1. Treasury spends into the real economy - the recipiants of the spending put the money in the banks and private deposits grow. 2. To settle with the private banks accounts, treasury trasnfers its cash balance at the CB to the Banks 3. Banks now have too many reserves earning a lower penatly rate of interest. Ie: too much liquidity 4. Treasury issue bonds to the banks to remove the liquidity so the CB can mantain its target interest rate 5. To settle the Bond trade with treasury, the Banks transfer its cash balances with the CB back to Treasury 6. Treasury now has a positive cash balance again, and the process can start over...
.......
Under QE The CB buys the exisitng bond from the banks and gives the banks more cash Normally this would create excess reserves in the banking system and push the interbank rate to near zero But the US is near zero anyway - so no real impact.
So shouldn't this then be:
7) Under QE, the CB then buys the existing bonds from the banks and gives the banks *more* cash reserves
8) As a result, the banks now have excess reserves, over and above what they would have had without QE. So they may choose to deploy these reserves into the purchase of other assets, such as shares, foreign currencies, commodities and so on. In doing so, they effectively deploy "new" money ($US) out into the economy don't they? Just as if they had written a new loan, and thus deployed "new" money when a borrower used that loan to say buy a house?
Eventually, the CB can "call in" this new money by selling bonds back into the market, or by letting them expire. In that sense, it's very similiar to a term loan issues by a bank normally to a borrower isn't it? Except in the QE case, the "borrower" is in effect the bank, and the "lender" is the CB.
For Aussie property bears, "denial", is not just a long river in North Africa.....
1. Treasury spends into the real economy - the recipiants of the spending put the money in the banks and private deposits grow. 2. To settle with the private banks accounts, treasury trasnfers its cash balance at the CB to the Banks 3. Banks now have too many reserves earning a lower penatly rate of interest. Ie: too much liquidity 4. Treasury issue bonds to the banks to remove the liquidity so the CB can mantain its target interest rate 5. To settle the Bond trade with treasury, the Banks transfer its cash balances with the CB back to Treasury 6. Treasury now has a positive cash balance again, and the process can start over...
.......
Under QE The CB buys the exisitng bond from the banks and gives the banks more cash Normally this would create excess reserves in the banking system and push the interbank rate to near zero But the US is near zero anyway - so no real impact.
So shouldn't this then be:
7) Under QE, the CB then buys the existing bonds from the banks and gives the banks *more* cash reserves
8) As a result, the banks now have excess reserves, over and above what they would have had without QE. So they may choose to deploy these reserves into the purchase of other assets, such as shares, foreign currencies, commodities and so on. In doing so, they effectively deploy "new" money ($US) out into the economy don't they? Just as if they had written a new loan, and thus deployed "new" money when a borrower used that loan to say buy a house?
Eventually, the CB can "call in" this new money by selling bonds back into the market, or by letting them expire. In that sense, it's very similiar to a term loan issues by a bank normally to a borrower isn't it? Except in the QE case, the "borrower" is in effect the bank, and the "lender" is the CB.
re (8)
Apart from the fact Banks are constrained by risk weighted assest relative to equity (which will severely restrict them from buying the assets you mention), they can do that any time. They do not need QE.
Think of the process of a bank (NAB) buying a share from a private citizen (sydneyite).
Bank (NAB) buys BHP shares from Sydneyite for $100.
Syndeyite puts $100 cash into bank (CBA).
NAB transfers $100 reserves to CBA to settle the trade.
RESULT Total amount of reserves in the banking system has not changed. NAB is short $100 of reserves. CBA is $100 long reserves. To prevent the penatly rate of interest, CBA lends the excess reserves back to NAB. No need for QE. And no money "leaving" the banking system. The only way reserves leave the banking system is when banks interact with the CB or treasury. So filling the banks with additional reserves creates no additional incentive for banks to go and buy risk assets.
But as I said, Banks rarely go out any buy risk assets. To Buy $100 worth of shares, NAB needs $100 of equity. Instead, with $100 of equity, NAB could write $3-4,000 worth of loans on a 2% spread. It is far more profitable on a risk weighted basis for banks to lend than to punt shares etc. That is why their balance sheets are full of loans.
B_b - The effect of QE is 'real'. You say QE has no effect, you say it's a placebo - yet it does have an effect. So you are wrong. You may not be able to adequately explain why you are wrong, and I didn't major in Economics, so I won't volunteer to pick out your flaws. But somewhere along the line. You are wrong. You basic theories which you are using are clearly wrong, because they don't match the real world. Sorry mate. That must come as a bit of a blow. But hey, maybe they just need some refinement. Sort of like Newton and Albert.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
"The QQE Secret of How to Print Money Without Increasing Debt
The answer to the secret lies in the name, in that we are discussing the QUANTOM of Quantitative Easing.
