13 Aug 2015

QE and the USD

Dollar 20 Comments

Today at his blog Krugman writes:

China has experienced a very large real appreciation since 2011, partly due to higher inflation than in its trading partners, partly because its dollar peg means that it has tagged along with the rising dollar (which was supposed to plunge due to QE, but never mind)…

In other words, Krugman was ridiculing those who had warned that QE would depreciate the dollar.

OK here’s the chart:

The dollar clearly fell in November 2010 with the start of QE2, it clearly strengthened once QE2 ended, and it strengthened sharply once QE3 began tapering off.

Yes, the dollar in absolute terms against other currencies was bolstered since 2008 because people are panicked and rushed into US Treasuries, but the notion that the dollar’s current strength refutes the people warning about QE is misleading at best. The above chart makes perfect sense with the people saying QE would lower the dollar, except for the period of QE3 where the Fed’s balance sheet grew rapidly while the dollar stayed in a tight range.

Incidentally, you know which economist came out and said QE2 had “worked” partially through weakening the dollar? You get one guess.

20 Responses to “QE and the USD”

  1. Tel says:

    Yes, the dollar in absolute terms against other currencies was bolstered since 2008 because people are panicked and rushed into US Treasuries

    Don’t forget the debt deflation though. If banks can create money by fractional reserves, then unwinding those banking actions must (by symmetry) destroy money. This makes it much more valuable to be holding cash at the time. Thus the QE helicopter dump and the debt deflation have opposite effects on the value of the dollar. The Cantillon is double because the failing mortgages happen in one sector of society and the Fed injections enter somewhere else (thus, the wealth transfer).

    • Jim says:

      I have been thinking this is the case (although I think the standard picture of the fractional reserve system is wrong).

      I think QE’s failure to inflate and private sector debt issues are actually related (I wish Dr. Murphy could straighten some of this out for me). Given the way the system works today, bank lending literally creates money by fiat. This happens apart from reserves, which are usually sought (and always found, even at the Fed if necessary) after loans are made.

      I’m guessing (which probably isn’t worth much) that QE temporarily weakened the dollar for 2 reasons. One, because toxic assets/longer term treasuries were purchased and money, in very small part, was provided directly to the non-bank (shadow bank) in the “private sector” (but not main street) – hence the runup in stocks, Manhattan real estate, etc.

      Two, the rest of the world temporarily dumped dollars out of fear. It was a temporary market reaction.

      The rest of the QE money actually ended up in bank reserves (since that’s who owned the assets/treasuries). This did nothing more than put downward pressure on interest rates – which, because of the massive private sector debt, goes unused and leaves the banks overcapitalized.

      In short, banks are currently the main mechanism by which money is created, and this via loans, and there aint none to be had.

      The only OTHER thing that will weaken the dollar would be massive deficit spending by the government. Since I thought what we’ve seen is exactly that, what’s needed to create inflation must pail in comparison to what’s going on now.

      Of course, outright monetizing of the debt would do it also but our current system prevents that.

      • Levi Russell says:

        “Given the way the system works today, bank lending literally creates money by fiat. This happens apart from reserves, which are usually sought (and always found, even at the Fed if necessary) after loans are made.”



        • Andrew_FL says:

          Levi, thanks for the link, Julien’s one of the better bloggers out there.

        • skylien says:

          Thanks for that blogger, didn’t know him. He writes interesting stuff.

        • Jim says:

          Levi, thanks. I had been looking for a rebuttal for this view and never found one. In fact, I thought nothing was posted because it was simply objective fact.

          I haven’t read through the article (and its references) thoroughly yet but I’m looking forward to it.

          Economist Steve Keen frequently makes the point that this was simply known since 1969 and economists are simply ignorant about the way the banking system works.

          Thanks again. I’ll probably be back with more questions since this is the first real attempt to explain it from an opposing point of view. Even Dr. Murphy didn’t do it in his debate with Warren Mosler.

          • Jim says:

            ” … this is the first real attempt to explain it …”

            Sorry. I should have added “that I’ve found.”

          • Levi Russell says:


            I’m just glad I had an opportunity to point y’all to Julien’s blog. If I want to know something, anything, about the collision of banking and economics, I ask him.

            I have a post on my own blog from March with a bunch of links to his other posts on MMT and banking after the financial crisis. Very good stuff:


            • skylien says:

              Of course Julien is not as good as Bob!


        • Jim says:

          Okay. Can you let me know if I have this correct?

          This article: http://spontaneousfinance.com/2013/12/17/the-problems-with-the-mmt-derived-banking-theory/

          says “[banks] try to attract depositors as they provide banks with more funds to lend. Of course they don’t lend out the deposits but the increase in reserves that comes along an increase in deposits allows the bank to lend more without risking a depletion of its reserve base.”

          So, the fractional reserve story is still wrong. The fractional reserve example is:

          1) I deposit $100
          2) The bank can load $90 of it (given it needs a 10% reserve).

          However, if I read Julien correctly, the entire deposit is the reserve. So:

          1) I deposit $100
          2) The bank can lend $1000 since the $100 is now it’s reserve.

