23
Nov
2010
Quantitative Easing Explained Explained
[Sic.]
So the video itself got more than 2 million hits in the first week. The interview with its creator currently has 810 views. You heard it here first (and last).
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I get that everyone wants to be an arm chair central banker these days, but this video represents another round of ignorance going viral. So many inaccuracies and lies in this video. To name a few:
-QE is not printing money. This is a huge misstatement. QE is an asset swap
-deflation is good? Right, wage deflation makes servicing debt easier.
-it describes monetary policy all wrong by claiming reserves are net new money. False.
-the video claims the Fed buys bonds from the Treasury. This factually inaccurate, and illegal. The Fed buys bonds from banks.
-the video claims the Fed pays Goldman the worse price. This is made up, and factually inaccurate.
-the video claims the Fed buys bonds from the Treasury. This factually inaccurate, and illegal. The Fed buys bonds from banks.
What difference does it make? Its just an extra step, a middle man. The banks wouldn’t buy all these treasuries if they didn’t know the Fed stood there to take them off their hands at any time.
“What difference does it make? Its just an extra step, a middle man”
If the Fed bought directly from the Treasury it would have zero impact on reserve balances because the money would go into the Treasury’s account at the Fed rather than into the banking system. By cutting out the ‘middle man’, there is no change to the duration or composition of private sector assets. What you are describing is the equivalent of writing a check to yourself and placing it in your savings account.
“The banks wouldn’t buy all these treasuries if they didn’t know the Fed stood there to take them off their hands at any time.”
This is incorrect as well. Federal deficit spending creates reserves, which are later mopped up with the issuance of Treasury securities.
Just wondering: why should the system make servicing debt artificially easy? Is debt-based finance so clearly the best approach that it needs a government subsidy?
AP Lerner wrote:
-the video claims the Fed buys bonds from the Treasury. This factually inaccurate, and illegal. The Fed buys bonds from banks.
-the video claims the Fed pays Goldman the worse price. This is made up, and factually inaccurate.
Which is it, AP? Does the video say the Fed buys from the Treasury, or from the Goldman Sachs?
(The answer is (b) of course.)
“Which is it, AP? Does the video say the Fed buys from the Treasury, or from the Goldman Sachs?
(The answer is (b) of course.)”
Actually, the answer, of course, is not (b). It is, of course, exactly what I said, which is both.
At minute 3:19, the cute little cartoon says the Fed buys bonds from Goldman. Then, at minute 3:29, the cute little cartoon says the Fed buys bonds from the Treasury.
Since cute little cartoons seem to have a fair amount of credibility these days, here’s one that actually correctly explains QE
http://www.youtube.com/watch?v=IcEkCUmo47A&feature=player_embedded
QE is a horrible policy, but, with all due respect, for none of the reasons you claim.
AP, what are you talking about?? Seriously, I know we have a lot of fights here, but you are totally wrong. Go watch the cute little video from 3:19 onward. The entire point is that the Fed does NOT buy from the Treasury directly, but from the Goldman Sachs.
At 3:29, the bear says, “If you want to buy bonds, you can do so from the Treasury, right?” So unless you think the left bear is supposed to BE the Ben Ber-nank, I don’t know what you are talking about.
You got me. I misheard the cute little bear. I surrender that point. I thought the cute little bear meant the Fed when he said he could buy directly from the Fed.
Of course, this changes nothing about the inaccurate and false description of QE in the video.
Ahhhh, victory!
In all seriousness, AP, I appreciate it. It makes me think it worthwhile to continue battling–I mean seeking the truth on other matters.
I like your thing about asset bubbles even though no new assets on net being created; I have to think about that.
And please don’t mistaken me correcting your errors on monetary operations as a ‘fight’. I’m a nonviolent person at all times 🙂
AP Lerner,
“-QE is not printing money. This is a huge misstatement. QE is an asset swap”
It is an asset swap of treasuries for money that didn’t exist until the Fed printed it. How does that not create new money? When private investors buy treasuries, the government gets more money and the private buyers have that much less money, so no new money is created. When the Fed buys treasuries from the private buyers, the private holders get new money but there is no corresponding decrease in the assets of any other party.
Also, you say that a dollar is a liability of the federal government. How is that true if the dollar is not redeemable for anything?
“Then, at minute 3:29, the cute little cartoon says the Fed buys bonds from the Treasury.”
No, it doesn’t.