This is taking place right now, completely out of the focus of the public and the mainstream press.
QQE is taking place by means of the interest earned on government debt bought by the Bank of England i.e. the Bank of England prints money to buy government debt from the banks, therefore the government pays the Bank of England interest on this debt most of which then gets recycled back to the Government so in effect the government has free money to spend that it should not have, and the more bonds the Bank of England buys the less net interest the Government has to pay. Imagine if all of the bonds were owned by the Bank of England, this would mean that the net interest paid by the government on all of its £1.1 trillion debt would be virtually ZERO! So effectively the government has NO DEBT TO SERVICE, because without any interest to pay it effectively ceases to exist! Yes this mechanism is QQE because it allows the government to spend money without increasing its NET debt burden, not only that but the government is actually REDUCING its debt burden as the debt is actually being cancelled out. So QQE is the quantum of QE as the net debt interest burden falls towards ZERO."
QE2/3 is different to QE 1 as I explained to Newjez. The addition of reserves it not really neded for the payment system. So why are they doing it? I guess you would have to ask the Fed, but i have a couple of thoughts - What else are they going to do at 0% interest rates and US congress unwilling to spend or reduce taxes yet asking the Fed to do more? - Benanke is a monetarist, so he probably beleives in the money multiplier - I have read a few a Benanke's academic papars, and it is clear he is a big beliver in the wealth effect. So the Palacebo may have "knock-on" effects as people borrow against rising equity values and this restarts the whole economy. - He has mentioned he is trying to lower the long end bond rate, but QE has generally done the reverse (because the punters see QE as a stimulus). I think this frustrates the Fed. He could set the ten year bond rate to 0.5% or lower if he wanted, by simply standing in the market at the appropriate price (which is what all CB's do at the short end anyway).
QE2/3 have had the effect of depressing the long end of the yield curve.
They also add liquidity, but as you say it is a long time since this has had any real effect. The markets are liquid. Maybe confidence that the markets will *stay* liquid has been a useful effect.
It is no coincidence that the only lasting effect of taper talk has been a steepening of the yield curve.
Elastic
7 Aug 2013, 12:53 PM
I should also add that under QE the newly created money ends up as excess reserves in the banks and is free to be invested in the sharemarket, high yielding currencies ($Aus) or in cheap real estate. So it's no surprise that the ending of QE would shock the sharemarket.
Actually, I don't think the excess reserves are free to be invested in high-yielding securities. They just basically sit there.
The thinking there basically said that banks would normally lend out their reserves, but they wouldn't do so in this particular environment because of the liquidity trap. But banks NEVER "lend out their reserves". Reserves are deposits issued within the interbank system and they stay within the interbank system. They're used for two primary purpose: 1) to meet reserve requirements; 2) to settle payments. When a bank wants to make a new loan it doesn't check its reserve balances first. It checks the creditworthiness of the borrower and measures the risk of the loan. If it needs reserves it will find them in the interbank market or borrow from the Fed AFTER the fact. A bank is always capital constrained, but never reserve constrained. There's no "multiplying" of reserves in this process.
I probably should have described the excess reserves as excess deposits to avoid that confusion. If the banks are stuck with excess deposits or liabilities they would have to invest the money somewhere (preferably high yielding) to avoid running a loss on these deposits (i.e they will be stuck paying interest on deposits that are sitting there). If this is the case and these excess deposits are chasing yields then this would likely explain why the Dow is behaving the way it has and why the $Aus went so high.
If interest rates go up and banks are forced to pay higher interest on these deposits then they may not find it quite so easy to find yields which pay the difference. The Fed would also be looking at huge losses if they sold their bonds back into the market as IRs were rising. I am starting to see where things may go wrong.
"The QQE Secret of How to Print Money Without Increasing Debt
The answer to the secret lies in the name, in that we are discussing the QUANTOM of Quantitative Easing.
This is taking place right now, completely out of the focus of the public and the mainstream press.
