That's not an "argument", it's an observation. Almost all of the QE "new money" was never used by the banks to make loans; it just sat in their accounts at the Fed. Why? Because the banks weren't fools: they knew they had way too little reserves for the loans they already had outstanding, so they just used the QE funds to increase their reserves. That equates to "significantly deleverage".
> I guess it may also have to do with how the QE was introduced. If it was money printed to pay civil servants it might have had a different effect than introduced in the bond market.
Or money printed to pay ordinary people whose retirement savings had collapsed through no fault of their own. And yes, that would have caused inflation, because you would have had a greatly increased quantity of money chasing the same quantity of goods and services. It might also have stimulated some economic growth which could have offset that effect, but that's a chancy thing to rely on.
We did exactly that. The Fed orchestrated the greatest ordinary person bailout the world has ever seen: it reinflated the US housing market and salvaged the net worth of the entire middle class in the process.
It did cause vast inflation. Just look at the cost of a house in 2012 vs 2018 or the equity situation then vs now:
Average gain on a home sale in 1Q04: positive ~$50,000.
Average gain on a home sale in 1Q12: negative ~$50,000.
Average gain on a home sale in 1Q18: positive ~$55,000.
https://i.imgur.com/SfktmBU.png
Median sales price for homes sold in the US:
1Q06: $247,000 (peak bubble...)
1Q12: $238,000
1Q18: $338,000 (!)
Those recent gains are very heavy with inflation courtesy of the Fed, and they are entering the real economy slowly but surely with every exit. That's also why the Fed is being forced to raise interest rates when it's the last thing the economic party wants.
The artificially juiced stock market (artificial courtesy of the low rates), which has created millions of new millionaires in the last four or so years, is also inflationary. It has also helped to salvage countless pension funds for large numbers of ordinary persons, funds that were badly under water. Every time someone sells their hilariously inflated Netflix stock at 200 times earnings, they can thank the Fed, and when they dump that into the economy (consumer goods or housing) it's inflation in action.
How the the Fed do this? Certainly not by QE, which did none of these things.
> Just look at the cost of a house in 2012 vs 2018
What did the Fed do during this time? Most of the money printed by QE happened from 2009-2013, and QE was shut down completely in October 2014.
QE was the bridge between the two sides of the chasm, hence it's not visible on the graph. We see a rapid fall, a smooth bottom and a nice rise, but it could have been simply a big crash at the bottom and nothing for a decade.
No. QE bought T-bills in order to exchange them for increases in the banks' account balances at the Fed.
TARP funds bought junk-ish bonds back in 2008-2009, but all that did was make banks and financial institutions not go bankrupt from being forced to make subprime mortgages for several decades due to the federal government's policy to "encourage" home ownership.
Also 247,000 to 338,000 over 12 years is not a huge gain. An APR of 2.7% doesn't seem crazy
Which I believe is the entire point of QE. I find the current incarnation of QE (buying bonds) unimaginative at best. I get that helicopter drops are politically hard, but there's gotta be something better than this.
Not really. The point of QE is to stimulate economic activity. Unfortunately, buying bonds doesn't do that either if banks don't use the newly printed money to make loans.
Usually QE allowed banks to roll over mark-to-market assets that turned into garbage into sane cash to satisfy solvency and liquidity requirements. And of course this led to price stability.
And why China is in deep trouble because they have 3Trillion (supposedly) in foreign reserves, but IMF said China needs at least 2.5Trillion for normal import/export operations. So really, they only have 500B in foreign reserves. And now they're going through reserves even faster, selling dollars to prop up yuan, since yuan has now fallen 10% within the last few months.
https://www.forbes.com/sites/salvatorebabones/2018/05/24/chi...
https://www.advisorperspectives.com/commentaries/2018/07/24/...
I think /mostly/ the 'big ticket' items; anything with a cost over 1000 USD.
However the price of many other items are also quite high, particularly for infinitely replicate-able information (entertainment).
I'd argue that the price of many other things under about 10 USD is largely a land ownership or transportation cost; as a society we've become so effective at producing (even grown things) that the biggest issue is the price of energy and labor associated with managing those products to end users.
