Mish, this explanation of QE[1] from the Bank of England tells a slightly different story to what I’m reading here. I’m not very clued in on this stuff so bear with me. Maybe it works differently in the UK, but the BoE article makes it pretty clear that the point of QE is to buy bonds from non-banks, which results in the seller getting deposit money which they can spend. So yes the banks don’t get any new money they can spend but he seller of the bond does:
The sellers of the assets will be left holding the newly created deposits in place of government bonds. They will be likely to be holding more money than they would like, relative to other assets that they wish to hold. They will therefore want to rebalance their portfolios, for example by using the new deposits to buy higher-yielding assets such as bonds and shares issued by companies — leading to the ‘hot potato’ effect discussed earlier.
(emphasis added)
The “hot potato” effect is explained elsewhere in the article:
This process — sometimes referred to as the ‘hot potato’ effect — can lead, other things equal, to increased inflationary pressure on the economy.
So presumably a lot of this money has been going into stocks or other things that don’t show up as inflation. But what’s to stop the recipients of that money from suddenly spending large amounts of it on commodities or whatever, causing a sudden massive increase in prices?
I think that strictly speaking, we ought not focus on “debt” at all, but rather the changes in taxes and expenditures that lead to changes in debt. More debt to finance creation of highly productive assets: good; more debt to transfer income to already rich people: bad
Intelligentyetidiot
2 years ago
Over time, Friedman’s equation holds : “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Its the law of gravity of economics.
The confusion is because people compare the rate of change of inflation rather than the cumulative effects for limited periods and conclude that printing money didnt affect the price level of a biased basket of goods during a chosen time period.
You need to look at all output and compare with the quantity of money. Friedman was an astute guy.
An increase in demand without a corresponding increase in output also creates inflation.
This is why over time as population increases the costs of finite goods like land increase because it’s not possible to produce more of it. It can also be a short term demand increase without more output like we are seeing at the end of Covid where there is high demand for things like lumber and cars but no ability to rapidly increase output.
RonJ
2 years ago
“The money multiplier”
That is what CEO’s get from coupling stock option grants with the corporation’s stock buyback program.
“In highly indebted economies, additional debt triggers the law of diminishing returns.” Commonly called pushing on a string. The FED is pushing really hard, now. The banks are even choking on all the pushing, causing repogurgitation at the FED.
RedQueenRace
2 years ago
“Schiff is wrong because QE is not spendable money, nor is it money on deck waiting to be spent.”
It’s more nuanced than that. QE does create spendable deposit money. It just isn’t created dollar for dollar with reserves.
Deposit money is created to the extent that the securities sold to the Fed by Primary Dealers come from non-banks. How much deposit money is created is not possible to tell, but the PDs are part of the broker-dealer network and get securities from entities other than banks.
QE as constituted isn’t going to create runaway inflation as the size of the purchases is basically fixed. To create runaway inflation QE purchases would have to be ever-increasing in size. While that could create extremely high levels of inflation and even a level considered hyperinflationary at some point it ends when the Fed runs out of assets to buy. The Fed by itself under the current process cannot create sustained hyperinflation.
With a fixed purchase size for QE we will get a persistent upward direction in prices until it is stopped or there is some sort of dislocation within the financial system, but not hyperinflation. Also, as long as QE remains at a set level and as the size of the money supply grows the percentage impact of QE on the money supply falls over time
QE is an asset swap. Period. Banks “trade” their bonds/MBS to the Fed and and get a “credit” to their Reserve account there. Reserves are not spendable. They are referred to as “base money” because they represent the POTENTIAL for their owners to create a new deposit by making a new loan. The presence of the newly created reserves encourages this, but it is up to the bank whether or not to make the new loan. The only “money” actually created up to this point is the “money” the Fed created out-of-thin-air to credit the reserve account. A side effect of the asset swap is that the bank has gotten rid of an asset that it apparently did not want to hold and may be looking to replace it with something else.
I am amazed at how many people still don’t understand this process.
For the most part Primary Dealers are NOT banks. For example, Wells Fargo Securities is a Primary Dealer. Wells Fargo Bank is not. Wells Fargo Bank is almost certainly the clearing bank for Wells Fargo Securities, who holds a demand deposit account at Wells Fargo Bank.
Primary Dealers sell from inventory. Some of that inventory comes from banks. The rest comes from non-bank entities.