“When the Fed buys treasuries from the private buyers, the private holders get new money but there is no corresponding decrease in the assets of any other party.”
False. There is a decrease in Treasury assets. Treasury assets are replaced with reserves. Nothing new is created.
I meant to say there is no money loss for any other party. Yes the treasury assets are replaced with reserves, but it’s reserves that didn’t exist until the Fed printed them, and now they are part of the economy. New money was created and used to purchase existing treasuries. There are now fewer treasuries in the economy and more money. Assuming those new reserves are lent out at some point, how would that not be inflationary? No one else’s cash balance had to decrease for these reserves to be created.
It seems to me that by your logic, if the Fed printed money to buy a yacht from someone, you could say that the Fed is just swapping a less liquid asset for a more liquid asset and not creating anything new. But clearly new money would be entering the system in that scenario.
And please explain how a dollar is a liability of the federal government.
AP, I think you might get your point across better, if you said, “Yes they create new money, but they destroy Treasury securities at the same time. And in this environment, that is effectively a pointless operation.” When you keep insisting that “no new money” is being created, people think you don’t understand that the Fed creates new reserves.
Incidentally everyone, *I* am not saying that QE destroys Treasury securities. But I think that’s what AP believes, and so I’m just coaching him on how better to get people to see his view.
“When you keep insisting that “no new money” is being created”
Actually, I never insisted on ‘no new money’ is being created. I insist no new net financial assets have been created. Big difference.
Private sector balances become more liquid, and the composition of private sector balance sheets change, but do not increase.
“people think you don’t understand that the Fed creates new reserves.”
Then I guess my debate skills are not clear enough for some, but you got my point.
thanks for the coaching 🙂
AP said:
Actually, I never insisted on ‘no new money’ is being created.
OK, then my new coaching suggestion. Don’t start off your critique of the video with this objection:
-QE is not printing money. This is a huge misstatement. QE is an asset swap
…if you actually don’t mean to say that QE is not creating new money. 🙂
“OK, then my new coaching suggestion. Don’t start off your critique of the video with this objection:”
Ok, got it. But to be fair, anyone paying attention (and I know you have been paying attention) knows in a prior post in response to someone asking ‘is the Fed creating
cash or not’ I very clearly responded ‘Yes. But that’s only one half of the transaction. It is also removing an asset ‘
http://consultingbyrpm.com/blog/2010/11/a-question-for-the-money-printers.html
I feel like all your wonderful coaching advice has caused a slight distraction, and we have gotten off topic. And the original topic was your misrepresentation of the operational realities QE and that you believe QE creates net new financial assets, adds to the money supply, and will cause inflation. All of this is incorrect and becomes obvious when you understand the mechanics of a QE transaction and better understand the monetary system of the US
Also, I feel it’s only fair to return the favor of free coaching advice, since you have been so kind to donate some free advice to me. My free advice to you: fully understand the mechanics and operational realities of a policy such as QE before critiquing the policy 🙂
QE is a horrible, but for none of the reasons you cite.
I think you may find this link helpful.
http://pragcap.com/mechanics-qe-transaction
Am I the only one who sees this? Is it because I’m taking crazy pills, or AP Lerner keeps contradicting himself every few sentences?
AP Lerner in his latest writes:
Ok, got it. But to be fair, anyone paying attention (and I know you have been paying attention) knows in a prior post in response to someone asking ‘is the Fed creating
cash or not’ I very clearly responded ‘Yes. But that’s only one half of the transaction. It is also removing an asset ‘
http://consultingbyrpm.com/blog/2010/11/a-question-for-the-money-printers.html
I feel like all your wonderful coaching advice has caused a slight distraction, and we have gotten off topic. And the original topic was your misrepresentation of the operational realities QE and that you believe QE creates net new financial assets, adds to the money supply, and will cause inflation.
AP Lerner, you obviously have not “got it” yet: You keep saying that the money supply is not changed by QE, and then when I beg you to stop saying that, you answer, “OK fine, but any idiot would know that I understand the money supply goes up because of QE2.”
What I think is happening is that you don’t see any distinction between “money” and “net financial assets,” and then when your critics keep going nuts on that, you begrudgingly concede the point, then go right back into accusing them of ignorance since they seem to think money and financial assets are distinct things.
““OK fine, but any idiot would know that I understand the money supply goes up because of QE2.””
