Alfonso.. While American QE is not dollar printing, I believe it is part of dollar debasement, to the extent that contributes to the funding of fiscal spending. (I am assuming here that the QE is never unwound.) Do you agree or disagree with that? Also, I would love to hear your thoughts on Lyn Alden's piece at <www.lynalden.com/quantitative-easing-mmt-inflation>. Here's an excerpt:
Quote from Lyn Alden >> Some analysts suggest that QE isn’t really printing money. It’s just a matter of creating bank reserves that get locked into a “box” of reserves and never put into the economy. The QE money never really gets to Main Street in their view, in other words. And if it doesn’t get to Main Street, it can’t cause consumer price inflation that critics of QE fear. Although there is some truth to it, the problem with that analysis is that proponents of that view are only looking at one side of the ledger, rather than both sides of the ledger. The other side of the ledger is that the government was able to spend money on the domestic economy via the fiscal spending side that it never extracted from any existing base of money; it instead extracted that funding from a newly-created pile of dollars from the Fed, and those Treasury securities are locked away on the Federal Reserve’s balance sheet from which it drew the new dollars from. The Treasury Department is the mechanism for the Federal Reserve’s QE to get to the public. <<
Hypothesis: QE (all mispricing of money) charges the inflationary capacitor (think financialization of the economy) through the "malinvestment" channel which slowly creates structural imbalances in the real economy. The inflation is latent. The inflation from QE doesn't appear until the inflationary capacitor fails. i.e. Perhaps a generation or two of malinvestment and excessive financialization leads to extreme structural imbalances and rigidity in the real economy, that when it breaks, all that stored hidden "inflation" is released. Water is stored behind a dam, and the dam fails.
I am a lawyer and this analysis escapes me. How can a commercial bank create money "ex nihilo"? Their loan portfolio has to be backed by something! Otherwise a commercial bank could lend ad infinitum.
Doesn't it depend on who the Fed bought the bonds from? If it's a commercial bank or another entity who has reserves then they are paid in reserves. If it is another entity that isn't reserve eligible, then their commercial bank is given reserves and they create a deposit for that investor. That would indeed lead to the creation of "real economy" money, wouldn't it? Example here: https://fedguy.com/two-tiered-monetary-system/
First of all many thanks for wrapping all this up!
I have a question though, is there not a missing piece, The pension fund deposit?
They have the rights to go out and re-invest all those new "printed" money. Hence is this not the reason why we see asset bubbles? Further there is also sellers of the assets the pensions funds re-invest in, so this would funnel new money out in the economy too.... am I wrong on this?
"The central bank created new reserves out of thin air (green stack increasing) to purchase government bonds from the pension fund."
Please elaborate this point. This is where I am confused. What is this process? I've heard people say they printed these dollars. Not found a good explainer. Maybe I missed it.
Forgive my ignorance I am a simple man ...carpenter. Money today is debt and this mechanism seems to me like plastering old debt with new debt, while old debt isnt a concern because there is a way to take off your old problematic debt and put it aside, cover it with new debt. Just like if I am living off the credit card and it will never become a problem because there will be always new credit card to cover minimum payment and cover my expenses. Am I right?
why is there a "panic" about inflation when workers "wages" start going up, but no problems if commodities spike, stock prices spike, CEO pay spikes, etc etc. you get the idea. all i hear today is we have to stamp out wage inflation because it's a horrible thing.
it basically sounds to me, like, central banks are there to screw the workers, and reward their friends.
Reserves can be used for “inside” activities. What are these “inside” activities? Salaries for employees/executives/board? Shares buyback or dividends?