QQE is taking place by means of the interest earned on government debt bought by the Bank of England i.e. the Bank of England prints money to buy government debt from the banks, therefore the government pays the Bank of England interest on this debt most of which then gets recycled back to the Government so in effect the government has free money to spend that it should not have, and the more bonds the Bank of England buys the less net interest the Government has to pay. Imagine if all of the bonds were owned by the Bank of England, this would mean that the net interest paid by the government on all of its £1.1 trillion debt would be virtually ZERO! So effectively the government has NO DEBT TO SERVICE, because without any interest to pay it effectively ceases to exist! Yes this mechanism is QQE because it allows the government to spend money without increasing its NET debt burden, not only that but the government is actually REDUCING its debt burden as the debt is actually being cancelled out. So QQE is the quantum of QE as the net debt interest burden falls towards ZERO."
Now that is very interesting post / article and view point!
b_b - what's your response to this one?
We are basically saying the same thing except 1. sovereign debt is not a burden so long as it is in your own currency. The UK will never run out of Sterling, so why so worry about interest payaments? 2. As I posted to NewJez, Net spending adds to private sectore savings and income. Interest is net spending. So the payment of interest on gov debt is a benefit (income) to the private sector
So In GenX's example of removing interest expense for the government via QE, is the same as removing interest INCOME for the private sector.
So as I have said, qe is channeling income to the government and away from the private sector. It has the same operational effect as a tax
EDIT: To be really clear, the central bank of England has always funded government debt - well before the introduction of QE. Re-read my post at #67 for the explaination.
newjez
7 Aug 2013, 04:28 PM
B_b - The effect of QE is 'real'. You say QE has no effect, you say it's a placebo - yet it does have an effect. So you are wrong. You may not be able to adequately explain why you are wrong, and I didn't major in Economics, so I won't volunteer to pick out your flaws. But somewhere along the line. You are wrong. You basic theories which you are using are clearly wrong, because they don't match the real world. Sorry mate. That must come as a bit of a blow. But hey, maybe they just need some refinement. Sort of like Newton and Albert.
No problems NewJez. Your clearly could not fault my logic, so you simply say I am wrong without any supporting argument.
Thats ok. I make my decision based on facts not superstition. Each to their own I guess.
We are basically saying the same thing except 1. sovereign debt is not a burden so long as it is in your own currency. The UK will never run out of Sterling, so why so worry about interest payaments? 2. As I posted to NewJez, Net spending adds to private sectore savings and income. Interest is net spending. So the payment of interest on gov debt is a benefit (income) to the private sector
So In GenX's example of removing interest expense for the government via QE, is the same as removing interest INCOME for the private sector.
So as I have said, qe is channeling income to the government and away from the private sector. It has the same operational effect as a tax
EDIT: To be really clear, the central bank of England has always funded government debt - well before the introduction of QE. Re-read my post at #67 for the explaination. No problems NewJez. Your clearly could not fault my logic, so you simply say I am wrong without any supporting argument.
Thats ok. I make my decision based on facts not superstition. Each to their own I guess.
Catweael say chin scratch is a right.
Nutty theory cannot be the proven wrong.
But questionable is how theory that not the proven the wrong,
or the right,
can become the 'fact."
Because a fact represent absolute the truth or verifiable occurrence.
It like a Greenspan the model based on compete the theory,
Apart from the fact Banks are constrained by risk weighted assest relative to equity (which will severely restrict them from buying the assets you mention), they can do that any time. They do not need QE.
Think of the process of a bank (NAB) buying a share from a private citizen (sydneyite).
Bank (NAB) buys BHP shares from Sydneyite for $100.
Syndeyite puts $100 cash into bank (CBA).
NAB transfers $100 reserves to CBA to settle the trade.
RESULT Total amount of reserves in the banking system has not changed. NAB is short $100 of reserves. CBA is $100 long reserves. To prevent the penatly rate of interest, CBA lends the excess reserves back to NAB. No need for QE. And no money "leaving" the banking system. The only way reserves leave the banking system is when banks interact with the CB or treasury. So filling the banks with additional reserves creates no additional incentive for banks to go and buy risk assets.
But as I said, Banks rarely go out any buy risk assets. To Buy $100 worth of shares, NAB needs $100 of equity. Instead, with $100 of equity, NAB could write $3-4,000 worth of loans on a 2% spread. It is far more profitable on a risk weighted basis for banks to lend than to punt shares etc. That is why their balance sheets are full of loans.
This explanation isn't quite right because your example, shows the bank (NAB) buying the asset before it has the liquidity to do so. I think this is a very important distinction. Due to QE the banks will be left with large amounts of excess deposits (liabilities) and will be left with no choice but to buy assets . I think the Fed was hoping the banks would lend these deposits to businesses and home buyers but instead they bought into the sharemarket and high yielding foreign currencies.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy