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QE for Dummies

Good4Nothin

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I am not a financial professional, and this is just my amateur understanding of the convoluted logic of QE. Most people probably don't even know what QE is, so hopefully this will be useful to someone.

QE stands for "quantitative easing," which is Fed speak for money creation. How does the Fed (Federal Reserve bank) create money, and why does it create money?

The Fed was created in 1913 and its job has been to prevent bank runs, and to control the money supply (not too much, not too little, just the right amount of money in circulation).

(Please don't get upset if I don't get every detail perfect, I am going on memory and this is supposed to be a rough outline).

Then we had the 2008 crisis, and the Fed decided it need to do more than just prevent bank runs and control the money supply. It also needed to prevent major crashes.

So we had the big bank bailouts that we all loved so much. And the Fed began doing QE on a massive scale, supposedly to keep the economy afloat.

What is QE? The Fed creates money by buying bonds -- government bonds, corporate bonds, mortgage-backed securities. Now, normally bonds are bought by private investors, because they think the government or company selling the bonds is worth something. They think owning the bonds will pay off.

But the Fed is not a private investor. What is the Fed? Well no one really knows, it is not part of the government but not exactly private either. Well that's complicated. Federal Reserve banks are privately owned, but the central "Fed" bank isn't.

Ok, so ... the Fed buys tons and tons of bonds, of various kinds. It doesn't care if these bonds are a good or bad investment, just buys whatever it wants. Based on what? Well maybe it prefers bonds issued by banks or corporations it likes for some reason. This is an example of crony capitalism.

Now, tons of bonds have been bought up by the Fed. That reduces the supply of bonds, which raises the price. The price of bonds is inversely related to their yield, so as the price of bonds rises, the yield (interest) lowers. That's how we got ultra low interest rates. At least that's one reason.

The Fed believes low interest rates are good for the economy, since they encourage businesses to borrow money, and consumers to buy houses and cars. Low interest also forces everyone to invest in risky assets (equities) thereby keeping the stock market blazing. And low interest makes it less impossible for the government to pay its debt.

So all that is good, right? The Fed keeps the economy humming along, instead of periodically crashing and burning and leaving us in a depression.

That is what mainstream news, and especially Democrat-leaning news (which is most of the mainstream) wants you to think. Interfering with the "natural" economy is perfectly fine, because experts are smarter than "nature." No need to worry about unintended consequences resulting from tampering with natural complex systems.

Independents, conservatives, libertarians, might see it differently. They have been predicting out of control inflation, for years. Creating nearly infinite amounts of money has to eventually inflate the money supply, and when there is too much money in circulation that contributes to inflation. There are other factors, like low supply, but it's multiple factors, not just one.

So now, the Fed promises to start "tapering." That is Fed speak for decreasing the bond purchases, or QE. NOT stopping the purchases, NOT selling any bonds, just decreasing the rate of increase. This is to, hopefully, prevent inflation from spiraling. Will it cause interest rates to rise? I don't know, but if it does the stock market could suffer, and the Fed might react by turning QE up again full force.
 
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Would you say your expertise in this field is more or less than your expertise in vaccines? I gotta know before I invest the time.

There is a similar theme -- interfering with complex systems backfires in unexpected ways. Don't read my post, you won't understand it.
 
Yeah. Someone with a PhD(c), MSc has no chance of grasping anti-vaxxer spam.
Yeah but they should be able to figure out that getting a Vaccine DOES NOT create a force field around you !
It does not stop one from carrying, spreading, or getting sick from a virus.
And if a person GOT THE ACTUAL VIRUS and fought it off, that they would have the Best Possible immunity to said Virus, and that it would be VERY ODD that the Government would still wants to FORCE these people to still get a mRNA based inoculation !...

As for the QE, that's just their way of avoiding terms like FIAT MONEY,
 
Yeah but they should be able to figure out that getting a Vaccine DOES NOT create a force field around you !
It does not stop one from carrying, spreading, or getting sick from a virus.
And if a person GOT THE ACTUAL VIRUS and fought it off, that they would have the Best Possible immunity to said Virus, and that it would be VERY ODD that the Government would still wants to FORCE these people to still get a mRNA based inoculation !...

As for the QE, that's just their way of avoiding terms like FIAT MONEY,
Science doesn't support your immunity claim.
 
Ok, so ... the Fed buys tons and tons of bonds, of various kinds. It doesn't care if these bonds are a good or bad investment, just buys whatever it wants. Based on what? Well maybe it prefers bonds issued by banks or corporations it likes for some reason. This is an example of crony capitalism.