Hi Alf, I think you missed out mentioning the results of pension funds having larger accounts. That extra balance leads pension funds to buy other assets like securities etc leading to asset inflation. Please elaborate if you think this is incorrect…
Alfonso.. While American QE is not dollar printing, I believe it is part of dollar debasement, to the extent that contributes to the funding of fiscal spending. (I am assuming here that the QE is never unwound.) Do you agree or disagree with that? Also, I would love to hear your thoughts on Lyn Alden's piece at <www.lynalden.com/quantitative-easing-mmt-inflation>. Here's an excerpt:
Quote from Lyn Alden >> Some analysts suggest that QE isn’t really printing money. It’s just a matter of creating bank reserves that get locked into a “box” of reserves and never put into the economy. The QE money never really gets to Main Street in their view, in other words. And if it doesn’t get to Main Street, it can’t cause consumer price inflation that critics of QE fear. Although there is some truth to it, the problem with that analysis is that proponents of that view are only looking at one side of the ledger, rather than both sides of the ledger. The other side of the ledger is that the government was able to spend money on the domestic economy via the fiscal spending side that it never extracted from any existing base of money; it instead extracted that funding from a newly-created pile of dollars from the Fed, and those Treasury securities are locked away on the Federal Reserve’s balance sheet from which it drew the new dollars from. The Treasury Department is the mechanism for the Federal Reserve’s QE to get to the public. <<
Thanks. It's one of the more clear explainers of QE. Amazed at how many financial analysts don't understand how it works.
Doesnt speak about why Central banks are doing it then? Time pass? There are inflationary effects happening realtime.
Hypothesis: QE (all mispricing of money) charges the inflationary capacitor (think financialization of the economy) through the "malinvestment" channel which slowly creates structural imbalances in the real economy. The inflation is latent. The inflation from QE doesn't appear until the inflationary capacitor fails. i.e. Perhaps a generation or two of malinvestment and excessive financialization leads to extreme structural imbalances and rigidity in the real economy, that when it breaks, all that stored hidden "inflation" is released. Water is stored behind a dam, and the dam fails.
I am a lawyer and this analysis escapes me. How can a commercial bank create money "ex nihilo"? Their loan portfolio has to be backed by something! Otherwise a commercial bank could lend ad infinitum.
Doesn't it depend on who the Fed bought the bonds from? If it's a commercial bank or another entity who has reserves then they are paid in reserves. If it is another entity that isn't reserve eligible, then their commercial bank is given reserves and they create a deposit for that investor. That would indeed lead to the creation of "real economy" money, wouldn't it? Example here: https://fedguy.com/two-tiered-monetary-system/
First of all many thanks for wrapping all this up!
I have a question though, is there not a missing piece, The pension fund deposit?
They have the rights to go out and re-invest all those new "printed" money. Hence is this not the reason why we see asset bubbles? Further there is also sellers of the assets the pensions funds re-invest in, so this would funnel new money out in the economy too.... am I wrong on this?
"The central bank created new reserves out of thin air (green stack increasing) to purchase government bonds from the pension fund."
Please elaborate this point. This is where I am confused. What is this process? I've heard people say they printed these dollars. Not found a good explainer. Maybe I missed it.
Aha. And how comes this?
https://de.tradingeconomics.com/united-states/money-supply-m2
https://de.tradingeconomics.com/united-states/central-bank-balance-sheet
https://wtfhappenedin1971.com/
Who is checking the physical deposits within the system? Who is checking the official numbers within central banks?
Thank you Alf
How do you know that commercial banks lend from newly created reserves?
What parameters should be checked?
Thanks
Forgive my ignorance I am a simple man ...carpenter. Money today is debt and this mechanism seems to me like plastering old debt with new debt, while old debt isnt a concern because there is a way to take off your old problematic debt and put it aside, cover it with new debt. Just like if I am living off the credit card and it will never become a problem because there will be always new credit card to cover minimum payment and cover my expenses. Am I right?
why is there a "panic" about inflation when workers "wages" start going up, but no problems if commodities spike, stock prices spike, CEO pay spikes, etc etc. you get the idea. all i hear today is we have to stamp out wage inflation because it's a horrible thing.
it basically sounds to me, like, central banks are there to screw the workers, and reward their friends.
Reserves can be used for “inside” activities. What are these “inside” activities? Salaries for employees/executives/board? Shares buyback or dividends?
Hi Alf, I think you missed out mentioning the results of pension funds having larger accounts. That extra balance leads pension funds to buy other assets like securities etc leading to asset inflation. Please elaborate if you think this is incorrect…
Just in case any of you would like to read further on this topic, https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy this is the paper from where Alf extracted the very interesting charts!