This explains some of the discrepancy but I think it's only a tiny fraction of the total. There is just an ever increasing amount of things that are sold for what they can get away with rather than any inherent value. The generic brand stuff has the same transport and labor costs as the fancy brands yet are much cheaper, which rules that out.
I just went shopping so a fresh example is my instant coffee. The one I buy is almost permanently on sale for half price (not today unfortunately), so it seems pretty logical to assume that they make a profit on this sale price and everything else is just a nice fat margin on people that don't "bargain" hunt. I went half way and only got the small jar, but there are a dozen other things in my shopping bag I don't track the price of.
I know there are plenty of other things we pay much more for than we should, if the rest of the world had to pay what I just did for rice (generic brand) then several billion people would starve this year. It seems we have more cartels than competition.
"Monetary policy doesn’t work. What does work are fiscal adjustments" http://antonisoycasals.blogspot.com/2015/10/monetary-policy-...
The truth is that monetary policy does little. QE just swapped out high-interest treasury securities for low-interest reserves on private bank balance sheets. This flood of reserves drove interest rates so far down that the Fed had to start paying interest-on-reserves just to maintain a floor.
It didn't do much else. The idea that banks are reserve constrained is a widely held misconception. They are not. If anything, they are capital constrained. Adding to the supply of reserves then does not increase lending.
Another widely held misconception is that interest rates and inflation are inversely correlated. They are not. Interest is the price of money, and the price of money impacts the prices of everything else. Lowering interest rates decreases inflation, not increases. This is called neo-Fisherism.
Fiscal policy is what does work. Increase government spending enough and you will get inflation. This should be entirely noncontroversial.
This is very much context dependent. But since there's enough brave money chasing after even marginally sane investment opportunities, it's not surprising that the interest rate level is not effective.
Economists often use quite narrow definitions of money, counting things like cash and bank accounts, and maybe CD's, but never other valuable liquid financial assets like stocks and bonds and real estate.
But financial decision makers absolutely do consider their full set of assets in deciding how much purchasing they can afford. How much purchasing power is chasing the available goods is really the relevant statistic for causing inflation.
In quantitative easing, the Fed gave new dollars in exchange for existing financial assets (bonds, mortgage backed securities, etc). The exchanges were roughly at market value, meaning the dollars had the same purchasing power as the assets.
The exchange let the Fed control long term interest rates and increase the supply of safe assets (dollars) in the market, which was needed as banks were forced to increase their holdings of safe assets to deleverage.
Since total purchasing power didn't increase, there was no cause for inflation.
1) High powered money supply produced by the central bank 2) Money held in deposits, available to be increased via the fractional reserve multiplier effect 3) The deposit:reserve ratio, which shows the strength of the fractional reserve multiplier effect
The financial crisis seems to have tanked 2 & 3, such that the Federal Reserve would have needed to do much more QE than it did to keep up with demand for money.
They also found that price growth and wage growth are affected by history: a history of slow money growth predicts an increase in money supply will be absorbed by more output. A history of high money growth suggests that more money growth will lead to modest output changes and an increase in inflation.
Scott Sumner echoes your fear about a coming recession, but thinks that appropriate NGDP growth via the right amount of money printing can lead to a soft landing without inflation. Given that this has been his entire career, I think it is very possible that we won't necessarily see renewed high inflation.
Scott Sumner post here: http://www.themoneyillusion.com/the-next-five-years/
The most common theory is that this loose equity sloshing around has gone into stocks and bonds.
QE is keeping the stock market up.
Inflation has simply been confined to some select assets. It's all going to come back into the mainstream economy unless the next recession/depression ends up being extremely deflationary before that happens.
Currently, we are hitting very low unemployment so wages have nowhere to go but up.
The weird one is housing: as rates stay low, people take on bigger and bigger mortgages leading to 'housing inflation' ... but it's generally not measured as inflation so it's kind another form of stealth inflation.
There seems to be something wrong either with the unemployment stats or something else is not quite right.
As long as the money that is confined in housing assets doesn't reach the "lower" market of people who actually need to spend that money, it's perfectly logical to me that it doesn't appear as price inflation in the general economy.
Nowadays we're seeing a decrease in the last category, and an increase in "underemployment" and people holding multiple low-quality jobs to make ends meet. They aren't "unemployed", but they're not in a strong negotiating position either.
