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WTF is QE?; Does Stimulus Stimulate?
Topic Started: 4 Sep 2015, 07:28 AM (7,642 Views)
Andrew Judd
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Terry
5 Sep 2015, 04:27 PM
Yes, I see your problem. You cannot deal with QE being referred to as a metaphor for money printing. You're not the only one. It's a real bug bear for many people.

Or perhaps you're trying to say that money printing is a boogeyman with no validity or impacts in the real world.
please explain to me why it is a form of money printing (that matters)
Edited by Andrew Judd, 5 Sep 2015, 04:30 PM.
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Loki
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Andrew Judd
5 Sep 2015, 04:22 PM
A banknote and an equivalent savings deposit amount are not equivalent forms of money.
False equivalence. Deposits are not traded, bonds are.
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If you could remove my savings deposit by force and give me cash what difference does it make to me?
None, because deposits are not traded. See above.
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Yes QE has been targetted at the so called risk free end of the spectrum. And? What is your point about that?
My point is that large institutions used to buy credit grade assets like treasuries, but can no longer do so because the yield does not cover their liabilities. This has forced them into riskier assets, pushing up the price of those riskier assets (In some cases this has forced up premiums, which hits disposable income). This was entirely intentional by the Fed. They believed that rising prices in risk assets would lead to consumer spending rather than saving, and the the lower risk free rate would encourage credit creation.
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I did read your earlier posts (earlier). I could not see what you were getting at.
If you are most specific with your questions, I will give you direct answers.


“Talk sense to a fool and he calls you foolish.” - Euripides
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Andrew Judd
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Loki
5 Sep 2015, 04:35 PM
False equivalence. Deposits are not traded, bonds are.

None, because deposits are not traded. See above.

My point is that large institutions used to buy credit grade assets like treasuries, but can no longer do so because the yield does not cover their liabilities. This has forced them into riskier assets, pushing up the price of those riskier assets (In some cases this has forced up premiums, which hits disposable income). This was entirely intentional by the Fed. They believed that rising prices in risk assets would lead to consumer spending rather than saving, and the the lower risk free rate would encourage credit creation.

If you are most specific with your questions, I will give you direct answers.
OK we agree on an important point. QE drives people into riskier assets.

If we agree on that I cannot see why we cannot agree that QE is effectively an asset swap. Instead of a super safe asset producing interest a person choses to sell for cash for an almost identical position where they can then buy an almost similarly safe asset earning the interest they want to achieve. This then feeds down the line so even the riskiest assets have more demand.

The money printing idea stressed by Terry entirely misrepresents what QE is doing.

I am lost as to why you think bonds being traded makes them so different from a savings deposit.
Edited by Andrew Judd, 5 Sep 2015, 04:41 PM.
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Sydneyite
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Loki
5 Sep 2015, 04:35 PM
My point is that large institutions used to buy credit grade assets like treasuries, but can no longer do so because the yield does not cover their liabilities. This has forced them into riskier assets, pushing up the price of those riskier assets (In some cases this has forced up premiums, which hits disposable income).
What evidence do you have that INSTITUTIONS (ie banks I presume you mean?), have stopped buying treasury bonds and instead are buying riskier assets for yield? And what "liabilities" exactly do you think they need to cover with the bond yield?

I would agree that the low yield on treasuries certainly causes other market players (say super funds, individual investors, companies, and so forth) to chase yield through riskier assets, but banks cannot hold those type of assets profitably because the risk-weighting is too high compared to reserves and bonds etc. I think you will find banks buy just as many bonds as they always have - under QE of course a lot were swapped with the Fed for cash reserves instead.
Edited by Sydneyite, 5 Sep 2015, 04:47 PM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Terry
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Andrew Judd
5 Sep 2015, 04:40 PM


The money printing idea stressed by Terry entirely misrepresents what QE is doing.

No, I didn't. I said that people perceive QE as money printing in metaphorical terms. One description I liked was "it looks like a financial perpetual motion machine that creates value out of nowhere." And the questions: Where are the hidden costs? Where is the printed value being redistributed from? What real value is it diluting?
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Loki
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Andrew Judd
5 Sep 2015, 04:40 PM
OK we agree on an important point. QE drives people into riskier assets.
As it is intended to do. The secondary effect of this was supposed to be a "wealth effect". That is, people were supposed to feel that their retirement nest egg was sufficient and secure, and go out and spend their disposable income rather than saving it.
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If we agree on that I cannot see why we cannot agree that QE is effectively an asset swap.
It is an asset swap, but it is not as asset swap like swapping a bond for equity, because this type of asset swap changes the price of the bond.
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Instead of a super safe asset producing interest a person choses to sell for cash for an almost identical position where they can then buy an almost similarly safe asset earning the interest they want to achieve.
No, they can't. That is exactly the point. They sell their bond, and in the process of doing so (in aggregate), the price of the bond goes up (lowering the yield). They can no longer buy the same asset, with the same yield, for the same price.
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The money printing idea stressed by Terry entirely misrepresents what QE is doing.
Where does the money come from to buy the bonds? How does the Fed's balance sheet go from $800B to $4T if they didn't "print" money to buy the bonds?
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I am lost as to why you think bonds being traded makes them so different from a savings deposit.
Because by trading them, the market prices them. That is, the bond market is a price discovery mechanism for the cost of risk-free credit.


