read through the comments, the author seems to be agreeing that M1 is increased (which is printing money as far as I'm concerned), but this is offset by the banks holding onto the money to increase their capital reserves.

In which case I agree. The total is not necessarily inflationary, but I'd argue that:

- QE is inflationary (and printing money)

- Banks increasing capital reserve ratios is deflationary.

Which is not what he's saying in the article.

Once more for the sake of it :)

Commericial banks pretend to have money.

When they get called on it, central banks print it up for them.

This is amazing because the problem, of the market asking for an over the rate of inflation return is neutralised, as the rate of inflation is uknown until AFTER the shit hits the fan.

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Once more for the sake of it :)

Commericial banks pretend to have money.

When they get called on it, central banks print it up for them.

This is amazing because the problem, of the market asking for an over the rate of inflation return is neutralised, as the rate of inflation is uknown until AFTER the shit hits the fan.

Commercial banks are always illiquid, so the Central Bank acts as a lender of last resort. I don't really have a problem with that.

The issue was that the banks became so leverages (low capital reserve ratio), that it only needed a small portion of defaults to make them insolvent. .... but does this relate to the actual act of QE?

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Central bank, in a way yes.

Market makers, not really (which is whom I was writing about).

market makers?..oh you mean the preferitti who get to buy the bonds at Auction...then sell them to the FED a week later?

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market makers?..oh you mean the preferitti who get to buy the bonds at Auction...then sell them to the FED a week later?

I'm well aware that the whole system has descended into farce.

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Commercial banks are always illiquid, so the Central Bank acts as a lender of last resort. I don't really have a problem with that.

The issue was that the banks became so leverages (low capital reserve ratio), that it only needed a small portion of defaults to make them insolvent. .... but does this relate to the actual act of QE?

They aren't "illiquid", they are commiting fraud.

The money they are given when it goes wrong is the money they are supposed to have already loaned to people. Not having loaned it to people makes their contracts invalid and obviously fraudulent in any rational universe.

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Bank A holds $100 in bonds

Central Bank swaps the $100 in bonds for a newly printed $100

Central Bank holds the $100 in bonds until maturity

If the central bank had not bought the $100 in bonds through QE, then it would have had to buy the $100 in bonds on maturity using money from where? Printed, Borrowed, Taxation.................

Bank A started with and ended with $100, as it bought $100 in bonds and sold $100 in bonds, whether Bank A had awaited maturity, or sold through QE?

Central Bank issued $100 in bonds, government spent money, on maturity or through QE, Central Bank bought the $100 in bonds.

Through QE the Central Bank magicked the money, but had the central bank awaited maturity of the $100 in bonds, where would have the money come from so to differ from QE?

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They aren't "illiquid", they are commiting fraud.

The money they are given when it goes wrong is the money they are supposed to have already loaned to people. Not having loaned it to people makes their contracts invalid and obviously fraudulent in any rational universe.

This was actually the point of my "forgery" thread.

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yes that's right. it has no effect at all.

That's why they are doing it.

:lol::lol:

+ 1

It was an anti-deflationary policy. Hence, an inflationary policy. It inflates the money supply.

Besides, here in Britain, QE also financed the public sector' deficit, allowing the government to pay its employees salaries 9real money in peoples' pockets, atomised across the whole country/economy), without taxing the private sector for the same amount. Hence, a NET injection of cash in the economy.

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Bank A holds $100 in bonds

Central Bank swaps the $100 in bonds for a newly printed $100

Central Bank holds the $100 in bonds until maturity

If the central bank had not bought the $100 in bonds through QE, then it would have had to buy the $100 in bonds on maturity using money from where? Printed, Borrowed, Taxation.................

Bank A started with and ended with $100, as it bought $100 in bonds and sold $100 in bonds, whether Bank A had awaited maturity, or sold through QE?

Central Bank issued $100 in bonds, government spent money, on maturity or through QE, Central Bank bought the $100 in bonds.

Through QE the Central Bank magicked the money, but had the central bank awaited maturity of the $100 in bonds, where would have the money come from so to differ from QE?

Translating that into real world items to reveal how dumb it is -

I have a tin of beans. I say worth 10 pence.

I sell it to you, and you buy it with a brand new 10 pence piece you have made.

No money has been added, because the tin of beans was worth 10 pence.

:lol::lol::lol:

Edited by Injin

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Bank A holds $100 in bonds

Central Bank swaps the $100 in bonds for a newly printed $100

Central Bank holds the $100 in bonds until maturity

If the central bank had not bought the $100 in bonds through QE, then it would have had to buy the $100 in bonds on maturity using money from where? Printed, Borrowed, Taxation.................

Bank A started with and ended with $100, as it bought $100 in bonds and sold $100 in bonds, whether Bank A had awaited maturity, or sold through QE?

Central Bank issued $100 in bonds, government spent money, on maturity or through QE, Central Bank bought the $100 in bonds.

Through QE the Central Bank magicked the money, but had the central bank awaited maturity of the $100 in bonds, where would have the money come from so to differ from QE?

where is the cancellation of the $100 on maturity? there isnt any as the government will pony up the $100 to the FED, who now STILL has $100 in IOUs to itself.

Money just issued has no value. That is the point. Maybe the MOney as debt video would help....printed money has no debt. Its therefore an IOU for nothing.

Meanwhile, before the FED writes off its IOUs to itself, the money has entered the World and diluted the stock...

Edited by Bloo Loo

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Bank A holds $100 in bonds

Central Bank swaps the $100 in bonds for a newly printed $100

Central Bank holds the $100 in bonds until maturity

If the central bank had not bought the $100 in bonds through QE, then it would have had to buy the $100 in bonds on maturity using money from where? Printed, Borrowed, Taxation.................

Bank A started with and ended with $100, as it bought $100 in bonds and sold $100 in bonds, whether Bank A had awaited maturity, or sold through QE?

Central Bank issued $100 in bonds, government spent money, on maturity or through QE, Central Bank bought the $100 in bonds.

Through QE the Central Bank magicked the money, but had the central bank awaited maturity of the $100 in bonds, where would have the money come from so to differ from QE?

Through QE the Central Bank magicked the money, but had the central bank awaited maturity of the $100 in bonds, where would have the money come from so to differ from QE? Future taxation or more debt/borrowed money................

So without QE, more debt issuence would take place so to pay bonds on maturity if there was a shortfall in tax revenue.........

So the only effect QE has is shorten the bond maturity timeline, which means paying less interest on the bond, so reducing the cost burden on the tax payer?

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Through QE the Central Bank magicked the money, but had the central bank awaited maturity of the $100 in bonds, where would have the money come from so to differ from QE? Future taxation or more debt/borrowed money................

So without QE, more debt issuence would take place so to pay bonds on maturity if there was a shortfall in tax revenue.........

So the only effect QE has is shorten the bond maturity timeline, which means paying less interest on the bond, so reducing the cost burden on the tax payer?

money is LENT into existence against a thing of value.

QE is not lent.

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Through QE the Central Bank magicked the money, but had the central bank awaited maturity of the $100 in bonds, where would have the money come from so to differ from QE? Future taxation or more debt/borrowed money................

So without QE, more debt issuence would take place so to pay bonds on maturity if there was a shortfall in tax revenue.........

So the only effect QE has is shorten the bond maturity timeline, which means paying less interest on the bond, so reducing the cost burden on the tax payer?

False assumption of central bank uniquity.

it's like saying that if you hadn't been mugged today hen it'd have meant a worse mugging tomorrow so it's actually a good deal. Actually theres another option - the mugger sods off.

It's inflationary. Time to get over it.

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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