I am not actually positive on wages increasing. I feel like there is enough information asymmetry in the market that wages will stay depressed.
some of us were paying attention to the shell game
It's going to mean people who were getting 3% on their bonds and are now getting 0% will go looking for 3% in whatever other financial assets they can find - San Francisco property, shares, etc.
> inflation happened but it was all concentrated into financial assets, real estate
... because demand remained static while supply (of yield bearing invesment assets) was restricted.
That was basically the whole point of QA. It bailed out the banks without needing to give them taxpayer cash by bumping up asset values until their loanbooks started to look healthy again.
In order to inject lots of money into the economy without causing inflation the Fed went to Congress for permission to pay banks interest on the money that they kept on deposit with the Fed beyond the money they were required to keep. Normally banks keep the minimum required reserves with the Fed and lend out the rest but the Fed hoped that paying interest on the reserves would encourage the banks to sit on the money rather than lending it out where it could chase goods and services and cause inflation.
This was all new territory and the Fed's economic models for how IOR would effect the broader economy weren't validated. That's probably part of the reason the Fed's predictions about inflation and recovery were so off as the crisis progressed.
EDIT: You can see the large effect of the policy in the graph of excess reserves over time. The policy is still in effect.
Also, link something about the Fed going before Congress with regards to the interest on reserves? (I think the Fed can do this without Congressional approval. It always had this power.)
- Economists say "MV = PQ", and QE adds to "M", so shouldn't "P" or "Q" go up?
- But the marginal dollar of added "M" had ~zero "V", so that didn't happen.
("I guess" because I've never taken any macroeconomics and can't pretend to understand it...)
If money isn't directly pumped into the system by receiving banks, then the only direct impact is on those banks balance sheets, which affects their choices and decisions. So the effects to the overall economy are second order, and don't have the same fractional amplification like changing the reserve ratio has.
While I'm an economist, and have training on the model you are mentioning, I'm not speaking from a formal model. Rather from what I've seen in a large bank's treasury while it happened.
Another impact I've not seen considered is what happens when different banks have different effective reserve requirements.
On stocks the V is nonzero, but it will depend on how much of it actually leaves the exchange, instead of just passing from hand to hand there.
When a bond is initially offered someone pays money for it, and the offering party gets the cash, and buys things with it.
That equation is independent of the form of money. Bonds can switch hands easily. Of course, if it turns out that the bond is junk, then it becomes hard to sell, so that slows down V indeed. (Which means the economy takes a moment to think when a lot of things turn out to be shit instead of gold. Credit becomes thin, etc.)
The global economy left to its own devices would likely have entered a full-blown depression, and deflation usually accompanies this. The decrease in demand across the economy puts a great downward pressure on prices, this puts pressure on decreasing costs, this puts pressure on decreasing wages, and so on. You have a real threat of a deflationary spiral as demand further dries up due to people having less money to spend on goods and services.
So, as a lot of economists argued, there was a significant threat of a deflationary spiral facing the economy, more than any threat of inflation getting out of control, which had already been low to begin with.
Real estate prices in Vancouver have spiked since 2008 so sign me up as someone who believes the fincialization of housing and QE is a main component in why Vancouver housing prices suddenly became wildly out of sync with local incomes.
The economy was stuck in a rut and needed some kind of kick in the butt. Congress was unwilling to fund another ARRA-like stimulus (the 1st too small), partly because the federal debt was high. Low interest rates were not doing the stimulus job they used to because it appeared the rich decided waiting out the recession and sitting on cash was a better strategy than suddenly investing in business. Near-zero inflation made sitting on cash not feel so bad. Or, invest in Asia: capital-intensive investments no longer paid off in the USA, as manufacturing was shifting to Asia.
The better solution would be to not run up debt so that the Federal Gov't can issue a big stimulus during slumps: classic Keynes, which is basically Grandmother's advice: save up during good times for rainy days.
But there's insufficient incentive for politicians to avoid debt; they are rewarded for short-term improvements in the economy, not long term. We need something akin to a Balanced Budget Amendment that allows Keynesian stimuluses. The law would probably have to kick in gradually so that politicians wouldn't fear a short-term dampening of the economy that could harm their re-election. (Pension problems have a similar short-vs-long-term feedback glitch.)
