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What is QE and what it really means to me

November 18, 2010

Rocky’s read a lot of information and mis-information regarding Quantitative Easing.  This may be the best and clearest discussion of the issues and is worth a read:


[Disclosure: Rocky rarely agrees with  Professor Landsburg, and finds some of his philosophies to be morally objectionable. Nonetheless, the Professor does a good job explaining the pros and cons of QE2 in his article.]

  1. November 18, 2010 at 1:29 pm

    I liked the cartoon character version better. Especially the way the blue character keeps asking “What does that mean?”. Also the way they preface terms with “the” as in “the Quantitative Easing”.

  2. kim
    November 20, 2010 at 10:35 am
  3. November 30, 2010 at 2:13 am

    Rocky, QE attempts to bring investors back to the markets by telling them that if they do not put their money in, then their money might just loose value (compared to assets).

    The problem with this approach is that while it does intend to pace the economy, however the attempt is via intermediation of financial markets, which can create bubbles.

    In any case, it does NOTHING to reduce the gap between valuations and real economy. And if I imagine that the valuations – of real estate, of debt have been inflated and distorted and that caused the financial crisis, it does nothing to reduce those gaps.


  4. Tyler
    December 6, 2010 at 11:42 am

    Rocky – would love to get your take on this.
    In the 60 minutes interview yesterday, Bernanke says something to the effect that one of the largest misunderstandings about QE is that it is printing money. He says that QE is not ‘printing’ money. (i’m paraphrasing)

    My Questions:
    It’s only not printing money if they actually sell the bonds at some point in the future, right? But if they don’t sell the bonds in the future, then it would effectively be printing money, right?

  5. December 6, 2010 at 12:06 pm

    Tyler: Rather than discussing the semantics — one can consider the practical effects.

    It depends. Suppose that the banks own lots of US bonds on their balance sheet right now. Then when Fed buys bonds (QE) and hand the banks $$, the banks show a larger balance on their account at the FRBNY. This creates more reserves for the banks. If the new reserves just sit there, then it has no practical effect … except that it might (not “must”) lower market interest rates. However, if the banks make more loans (for whatever reason), then the multiplier effect kicks in … since a bank that has $10 of excess reserves can make roughly $100 of loans. If the banks make lots of new loans, then it is equivalent of printing money …and the money supply could quickly explode. If the loans are being made for productive investment, it’s not necessarily a bad thing, but if the loans are being made because of hoarding or other misallocation of capital (due to expectations of whatever), it can be a very bad thing. If the loans are being made so people can buy gold, stocks or whatever, those prices will rise a lot. Also, the Fed could pay a negative interest rate on bank deposits at the Fed — and that would cause the banks to move excess reserves out of the FRBNY — but that’s really playing with fire.

    Most likely if the excess reserves just sit at the FRBNY, then it isn’t the equivalent of printing money — it’s just moving paper around. And so it’s a variation of the pushing-on-a-string problem … on a larger scale.

    However, if you take the analysis to the absurd, AT SOME POINT, QE (if it’s big enough) must have an effect like printing money … because if the Fed were to purchase ALL outstanding US Treasury debt, then all interest rates would approach zero — (and forgetting about the private sector) since the US TREASURY is running a huge deficit, it would be like the US TREASURY could run unlimited deficits at no cost whatsover. The deficits could be productive or unproductive … but they would flow into the private sector … and so the Keynesian stimulus + monetization of debt would be very pro-growth and pro-inflation for some period of time. This is situation where the dollar might be expected to decline (unless other countries are in even worse shape.)

    If the Fed sells of the bonds in the futures it’s not necessarily relevant — except that it’s a method of quickly tightening. After all, the Fed could just hold the bonds to maturity…and then the QE disappears too. And the Treasury then rolls the maturing bonds back out to the private sector.

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