Uh, exactly where did I say that? I never said the net money supply goes up from QE2. I have said, consistently, and repeatedly, QE is nothing more than an asset swap. I have stated, pretty clearly, that for ever dollar in reserves added to the private sector, a dollar in treasuries is removed. The net impact to the private sector is zero. It’s an asset swap.
“What I think is happening is that you don’t see any distinction between “money” and “net financial assets,””
Actually, what I think is happening is you don’t understand the distinction (or lack of) between reserves and treasury securities.
Let’s try this a different way: maybe you could explain how, despite all the massive money printing you claim is taking place from QE, why is the money supply shrinking?
http://www.shadowstats.com/alternate_data/money-supply-charts
I’ve been reading the brilliance of AP “Hut Tax” Lerner for months now. He’s a Chartalist, a follower of the wacky ideas of Warren Mosler, L. Randall Wray and Bill Mitchell. If you are curious as to the origins of the “Dr. Hut Tax” moniker, go to page 26 of this book by
Warren Mosler, APLerner’s hero, and learn of the marvels of the hut tax inflicted by the imperialist British upon subjugated locals. It’s quite an example of the grisly, immoral nature of the Chartalist mind:
The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops.
He says stuff like this:
It’s hard to take Robert Murphy serious as an economist since he has bought into all the usual neo-liberal myths, and very clearly is clueless regarding the monetary system of a country like the US.
He asks questions like these:
1) Could you explain the errors in this essay by Paul McCulley?
http://www.pimco.com/Pages/GCBFocusJuly2010FactsontheGround.aspx
Specifically, could you please explain the relationship between the public, private, and external balances of the ecnomy? Is this graph just a coincidence?
http://cdn.creditwritedowns.com/wp-content/uploads/2010/07/Pimcos_double_entry_bookkeeping.gif
2) If the US government represents a credit risk as you claim, could you explain why rates on US government securities continue to fall despite an increasing deficit and the repeated claims by Peter Schiff that bankruptcy is imminent?
3) If the government is revenue constrained as you claim, could you explain why entering WWII was not contingent on the completion of a bond auction? Could you explain why TARP was passed without seeking funding first? Could you explain why all government spending initiatives are not contingent on financing?
4) This one may be extremely difficult, but could you please address the flaws in this essay by a real economist, Bill Mitchell
http://bilbo.economicoutlook.net/blog/?p=11444
These guys insist that the study of catallactics does not matter now that we are in a fiat money regime [because there are no people???]. They also insist that the government is never “revenue constrained” and that government deficits are necessary to provide private savings.
My prior link to the Mosler book must contain errors. I think this one works:
http://moslerforsenate.com/wp-content/uploads/2010/06/7DIF.pdf
Warren Mosler states that US Government spending of dollars is not operationally constrained by revenues, and will pay $1 million to any senatorial candidate on the ballot who can prove he’s wrong.
Because he does understand that there are no operational constraints, Warren Mosler is uniquely qualified to propose the right policies to fix the American economy and quickly restore full employment and prosperity.
A 37 year ‘insider’ in monetary operations, Mosler knows as a fact of actual monetary operations that, operationally, there is no such thing as the US government running out of dollars, being dependent on foreign borrowing, or potentially facing a solvency crisis like Greece. Nor is there any financial reason to cut Social Security or Medicare benefits. To make the point, he’s offered to pay $1 million of his own money to any of his Senatorial opponents on the ballot who can prove him wrong. ‘Those fears come from pure fear mongering from supposed experts, with no factual basis, and those unwarranted fears are the true obstacles to the return of full employment and prosperity’ said Mosler.
http://moslerforsenate.com/
I suppose that if and when the government runs out of money, it will just send out the Einsatzgruppen to replenish its coffers. Unconstrained, indeed.
I think the key to understanding QE, and standard textbook (keynesian) economics, comes at exactly 7:00:
“Economics, monetary policy, all these concepts are totally manmade. It’s not like physics or chemistry where there’s a direct tie to the world around us.”
1. I would add that Keynesian “economics” exists to obfuscate and disguise the surreptitious theft of purchasing power, wealth and assets which is the essence of a fiat money system. The relatively simple thefts and scams are hidden behind a veneer of incomprehensible jargon. and mechanical complexities.
2. In addition to the brilliant content of this video is the incredible comic timing of the video creator. Stuck with the inherent deadpan dialogue of the format, he’s produced an absolutely marvelous comic gem.
Agreed…it’s critical that everyone realizes that this stuff isn’t natural, but a game set up by a bunch of thieves to rob and enslave you.