Inflation doesn't work as simply as you might expect. What people believe is actually a big piece of the puzzle. As proof of this look at the Paul Volcker interest rate hikes, that squashed run-away inflation. While his hikes did eventually work, in the short term they did nothing to combat inflation. Why? Because people didn't believe they would help (in fact many thought it would make the problem worse). You had to get the minds of the the investors and spenders on-board before you actually see results (despite what the math might say).
I think the reason QE hasn't caused much inflation is because people either don't care or don't understand (most likely the latter). I am sure intentionally obscuring "printing shit tons of money" as "Quantitative Easing" also helps with the psychological factor so as to not panic the masses.
I don't know if this is the correct answer, but a very simple answer would be that we were/are in a massively deflationary environment and (things like QE) have been necessary just to stay in place ...
QE money is asset money, it sits on the left hand side of the bank's balances. The money that everybody actually uses is bank deposit - liability money, which sits on the right hand side. Liability money dwarfs asset money in modern economies.
The rest is then a question of what happens when you inject asset money into a banking system, and that depends on the regulatory framework. In the modern banking system capital controls have taken over from asset liability money controls, and that is essentially what has stopped the hyperinflation that some people predicted.
If you look at the deposit money quantities, well the normal rate of expansion for the US is approximately 2x decade, and that continues to be the case.
QE got swallowed up to make the large creditors whole and it ended up being a massive wealth transfer to them, so you see elite real estate, art, etc. being bid up while the rest of the economy flounders around aimlessly
The IS-LM model has a phenomenon called the "(Hicksian) liquidity trap"
* http://people.ds.cam.ac.uk/mb65/library/boianovsky-2004.pdf
How it applies to quantitative easing (QE):
* https://pro.creditwritedowns.com/2010/10/on-liquidity-traps-...
Basically, as the the rate of interest goes down, the demand for money increases (because it becomes cheap(er) to borrow). This is why when the economy tanks, central banks lower interest rates: cheap money encourages people / business to borrow and spend (thus increasing demand, and stimulating the economy).
However, at a certain point the demand for money becomes perfectly elastic. This is the generally when the interest rate is zero, which is where we were at from 2008 and for some years. The interest rates can't go negative (well, mathematically they can, but practically they generally don't (with some exceptions)).
This is called the zero lower bound, and once you're here, IS-LM says that you can print money without worrying about inflation too much:
* https://en.wikipedia.org/wiki/Zero_lower_bound
Once you do see the economy recovering (through un/employment rates and inflation), you stop printing money and start increasing interest rates.
I know some people on HN like to rag on Krugman, but he was saying all of this over the last ten years, and has generally been correct. All of the above is fairly straight forward IS-LM (which he exposes).
The Great Recession has been pretty good as a "scientific" experiment to see whose predictions were accurate: turns out the demand-side Keynesians were pretty good, and the Chicago-school supply-side folks were not.
Because what you call money is just a 0% permanent bearer bond to anybody not in your currency area.
QE is just a swap from interest paying savings to non-interest paying savings. If you're scared, you don't need paying interest to save, and anybody without a good index linked state pension to look forward to is scared.
Money and credit can both can be used to buy goods/services. Role of credit here is/was underestimated by economists.
In 2008, bunch of credit was destroyed. In response, central banks printed money, bought assets These things generally netted out.
The only convincing arguments I have heard so far is that:
1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system.
2. inflation happened but it was all concentrated into financial assets, real estate, and salaries for the upper middle class, which expenses (college tuition, luxury flats and houses, restaurants, etc) have seen a double digit inflation (my FT subscription must have doubled in 10 years!). These aren't really measured by CPI indices.
I guess it may also have to do with how the QE was introduced. If it was money printed to pay civil servants it might have had a different effect than introduced in the bond market.
But I don't know if it is reproducible. It feels like we are at the end of the current cycle (it's hard not to be nervous when looking at a 30y chart of the S&P500). QE is pretty much all the way in, rates are low. There isn't going to be much more central banks can do than print even more money. Inflation should show its ugly head sooner or later.