          So the bank STILL literally creates $900 by fiat. This is still “endogenous” money. Isn’t it?

          What am I missing?


          • Jim says:

            Obviously, this is wrong. The 2 examples cite an 84% and a 126% loan/deposit ratio. In my example that would be a 1000% loan/deposit ratio.

          • Tel says:


            Note that for an individual expansionist bank to inflate warehouse receipts excessively and go out of business does not require a bank run; it doesn’t even require that the person who eventually receives the receipts is not a customer of banks. This person need only present the receipt to another bank to create trouble for the Rothbard Bank that cannot be overcome.

            For any one bank, the more it creates fake receipts, the more danger it will be in. But more relevant will be the number of its banking competitors and the extent of its own clientele in relation to other competing banks. Thus, if the Rothbard Bank is the only bank in the country, then there are no limits imposed on its expansion of receipts by competition; the only limits become either a bank run or a general unwillingness to use bank money at all.

            On the other hand, let us ponder the opposite if unrealistic extreme: that every bank has only one customer, and that therefore there are millions of banks in a country. In that case, any expansion of unbacked warehouse receipts will be impossible, regardless how small. For then, even a small expansion by the Rothbard Bank beyond its cash in the vaults will lead very quickly to a demand for redemption by another bank which cannot be honored, and therefore insolvency.

            One force, of course, could overcome this limit of calls for redemption by competing banks: a cartel agreement among all banks to accept each other’s receipts and not call on their fellow banks for redemption. While there are many reasons for banks to engage in such cartels, there are also difficulties, difficulties which multiply as the number of banks becomes larger. Thus, if there are only three or four banks in a country, such an agreement would be relatively simple. One problem in expanding banks is making sure that all banks expand relatively proportionately. If there are a number of banks in a country, and Banks A and B expand wildly while the other banks only expand their receipts a little, claims on Banks A and B will pile up rapidly in the vaults of the other banks, and the temptation will be to bust these two banks and not let them get away with relatively greater profits. The fewer the number of competing banks in existence, the easier it will be to coordinate rates of expansion. If there are many thousands of banks, on the other hand, coordination will become very difficult and a cartel agreement is apt to break down.

            • Major.Freedom says:

              One of the ironies that dominates anti-capitalist thought is that on the one hand, there is an almost universal revulsion against individual selfishness, that is at best a nuisance and at worst the one driver that would end all civilization, while on the other hand, it is almost always indvidual selfishness that they underestimate as the best solution to the social problems they think about.

              One example is monopoly. There is the argument that capitalism won’t work because individual selfishness will lead to a perpetual increase in monopolization, logically until there is one or at most a few mega-multinationals that “own us all.”

              Yet it is precisely individual selfishness that breaks the counterproductive mergers and acquisitions and ensures a balance.

          • Cosmo Kramer says:

            There are some issues with spontaneous finance. It makes incorrect charges against MMT and BOE writings.

            They would say that the reserve requirement is effectively non existent.

            Deposits support loans with capital.

            Reserves can be obtained after the fact, if they are indeed short. Lending decisions are made cognizant of this and interest charges reflect the difference between borrowing at the target rate and the lending rate to the public.

  2. Adrian Gabriel says:

    Indeed what is occurring with China is a currency war of sorts. Through the purchasing of foreign reserves, China has thus issued more of it’s own creating inflation. China’s Central Bank is essentially creating a bubble by trying to maintain a peg, and now that they further manipulate (which seems like a free-float since the currency’s value is supposed to fall) the US gets mad because they want to be the ones that create the international monetary circumstances. It seems that China will experience a flight of investment for further currency depreciation, hence the falling stock market, Furthermore the US will realize their inventories have built up due to currency distortions and especially excessive monetary stimulus: http://www.zerohedge.com/news/2015-08-13/business-inventories-surge-most-29-months-sales-ratio-signals-recession-imminent

  3. Andrew_FL says:

    Given that the Dollar Index is probably the indicator most affected by completely different variables-especially the monetary policies of other countries-finding any relationship at all is impressive, if you ask me.

  4. Anonymous says:

    other than US are doing their QE as well

  5. Levi Russell says:

    In Krugman’s world, forex markets only exist when it’s convenient for his hydraulic Keynesianism.

  6. Major.Freedom says:

    The Fed can introduce any name it wants.

    All they do is repeatedly press CTRL+P.

    “QE” is really just pressing CTRL+P at a quicker than “normal” frequency.

    Nothing fundamentally changed in what the Fed did with QE. They are always engaging in the same activity that “QE” is meant to refer, and have been since 1913.

    Krugman has an ideological incentive to cherry pick particular comments out of the millions of them, that consists of incorrect predictions made from people he identifies as his ideological opponents.

  7. Yogi says:

    Also, China’s trade surplus then was $20-30 billion per month and now it is pushing $50 billion a month, but there is no doubt that the Renminbi was hugely undervalued then and it is immensely overvalued now 🙂

    I am sure Krugman will come up with some reason for why things are completely different now and only a fool (like Trump presumably) would argue otherwise, but back then, his entire argument was to point at the trade surplus and shrug at the retarded people who doubted that China was a currency manipulator, like thus:


Leave a Reply