But don't take my word for it. Recently the US Treasury conveniently wrote a paper admitting that the Fed was responsible for spurring the asset inflation.
The dollar has lost 97% of its value, according to the Fed, over the course of a century. That was before they were knee deep into the economy 'printing' trillions - having increased their balance sheet by 300% in five years. How can they ever stop printing while the US Govt. runs a $700+ billion deficit? They can't. The outcome is obvious.
The Fed intentionally re-inflated assets, because it's the only gimmick they have left. Once you lower interest rates to zero, there's nowhere else to go but to intentionally try to spur asset inflation and generate a fake wealth effect, which the Fed has done two other times in the prior decades. They use their POMO program, along with mortgage purchases and cheap interest rates to inflate the stock market and the real estate market. It's real simple.
There has been no job recovery. There has been no manufacturing boom. There has been no improvement in the welfare and poverty picture. There has been no improvement in incomes. And we're still missing seven million full time jobs, and millions have fallen out of the labor force.
So why are asset prices booming? The answer to that is obvious as well.
1.) Quantitative Easing is printing money -- "This is because when the Fed buys bonds from banks it does so by crediting those banks’ accounts at the Fed with reserves that didn’t exist before. But it’s misleading to call this process “money printing” because it doesn’t actually do anything to increase the amount of money in circulation. In fact, in our monetary system, most money is created by private banks and not the Federal Reserve. When a bank lends you money on your credit card, that’s “printing” money."
They say it's misleading to call it "printing money" because all they do is increase the amount a private bank can lend out. Apparently it's not their fault for putting in the extra reserves, it's the private bank "printing the money."
2.) Quantitative Easing will eventually lead to inflation: "If the government literally began printing money and started mailing out new $100 bills to citizens, that would lead to price inflation." --- Apparently, using their own example above, people getting lent more money and using that lent money is not inflation. The author is purposefully evading the core argument and instead paints a ridiculous definition of inflation (direct inflation). It doesn't take a genius to see that more reserves = more money to lend = more money to spend = more money in circulation.
3.) Quantitative Easing is responsible for recent stock market highs --- Point isn't pertinent to the discussion and quite frankly, I don't care. The stock market is driven by people who decide to buy or sell. When more people buy, prices go up.
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So, what are your thoughts?
The simpler and more plausible explanation for stock market growth is coinciding GDP and earnings growth. QE should lead to a mild preference against (UST) bonds by lowering yields, but it is dubious that this alone could explain stock market indexes doubling over the same period. Twitter's one-day stock price specifically is idiosyncratic investor behavior and blaming that on QE is absurd nonsense.
In fact, there are almost no serious arguments for why QE should stimulate the economy in any way, except for a small straw, which is that QE might reduce long-term interest rates, and that this drop of long-term interest might induce more people to take out bank loans and increase their spending in this way.
Also, yes, Quantitative Easing might lead to inflation, but this is exactly what people hope for in the first place :-)
And no, Quantitative Easing will not lead to uncontrollable inflation. If loan-driven inflation gets too high, the central bank can simply decide to raise interest rates and stop QE again.
Not the parent but I thought depository and possibly other types of loans were limited by the size of reserves.
As long as the amount of reserves is close to the legally required minimum amount, there is an indirect link between loans and reserves, but its causality goes in the other direction as traditionally believed. When the volume of loans increase, then deposits increase also. Then the banking system as a whole needs more reserves.
If the amount of reserves available were fixed, this would lead to banks bidding up the overnight interbank interest rate. However, after some disastrous experiments in the 1970s and 80s with alternative policies, central bank policy is to keep that interest rate fixed. And that means: the central bank accommodates the banks' desire for more reserves by buying assets from the banking system.
Conversely, banks bid down the overnight interbank interest rate towards zero if there are too many reserves in the system, unless the central bank pays interest on reserves. This is exactly what central banks in most of the Western world want to happen today.
In any case, the story is that the amount of loans made by banks causally sets a lower bound on the amount of reserves in the system. The reverse direction does not hold.
Again, anybody who believes the latter would have to exhibit an explicit mechanism that establishes a reverse causality. There is no such mechanism in the rules (i.e. laws or regulations).
Oh, and if you are appalled because you believe that all this means that banks can just make loans as they please: they can't. However, the limits on loans are set by capital requirements, and for good reason: capital is a suitable buffer against defaulting loans, reserves aren't.
When a bank makes a loan, they simply create a new deposit, say worth 100#. If the reserve ratio is 0.1, and assuming that bank had exactly the required reserves before this operation, then they will have to acquire 10# in additional reserves within a week or two (yes, you read that correctly; reserve requirements are after-the-fact requirement that can be fulfilled with some delay).
More likely, though, the person or company that the loan was made to will use these 100# to pay somebody else, and in doing so, the newly created deposit is transfered to another bank B.
To balance this transfer, bank A must transfer 100# in reserves to bank B. Usually, it will simply borrow those reserves from bank B against an appropriate collateral such as the loan it has made. The profit of bank A from the loan is the different in interest between the interest owed by their customer, and the interest they have to pay in the interbank market to bank B.
At the same time, bank B now has an increased reserve requirement, and they need to get those 10# from somewhere.
As I explained previously, this will lead to the interbank rate being bid up if there are no excess reserves in the system. When that happens, the central bank buys assets from banks in exchange for new reserves (instead of outright buying, a repurchase agreement may be made).
However, banks also have the option to directly borrow reserves from the central bank, at a fixed interest rate.
Is that correct?
Do you work in finance? Can you recommend any books on money?
I do not work in finance, but I became curious about such things when the financial crisis hit. I ended up reading (among other things) Understanding Modern Money by the economist Randall Wray and the more populist 7 Deadly Innocent Frauds by the former trader Warren Mosler. Those books were the first time that I glimpsed a coherent view of what "reserves" and related topics are (seriously, almost every traditional media mention of the word "reserves" is a bit confused in some way - this really should be a topic in school curricula).
Since then I've just been piecing more things together by following blogs and tracing their statements back to original papers, including things like the actual text of the Basel regulation agreements and corresponding national laws (of Germany, where I'm from) and central bank publications.