I'll correct you on this point - the Fed doesn't typically purchase Corporate Bonds. It only purchases Treasury and other Government Agency (ie, Fannie Mae, Freddie Mac, Ginne Mae) debt. There is a provision where it can purchase Corporate assets in extraordinary circumstances (ie, the 2008 AIG bailout), but they are rarely exercised and the securities are moved off the Fed's balance sheet ASAP.

I look at QE as essentially a replacement for the (now non-existent) Social Security surplus in financing deficit spending without pushing interest rates up. Obviously, it's not as good as a Social Security surplus because it is marketable debt (as opposed to Social Security's non-marketable debt), so it's got to come back out into the market (and raise interest rates) at some point, but it's a good stop-gap until we can find a way to address the deficit problem and/or reform Social Security.
 
I'll correct you on this point - the Fed doesn't typically purchase Corporate Bonds. It only purchases Treasury and other Government Agency (ie, Fannie Mae, Freddie Mac, Ginne Mae) debt. There is a provision where it can purchase Corporate assets in extraordinary circumstances (ie, the 2008 AIG bailout), but they are rarely exercised and the securities are moved off the Fed's balance sheet ASAP.

I look at QE as essentially a replacement for the (now non-existent) Social Security surplus in financing deficit spending without pushing interest rates up. Obviously, it's not as good as a Social Security surplus because it is marketable debt (as opposed to Social Security's non-marketable debt), so it's got to come back out into the market (and raise interest rates) at some point, but it's a good stop-gap until we can find a way to address the deficit problem and/or reform Social Security.

The Fed bought corporate bonds in 2020. And it could buy stocks also if it wanted to.
 
The Fed bought corporate bonds in 2020. And it could buy stocks also if it wanted to.

This is true, but as I said before, it was an emergency measure designed to provide liquidity to employers in response to Covid-19. The purchase window only lasted between July and December of 2020.

Such purchases are governed by law under 12 USC §343.
 
The person I was replying to says it doesn't typically buy corporate bonds. And apparently you think that's just fine.
The Fed opened up a corporate credit facility to ensure these markets didn't freeze up, leading to contagion in fixed-income markets.
 
The Fed opened up a corporate credit facility to ensure these markets didn't freeze up, leading to contagion in fixed-income markets.

The point is the Fed can do whatever it wants. There is no restriction it can't find a way around. Which means there is no real limit to its power.
 
The point is the Fed can do whatever it wants.
This is a meaningless statement.
There is no restriction it can't find a way around. Which means there is no real limit to its power.
Lame attempt to fearmonger. The Fed does what necessary ensure the U.S. economy won't go into a financially induced economic spiral. Once the financial system was functioning properly, they closed the credit facility.
 
This is a meaningless statement.

Lame attempt to fearmonger. The Fed does what necessary ensure the U.S. economy won't go into a financially induced economic spiral. Once the financial system was functioning properly, they closed the credit facility.

The Fed is not part of the US government, supposedly. There is nothing to oppose or balance it. Sure, it SAYS everything it does is to protect the economy, and all of us poor suckers. How nice of it. But nothing stops the Fed from enriching its own officers and members and friends.
 
The Fed is not part of the US government, supposedly.
The Fed's autonomy is granted by congress. While nothing is perfect, they've done a spectacular job balancing economic growth and low inflation. At the moment, the only way the Fed can address current inflationary pressure is to slow down the economy, possibly leading to another recession.
There is nothing to oppose or balance it.
Sure there is. There is actually tremendous oversite. However, given objective economic policy cannot be based on politics, the Fed is given a great deal of political independence.
Sure, it SAYS everything it does is to protect the economy, and all of us poor suckers.
Speak for yourself. It's very clear you are quite ignorant of macroeconomics. Normally, i wouldn't feel compelled to say this, but your tone is ultra-aggressive. Instead of making ridiculous partisan rant threads that are founded on a lack of familiarity of the subject matter, why do you refuse to learn about these topics? There's nothing worse than a person who decides on a POV and then scrambles to find data / reasoning / rhetoric to support it. Anti-intellectualism at its worst.
How nice of it. But nothing stops the Fed from enriching its own officers and members and friends.
The Fed is mostly made up of PHD economists. They are certainly not getting rich from working in government....
 
The Fed's autonomy is granted by congress. While nothing is perfect, they've done a spectacular job balancing economic growth and low inflation. At the moment, the only way the Fed can address current inflationary pressure is to slow down the economy, possibly leading to another recession.

