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WTF is QE?; Does Stimulus Stimulate?
Topic Started: 4 Sep 2015, 07:28 AM (7,632 Views)
Jimbo
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WTF is QE?

In my mind, a central bank buys all of the shit that nobody else really wants. This increases the demand on the shit that nobody else wants and forces up the price (and reduces the yield).

The people who sold the shit now have more money, the central bank that bought the shit now have more shit.

The people who now have money instead of shit, try and chase yield. So they invest in anything that offers yield.

So they pump their recently exchanged "shit for money" into stocks, carry trades, property.

And up they go like a balloon.

Puff puff.

But (correct me if I am wrong), wasn't a proportion of every dollar pumped into the balloon once a piece of shit that someone was trying to get rid of?

Hasn't every piece of shit bought by a central bank. ended up inflating a market somewhere or another?

Has an unpayable mortgage from 2006 been pumped into the ASX or the DOW? If so, where does it end?

Can anyone on here give me an example of where QE has worked in the past?

Thoughts are invited......Please explain.


Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be :?: rising.
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Andrew Judd
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Jimbo
4 Sep 2015, 07:28 AM
WTF is QE?

In my mind, a central bank buys all of the shit that nobody else really wants. This increases the demand on the shit that nobody else wants and forces up the price (and reduces the yield).

The people who sold the shit now have more money, the central bank that bought the shit now have more shit.

The people who now have money instead of shit, try and chase yield. So they invest in anything that offers yield.

So they pump their recently exchanged "shit for money" into stocks, carry trades, property.

And up they go like a balloon.

Puff puff.

But (correct me if I am wrong), wasn't a proportion of every dollar pumped into the balloon once a piece of shit that someone was trying to get rid of?

Hasn't every piece of shit bought by a central bank. ended up inflating a market somewhere or another?

Has an unpayable mortgage from 2006 been pumped into the ASX or the DOW? If so, where does it end?

Can anyone on here give me an example of where QE has worked in the past?

Thoughts are invited......Please explain.


If you have decided the best government debt assets are junk then i suppose nobody is going to change your mind.
Edited by Andrew Judd, 4 Sep 2015, 07:59 AM.
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When ALL else fails greater desperation is needed, basically to aviod complete economic collapse, social collapse and lead to the next world war sooner. Those in power througout the world dont want it to collapse on their watch, they would lose their wealth ,retirement plans and possibly job too. When you have interest rates at zero you cannot cut those any further, with 100%lvrs , you cannot go any further despite this we had 105% and I recently saw 110% here if your parents ransom their home against your loan.

What I would luv jimbo is for people to explain to me where you go from 0% rates and 100% lvrs. The fact is , nothing can grow or be sustained beyond those levels. As a result growth dies and decline set in. With all else failing, the desperstion sets in, and out comes the QE. QE is an admission that things are collapsing further, that zero rates for seven years was not enough, and that ALL QEs that came before it have failed on top of the zero rates.

It shows us that QE does not work, and is just a delay of worse consequences in future with more money owing than before. Our leaders dont want recessions on their watch, yet in the good old days a recession was a normal and healthy part of any economy, it rebalanced things and kept things under control, things found a point of grounding from which they could thdn move forward from.
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peter fraser
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Andrew Judd
4 Sep 2015, 07:58 AM
If you have decided the best government debt assets are junk then i suppose nobody is going to change your mind.
Maybe jimbo is thinking of the TARP program in the USA.
Any expressed market opinion is my own and is not to be taken as financial advice
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The Whole Truth
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Jimbo has described it accurately but I would go further and say that the money used is just debt.


In my mind, a central bank creates new debt for all of the shit that everyone bought with loans they can't afford to repay. This increases the demand on the shit that nobody can afford to repay and forces up the price.
The people who sold the shit now have less debt (which hopefully they can pay the interest on), the central banks that bought the shit now have more shit and more liabilities that can easily be passed onto the public via taxes as in the TARP deal. The people who now have less debt instead of shit, try and chase yield. So they borrow more to invest in anything that offers yield. So they pump their recently exchanged "shit for debt" into stocks, carry trades, property. And up they go like a balloon.

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The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008.
"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." John Stuart Mill
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QE is an admission that NOTHING else is working, and that nothing else will work, and without it, the more and more debt that is, it would just collapse. Like a well paid miner losing their job but not wanting to lose the 2 million dollar house he can no longer afford. He could sell off the house, paid down the debt, and be forced into a more humble existence. OR, he could kick the can down the road and apply for some quantative easing. In this case, another 100k loan from a bank or lender. He now has some QE, he can still pay the mortgage for now, pay the bills and not be kicked out for now. He has kicked the can down the road in the hope that things will improve in future and he will somehow get back his 250k a year mining job. QE here has avoided any collapse now, but he now owes more money than before with still no means of repaying it. That was QE1, it has not worked, he still has no job yet more money owing than before. Collapse is starring him in the face again, he goes to another lender to apply for QE2, a 150k loan to last a bit longer than the last one, surely that will work until he finds another high paying job. So he still LOOKS to be doing good, is still living beyond his means in his big house with nice car, but is he really doing good. Just like the US economy, is it really doing good, or it being made to look good through a charade of more debt owing than before. Where does it go from there, qe3, another 200k loan for this guy, then what qe4 with another 250k loan, surely that will work....wont it...

So what would happen without QE, well in the good old days, we would of had a correction, a recession, prices would find normality and drop back to sustainable levels.

The reasons zero rates wont work or that QE wont work, it because we have not had a proper correction, the fed is still trying to avoid it. And without a proper
correction, you will NEVER see a proper recovery, just a fake one, a short term fake one, before the next QE is needed.

The reasons the fed dont want a proper correction are because they know what that means this time round. It means a far greater fall than anything ever seen during the great depression such are the levels of debt throughout the housing and stock markets with many leveraged 90% into both, some 100%lvrs and more became the recipe for growth. The fed also know that unlike the last great depression, we did not face an overbundance of dirt cheap asain wages a mere fraction of their wages moving forward in the early thirties. The other fact is, the lastest round of debt expansion has been going ever since the last great depression. But is way out of hand by comparison with no REAL way forward economically. Anybody thinking otherwise is an ignorant fool void of the facts and reality and proof right in front of you.

Things have only been working throuh the never ending expansion of debt over decades. Problem is , we hit 100% lvrs , hard to move beyond that, hard to grow from that.

At 20% deposit, like the good old days, the bank would lend $4 for every dollar of deposit they recieved. And then they would recieve the interest from that loaned money. But since the days of 20% deposit, bankers and the LEADERS realized that lending more money would line fatcat pockets sooner with more cash, so along came the rapid expansion of debt. Now 10% deposit was required, the banks could now lend $9 for every $1 of deposit they recieved instead of the $4 lent for every dollar when 20% deposit was required. With more than double the money now loaned than before, the banks could make double or more the profit than before, making these bankers wealhier sooner, and why we are able to pay ONE worker, like gail kelly from the wespac, 15 million dollars per annum.

As we continue you will see why and why its also coming to an end. Above we saw the expansion of debt from 20% to 10% deposit and how lenders could now lend $9 for every dollar of deposit instead of $4 at 10%. At 5% deposit, debt can be expanded much further again..At 5% deposit, a lender can now lend $19 for every dollar of deposit, unlike the $9 before that, or $4 before that. With a 3% deposit , they can now lend $33 dollars for every $1 of deposit. And at 1% deposit, $99 dollars can be lent for every $1 of deposit. This being a 99%lvr, remembering we have had 100% and 105% lvrs too. A 99.5% lvr would see the banks lending nearly $200 for every dollar of deposit.

The FACT is, greedy bankers have used these tactics to the end degree, milked the system to the death, to the end, to the point that debt expansion can go no further. Its why zero rates are not working are seven years, why house prices are the same as ten years ago depsite these zero rates for so long. Its why qe1 did not work, why qe 2 3 4 did not work and why it will NEVER work.

So these are the facts boys and girls, and to top it all off, they now have to SOMEHOW TRY to compete with asain wages a mere fraction of theirs while dealing with this debt expansion issue that can go now further.

There are NO recoveries going on, just lies covered by further debt, FOR NOW. The whole thing is a charade, a conjob that somehow the economy can improve despite brickwalls beimg reached on all sides, wheather it be 0% rates, 100% lvrs, or wages you can no longer compete with as they are a mere.fraction of US wages. Kettles and toasters cost more here and in the US thirty years ago. 30 years ago, my mates oldman had a shop repairing toasters and the like in bondi junction. He would charge about $10 to $15 just to REPAIR.one thirty years ago, but now I can buy a brand new one for less than the reapir job of thrity yesrs ago. Needless to say he went out of buisiness about 20 or more years ago. Basically, you cannot compete with these dirt cheap wages. And now we also face the rapid rise of computerised automation , which not only puts more people out of work but is also a threat to these already dirt cheap asain labour jobs. And have you seen how they print houses nowadays ?

Hope that answers some of your QE questions jimbo.
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Sydneyite
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Andrew Judd
4 Sep 2015, 07:58 AM
If you have decided the best government debt assets are junk then i suppose nobody is going to change your mind.
Quite. :re: also some gross mis-conceptions I suspect re the mechanics of monetary policy and QE etc.

Also these guys may not be aware that QE in U.S finished over a year ago now, and TARP (which is not QE) finished years ago as well, with all the instos who were in TARP having paid back the funds in full, and then some! The U.S. Gov made a profit from TARP.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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The Whole Truth
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All debt assets are good investments when they are issued. If they weren't then nobody would buy them. But ultimately they are just that, debt. An investment that relies on someone elses ability to make a profit and pay it back.

It's no surprise the US debt and Australian debt (at almost all levels) continues to grow. No one has the ability to pay these debts back in full, hence more must be borrowed to allow economic growth and the repayment of the interest due plus a small proportion of the debt. At some point the total debt reaches a critical mass and even this strategy fails. As we see happening with Australia's economy just posting its worst nominal growth since 1962.