“Talk sense to a fool and he calls you foolish.” - Euripides
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Foxy
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Zero is coming...

Andrew Judd
5 Sep 2015, 04:40 PM
OK we agree on an important point. QE drives people into riskier assets.

If we agree on that I cannot see why we cannot agree that QE is effectively an asset swap. Instead of a super safe asset producing interest a person choses to sell for cash for an almost identical position where they can then buy an almost similarly safe asset earning the interest they want to achieve. This then feeds down the line so even the riskiest assets have more demand.

The money printing idea stressed by Terry entirely misrepresents what QE is doing.

I am lost as to why you think bonds being traded makes them so different from a savings deposit.
http://www.dailymail.co.uk/news/article-2781153/Payday-loans-written-1million-people-Wonga-founder-walked-4million-payoff-left.html

Very hard to pay the money back.

Peter
http://www.afr.com/content/dam/images/g/n/2/1/u/8/image.imgtype.afrArticleInline.620x0.png/1456285515560.png
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Loki
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Sydneyite
5 Sep 2015, 04:47 PM
What evidence do you have that INSTITUTIONS (ie banks I presume you mean?), have stopped buying treasury bonds and instead are buying riskier assets for yield? And what "liabilities" exactly do you think they need to cover with the bond yield?

Not banks. Mostly insurance companies and pension funds. The flip side is certain institutions who are not permitted to go above a fixed weight of risky assets, who are now underfunded relative to liabilities. Defined benefit funds and writers of annuities in particular.
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I would agree that the low yield on treasuries certainly causes other market players (say super funds, individual investors, companies, and so forth) to chase yield through riskier assets, but banks cannot hold those type of assets profitably because the risk-weighting is too high compared to reserves and bonds etc. I think you will find banks buy just as many bonds as they always have - under QE of course a lot were swapped with the Fed for cash reserves instead.
Yes, institutions other than banks. Banks need bonds for collaterized lending. QE programs are starting to break the liquidity of bond markets as the central bank owns too many bonds and market breadth has contracted sharply. This is why Sweden's Riksbank lost control of monetary policy in June this year, and it's why the Fed is so desperate to raise the funds rate. Banks have basis exposure to term deposits, but the tenors are so short, and the margins so wide that it is largely irrelevant.


“Talk sense to a fool and he calls you foolish.” - Euripides
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Andrew Judd
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Terry
5 Sep 2015, 04:56 PM
No, I didn't. I said that people perceive QE as money printing in metaphorical terms. One description I liked was "it looks like a financial perpetual motion machine that creates value out of nowhere." And the questions: Where are the hidden costs? Where is the printed value being redistributed from? What real value is it diluting?
If you want to talk about what people perceive QE to be then that is fine.

I am asking you what you think and why you think it.

And already I am reaching the limits of my patience in waiting for you to respond in a manner that indicates you are prepared to share what you do think without playing games.

If you want to make a difference to the World I think it is better you simply say what you think and get on with it.

Terry
5 Sep 2015, 03:36 PM
It provides a framework by which financial institutions can lend to the public to maintain the status quo.
Please explain so that your meaning can be understood


Loki
5 Sep 2015, 05:00 PM
As it is intended to do. The secondary effect of this was supposed to be a "wealth effect". That is, people were supposed to feel that their retirement nest egg was sufficient and secure, and go out and spend their disposable income rather than saving it.

It is an asset swap, but it is not as asset swap like swapping a bond for equity, because this type of asset swap changes the price of the bond.

No, they can't. That is exactly the point. They sell their bond, and in the process of doing so (in aggregate), the price of the bond goes up (lowering the yield). They can no longer buy the same asset, with the same yield, for the same price.

Where does the money come from to buy the bonds? How does the Fed's balance sheet go from $800B to $4T if they didn't "print" money to buy the bonds?

Because by trading them, the market prices them. That is, the bond market is a price discovery mechanism for the cost of risk-free credit.
You are deciding that government cash and government ultra liquid bonds are totally different forms of money.

Best leave it at that.

For the record when the bonds are sold to the fed the person can buy a similar instrument. I never said or meant to imply they buy the same instruments - although that could be done.
Edited by Andrew Judd, 5 Sep 2015, 05:35 PM.
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Loki
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Andrew Judd
5 Sep 2015, 05:19 PM
You are deciding that government cash and government ultra liquid bonds are totally different forms of money.
No, you haven't understood at all. Why do you think it is called Quantitative Easing?
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Best leave it at that.
That would be my recommendation for you.
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For the record when the bonds are sold to the fed the person can buy a similar instrument.
Give me an example. What is a credit instrument similar to a treasury bond?
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I never said or meant to imply they buy the same instruments - although that could be done.
It's irrelevant. Every credit instrument has a credit rating and a price. For corporate bonds the price is set by the market. For US treasuries the price is now set by the federal reserve. Do you understand how supply and demand affect price?


“Talk sense to a fool and he calls you foolish.” - Euripides
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