When the Fed buys from a PD they credit the reserves of the bank that holds the PD’s deposit account AND they direct the bank to credit the PD’s account. So when the Fed buys from Wells Fargo Securities they credit Wells Fargo Bank’s reserves AND direct Wells Fargo Bank to credit Wells Fargo Securities’ demand deposit account.
Reserves are always created, regardless of from where the security sold came. Whether or not deposit money is created (net) depends upon from where the security came. If it came from a bank, no deposit money is created net. If it came from a non-bank then money is created.
You used to be at Pater’s site. Here is his take (go argue it with him if you still disagree):
“In the Hoisington report we mentioned earlier there is an unspoken
assumption (others such as Cullen Roche have actually made this
assertion explicitly), namely that all that the Fed does when it buys
securities in QE operations is to credit the reserve balances of banks
in return, and that it then kind of hopes that the banks will increase
their lending.
This would be true if the Fed bought securities directly from banks
and no-one else. Given that bank reserves are held with the Fed and
cannot be spent (they can only be used for interbank lending operations
and to pay for customer withdrawals of deposits), they are not
considered part of the money supply, as they remain outside of the
economy. However, this is not what actually happens. Most of the Fed’s
securities purchases in the course of QE are from entities that are
legally organized as non-banks – even if many of them are bank
subsidiaries, such as the primary dealers (in the course of QE, the Fed
has also bought securities from other non-banks, such as Blackrock and
Fidelity). Here is a list of the primary dealers with which the Fed does
most of its business:
<<< List removed – it is out of date anyway >>>
One can already see from the company names that these are not the
banks themselves, but rather subsidiaries of banks (at one time, several
of the parent companies such as Goldman Sachs were non-banks as well –
this changed after the crisis, as they wanted to get easy access to Fed
credit). Given that the primary dealers are not deposit-taking
institutions, what happens when the Fed purchases securities from them?
It will send them a check, which they pay into an account held with
their parent bank. The bank will then credit this account with deposit
money and present the check to the Fed for settlement – the Fed will in
turn credit the bank’s reserve account.
As can be easily seen, in this process both new deposit money and new bank reserves are created.
This explains two things at one stroke: 1. how it was possible for the
money supply to rise in spite of a contraction in outstanding loans and
fiduciary media and 2. that the banks have absolutely no control over
the amount of excess reserves piling up at the Fed. The Fed has simply
replaced the interbank lending market, and in the process created so
much new bank reserves and covered deposit money, that it has easily
offset the contraction in uncovered deposit money during the crisis, and
then some.”
The differences between us are minor. I rather doubt the Fed actually sends a check. I expect it is all done electronically. But the net effect is the same. Also, he doesn’t mention that if the security was acquired from a bank that deposit money is not created. While the purchase does create deposit money it is only replacing a deposit that was destroyed (in the PD’s demand deposit account) when the security was acquired from the bank by the PD. But if the security came from a non-bank entity then deposit money is created net. This is why I said deposits are not created $ for $ with reserves. It depends upon the security source mix.
Before telling someone they do not know what they are talking about and expressing amazement of how little others understand make certain you know how things work. The stuff you wrote is a repetition of misinformation that has been spread about on many sites.
Eddie_T
2 years ago
Mostly I just try to figure out how to create and preserve personal wealth, given these admittedly unfortunate circumstances. My quarterly outlook, unchanged since 2009, is that it is going to get worse before it gets better.
Now they’re talking about Powell being replaced with Brainard, or maybe Cook or Spriggs. If you don’t like Powell, you sure enough won’t like any of those choices.
QE is here and unlikely to go away anytime soon. The next phase is probably going to be more of an MMT approach, which is much scarier than QE, imho.
I think you have to hold assets that are going up. Calling it a bubble might be correct, but failing to use some kind of asset hedge to keep up with ever-rising prices is a prescription for disaster. I like tangible assets, and real estate is the most predictable market under the current system, imho.
I’m looking forward to some classroom time soon with one or more of my chosen mentors to try to read the tea leaves and adjust my thinking. I get it that bubbles all eventually pop. I am trying to think of ways to be more resilient. Gold is great if you can afford to hold an asset without any promise of a ROI. De-leveraging seems prudent, at least to some degree. I don’t believe being totally debt free is all that wise in this current scenario. But I think high leverage when asset prices are super high is foolish. I also think the Jamie Dimon approach to sit on cash and wait for a crash to buy….is apt to be a longer wait than a lot of people think.
Love your last paragraph and agree with it completely.