The property bulls yabbering away on this thread have no answer to that conundrum. Hence they avoid such threads like the plague. No growth means no normal appreciation in house prices, contraction means collapse in house prices and rents.
"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." John Stuart Mill
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Gossamer
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QE is money printing.
Common sense is a curse - those who have it need to suffer dealing with those who don't have it.

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b_b
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Jimbo
4 Sep 2015, 07:28 AM
WTF is QE?

In my mind, a central bank buys all of the shit that nobody else really wants. This increases the demand on the shit that nobody else wants and forces up the price (and reduces the yield).

The people who sold the shit now have more money, the central bank that bought the shit now have more shit.

And up they go like a balloon.

Puff puff.
I think what you may be referring to is QE1 (or TARP). This was different to QE2 and QE3.

QE1 was a program by the Fed to acquire loans with questionable value, in exchange for reserves in 2008/09. This preserved the balance sheets of the banks - because without it, there was a real risk of asset write-downs and bank liabilities (deposits) being greater than assets. A bail-in would have occurred, and deposits lost in exchange for equity with questionable value.

So QE1 was a type of money printing - in that without it, private sector money (deposits) would have been lost. Operationally however, it is nothing more than an asset swap.
Quote:
 
But (correct me if I am wrong), wasn't a proportion of every dollar pumped into the balloon once a piece of shit that someone was trying to get rid of?

Yes. The loans were troubled. But at the end of the day, the Fed did ok out of them. Here is a history of Fed profits paid to treasury over the years. Seems to have increased a lot since the GFC. I will explain why below.
Posted Image
Quote:
 
The people who now have money instead of shit, try and chase yield. So they invest in anything that offers yield.

So they pump their recently exchanged "shit for money" into stocks, carry trades, property.

No. This is incorrect on a number of fronts.

Firstly, the entities which received the TARP funds were financial institutions / banks. So the funds they received were "reserves" or "cash at the Fed". Reserves are never lent out or "spent out" to chase yield or for anything else for that matter. The roll of reserves is to facilitate and support banking operations - specifically to enable banks to settle transitions on behalf of customers. For more on this point you can read an excellent summary from S&P here.
https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_Me_8_14_13.pdf

Additional reserves also supports the expansion of a banks balance sheet. This could be by creating additional loans or (theoretically) buying shares commodities etc.

But a Bank can not simply go and buy shares or other risk assets. This is because banks are governed by risk ratios. A loan may require a bank to carry $4 of equity for every $100 of loan. But $100 of equity for every $100 of shares. It is simply not profitable for banks to buys loads of shares for capital gain. It ties up their balance sheet and renders their operations impotent.

So, why has the share market boomed?

The share market has boomed not because of QE. It has boomed because profits have boomed. (see below).
Posted Image

Quote:
 
Hasn't every piece of shit bought by a central bank. ended up inflating a market somewhere or another?

Has an unpayable mortgage from 2006 been pumped into the ASX or the DOW? If so, where does it end?


Thoughts are invited......Please explain.

After seeing that profits drove the share market higher (not QE), most people suggest QE boosted profits.

But this make no sense. As described earlier, QE is nothing more than an asset swap. Mortgages / Bonds for Cash. The process does not increase the net financial assets of the private sector unless the bonds are worth less than face value. And the seller of the bonds is not about to up their consumption of iPads because of QE (since most holders of bonds are financial institutions).

Profits have boomed because the labour market is weak. A weak labour market means weak labour share - and strong profit share of GDP. Nothing to do with QE. See chart below
Posted Image
Quote:
 
Can anyone on here give me an example of where QE has worked in the past?

I would argue QE1 worked. It prevented a wholesale bail-in for the US banking system. This preserved cash accounts, and allowed households and business to drawn upon their cash balances to continue on with their daily transactions. Without it, the US economy would have collapsed, and a global Depression would have followed.

Subsequent QE (reserves for high quality Bonds etc) has not worked. It has not worked because it is not stimulus. QE is nothing more than a swap (cash for Bonds). It has moved the privates sector's term savings (Bonds) into "at call" savings (cash). No additional financial assets / savings have been created.

In fact, I have often argued here the QE is really a tax. The private sector gives up high yielding bonds for low yielding cash. This is a net loss of income to the private sector (and a net gain for the Fed - Remember the chart I posted earlier). The increased profits from the Fed are remitted to the US Treasury. So operationally, it is no different to a tax.

That is why there has been no inflation from QE. in fact the evidence suggest is has been deflationary. Not only in the US, but also Japan where QE has been used since 2002.

But QE keeps interest rates low..right?
No - in fact the evidence suggests QE pushed up interest rates. Bond rates are simply a reflection of expected long term cash rates. Since QE is incorrectly seen as stimulus, the market "pulls forward" its cash rate expectations which increase the bond yields. The following chart shows it nicely The same rally in bond yields happened when QE 3 ended last year. So the evidence suggests QE increases interest rates. The end of QE caused rates to fall.
Posted Image

I hope that helps.
Edited by b_b, 4 Sep 2015, 02:46 PM.
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