Sure there is. There is actually tremendous oversite. However, given objective economic policy cannot be based on politics, the Fed is given a great deal of political independence.

Speak for yourself. It's very clear you are quite ignorant of macroeconomics. Normally, i wouldn't feel compelled to say this, but your tone is ultra-aggressive. Instead of making ridiculous partisan rant threads that are founded on a lack of familiarity of the subject matter, why do you refuse to learn about these topics? There's nothing worse than a person who decides on a POV and then scrambles to find data / reasoning / rhetoric to support it. Anti-intellectualism at its worst.

The Fed is mostly made up of PHD economists. They are certainly not getting rich from working in government....

I am always reading about the economy and about the Fed. But I don't simply accept all mainstream propaganda. There are many economists who think the Fed is too powerful and its interventions cause more harm than good. The Fed has come to believe it can control the economy and keep it steady and prosperous at all times. It can't, it doesn't know how to do that and it doesn't have any way of doing that. The extreme interventions we have seen since 2008 are just setting the stage for ever bigger crises.
 
I am always reading about the economy and about the Fed. But I don't simply accept all mainstream propaganda. There are many economists who think the Fed is too powerful and its interventions cause more harm than good. The Fed has come to believe it can control the economy and keep it steady and prosperous at all times. It can't, it doesn't know how to do that and it doesn't have any way of doing that. The extreme interventions we have seen since 2008 are just setting the stage for ever bigger crises.

I'm with you there - QE is a bad thing and it's going to haunt us down the road. Only thing is, it's probably the least bad thing we could have done for the last 13 years or so. If we had let interest rates float, we just would have ended up with stagflation and if we had done budget austerity, we would have probably ended up in another Depression.

We do need to start getting our fiscal house in order, though. We need Social Security reform AND Tax reform. Reagan managed to tackle both of those in 1983 and 1986.... there's no reason why Biden couldn't do the same during his Presidency.
 
I'm with you there - QE is a bad thing and it's going to haunt us down the road. Only thing is, it's probably the least bad thing we could have done for the last 13 years or so. If we had let interest rates float, we just would have ended up with stagflation and if we had done budget austerity, we would have probably ended up in another Depression.

We do need to start getting our fiscal house in order, though. We need Social Security reform AND Tax reform. Reagan managed to tackle both of those in 1983 and 1986.... there's no reason why Biden couldn't do the same during his Presidency.

Biden’s alleged ability to herd congress critters into unity (bipartisan compromise?) has been grossly exaggerated. Borrow, print and spend federal ‘budgeting‘ has allowed congress critters to be re-elected at a rate of over 90%, so that (politically successful) policy is highly unlikely to change.
 
Biden’s alleged ability to herd congress critters into unity (bipartisan compromise?) has been grossly exaggerated. Borrow, print and spend federal ‘budgeting‘ has allowed congress critters to be re-elected at a rate of over 90%, so that (politically successful) policy is highly unlikely to change.

If everything starts going to hell, as it inevitably must, eventually, maybe they won't be re-elected.
 
I am always reading about the economy and about the Fed. But I don't simply accept all mainstream propaganda.
:sleep:
There are many economists who think the Fed is too powerful and its interventions cause more harm than good.
Sure. But their positions (like yours) are pure nonsense. The Fed has done a miraculous job at serving as lender of last resort while ensuring credit markets function properly during times of extreme distress. You cannot argue to the contrary.
The Fed has come to believe it can control the economy and keep it steady and prosperous at all times.
No. The Fed doesn't control the economy. It sets monetary policy. The economy is controlled by millions of individual agents, some of which have more aggregate influence than others, all assimilating Hayekian-information in effort to derive economic profit.
The extreme interventions we have seen since 2008 are just setting the stage for ever bigger crises.
:sleep:
 
No. The Fed doesn't control the economy. It sets monetary policy. The economy is controlled by millions of individual agents, some of which have more aggregate influence than others, all assimilating Hayekian-information in effort to derive economic profit.

Ideally, yes, the economy is controlled from the bottom up, by individual agents. But the Fed's massive interventions interfere with that ideal. Now we have a stock market completely divorced from reality, since there is no safe alternative. And we have inflation, which was partially caused by unprecedented money creation. And the Fed can't let interest rise to control inflation without crashing the stock market and real estate markets, and making the astronomical debt unpayable.

Yeah, a really miraculous job of interfering with the free market ideal.

Economies can't be all good all the time. The Fed has been trying to create a perpetual motion machine.
 
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