The music is playing so we all have to be up and dancing (unless you want your assets inflated away). When it’s going to stop and it’s time to find a chair, no one knows nor do they know how suddenly it will stop. It could well play on long enough for people like you and I but probably not long enough for someone in their 40’s and under.
The problem with real estate is it’s an easy target for tax collection. Governments can jack up your tax rate and you’re screwed. Not only will you have to pay more taxes, your property value will also go down. You can’t move your real estate somewhere more tax friendly.
There is some truth to what you’re saying, of course, but you’re over simplifying a fairly complicated scenario.
I’m not a flipper. I invest primarily for long term cash flow…and taxes are an expense. I don’t tolerate negative cash flow. If rents go up proportionally to taxes (and my other expenses) I’m okay. If they don’t, I’ll sell. But that’s a last resort, and in this area it’s just been a theoretical problem……at least since about 1990.
I’m old, and I have a lot of equity. Worst case, I can cash out and retire. It’s too late for me to get screwed too badly.
Prices of single family homes are driven by demographic trends and supply and demand. Market matters. Every place is different. We’ve always had high property taxes here, but it’s a trade-off. We have no state income tax. The higher tax areas typically have the better schools and people want to live in the good school districts.
The demographic outlook here is projected to be excellent until at least 2040, which pretty much covers my watch.
I haven’t found too many assets that the government can’t tax. RE does have the advantage of depreciation, which is a non-cash expense item….not many assets have that. The 1031 Exchange tax law, as it stands, allows you to defer capital gains for a lifetime. So, while property taxes are an issue, there are some excellent income tax advantages that no other asset has, AFAIK. For people like myself who have pretty high earned income too, the deductible interest expense also serves to offset that. You have to look at more than just property taxes.
I think you are on point and since the Sunnyside condo collapse I have been looking for spalling down in the basements of friend’s condo’s. I’ve got a lot of nice spalling photos now. There is a scary amount of deferred maintenance in buildings here in LA. I think our current system has eliminated anybody that is responsible and does the right thing for the masses from positions of any power.
KidHorn
2 years ago
Inflation is always directly caused by supply and demand. Having more money in circulation means, in general, people have more money to spend, which, in of itself, creates demand. We’re in a situation now where the wealthy are getting richer and everyone else is staying about the same. The reason is the demand for things wealthy people buy has gone up and wealthy people own things wealthy people buy, like equities and real estate, so their portfolios have gone up. It’s kind of a reinforcing loop. We’ve had asset inflation for decades, but, in the past year or so, we’ve seen much more widespread inflation and the only thing that makes sense is it’s due to shortages from covid shutdowns. Every other explanation fails because other things have been in effect for far longer than the past year.
assumption (others such as Cullen Roche have actually made this
assertion explicitly), namely that all that the Fed does when it buys
securities in QE operations is to credit the reserve balances of banks
in return, and that it then kind of hopes that the banks will increase
their lending.
This would be true if the Fed bought securities directly from banks
and no-one else. Given that bank reserves are held with the Fed and
cannot be spent (they can only be used for interbank lending operations
and to pay for customer withdrawals of deposits), they are not
considered part of the money supply, as they remain outside of the
economy. However, this is not what actually happens. Most of the Fed’s
securities purchases in the course of QE are from entities that are
legally organized as non-banks – even if many of them are bank
subsidiaries, such as the primary dealers (in the course of QE, the Fed
has also bought securities from other non-banks, such as Blackrock and
Fidelity). Here is a list of the primary dealers with which the Fed does
most of its business:
One can already see from the company names that these are not the
banks themselves, but rather subsidiaries of banks (at one time, several
of the parent companies such as Goldman Sachs were non-banks as well –
this changed after the crisis, as they wanted to get easy access to Fed
credit). Given that the primary dealers are not deposit-taking
institutions, what happens when the Fed purchases securities from them?
It will send them a check, which they pay into an account held with
their parent bank. The bank will then credit this account with deposit
money and present the check to the Fed for settlement – the Fed will in
turn credit the bank’s reserve account.
As can be easily seen, in this process both new deposit money and new bank reserves are created.
This explains two things at one stroke: 1. how it was possible for the
money supply to rise in spite of a contraction in outstanding loans and
fiduciary media and 2. that the banks have absolutely no control over
the amount of excess reserves piling up at the Fed. The Fed has simply
replaced the interbank lending market, and in the process created so
much new bank reserves and covered deposit money, that it has easily
offset the contraction in uncovered deposit money during the crisis, and
then some.”