One thing for sure is that the newly created money will eventually find its way into ‘circulation’, unless he takes some of it it back out before, which is theoretically possible, but highly unlikely. Most likely, this 600 billion will turn into several trillion through the current centralized fractional reserve banking system.
Whether this money immediately make its way into ‘circulation’ depends on what he buys and whom he buys from. If he buys fresh treasury bills, that money is spent immediately by the government. If he buys already existing debt from banks or individuals, then it depends what those sellers will do with their newly acquired cash balance.
“You are jumping the gun, money loaned out is not inflation. It’s simply not true. If I had a printing press and created 1 trillion dollars, then kept it in my basement, IT IS NOT INFLATION. It is just an act. You need to recalibrate your definitions.”
at least you realize they are creating money out of thin air…
thats a good start…
now you really believe this billions of dollars of counterfeit money will sit in a basement forever?
really?
where in the world is this basement? because I’m buying a crowbar tonight…
No I am not admitting that at all, I am simply saying that just because a line of credit is extended does not mean that the action is inflationary.
That conclusion skips a whole lot of steps.
That is the entire point of this discussion. The money is not printed, its in the form of a loan FROM the Fed to the member banks. He can reverse that operation at any time and if they do start lending, it will only happen after a whole lot of deflatonary steps occur int he economy in the form of deleveraging. The banks are not lending because they don’t feel like making money, they are not lending because the mail-investments have tapped out the borrower. It will take a long time to change that.
“QE1 was similarly marginally inflationary because most of the money lent out to the banks by the Fed was never used.”
Of course it was used. It was lent to the govt with interest. And it was not “marginally inflationary”. It was very inflationary. Go to the supermarket.
“QE2 is an attempt to get the money moving, but not through the banks, but the Federal government. This is no more inflationary than any bank lending under fractional reserve banking. In fact, it’s less, since these loans do not trickle down to other banks.”
I see from this line that we have completely different understandings of very basic concepts. So I’m going to retire until you do a lot of reading.
Maybe I missed it, but QE1 put money into circulation. It was given to the banks, who lent it to the us govt, who spent it. Maybe I’m missing something, but to me “spending money” and “putting money into circulation” is the same thing.
QE2 is going to the US govt to spend. Maybe I’m missing something, but to me “spending money” and “putting money into circulation” is the same thing.
One thing for sure is that the newly created money will eventually find its way into ‘circulation’, unless he takes some of it it back out before, which is theoretically possible, but highly unlikely.
Actually, in the quoted passage Bernanke admits this (save for the “unlikely” part).
On the contrary it would appear that you are the one in need of the reading. You telling me to find the definition of inflation is especially amusing, considering you are pointing to prices in the supermarket. Good god, speaking of missing the basics. Still, I feel obligated to help you out.
QE1 did not expand the monetary base because the money was never lent and credit never generated. QE1 failed to stop deflation, that is why QE2 was announced.
Asset bubbles and distortions is the negative outcome of failing to predict just what the banks would do with the money and they happened to chase assets.
With 23,000 posts under your belt, I would have expected better.
" The money is not printed, its in the form of a loan FROM the Fed to the member banks.’
But where did the Fed get the money to lend in the first place? Drumroll please. They printed it, that’s where. THEN they lend it. First the counterfieter prints the money, then he buys the yacht.
He can reverse that operation at any time
I dont understand that line. Please explain. He lent money to the banks. They lent it to the US govt. The govt spent it. What is goiing to be reveresed here?
and if they do start lending,"
They already have. They lent it to the US govt, and are getting paid interest on that loan as we speak.
Maybe I missed it, but QE1 put money into circulation.
The first round of quantitative easing put “some” money into circulation (a relatively small percentage of the total), but most of it makes up excess reserves. The threat is what will happen when confidence increases and banks start to increase the volume at which they create new loans. If that part of the money supply is not contracted the consequences can lead to a more obvious rise in prices, and it’s questionable whether or not that part of the money supply can be contracted.
Maybe I’m missing something, but to me “spending money” and “putting money into circulation” is the same thing.
I don’t think all the money in the original round of quantitative easing when to buying government debt. I don’t even think this is true for most of the money. This second round is more clearly inflationary, as long as the government continues to increase its debt (and the Federal Reserve continues to monetarize it). Honestly, in terms of confidence in money, rampant government spending and continued debt monetization is historically the most dangerous series of events.
QE2 is going to the US govt to spend.
Well, it’s going to the creditors. The United States Government already spent the money (deficit spending). What the creditors decide to do with that money is the question (and it depends on who these creditors are).
As a matter of fact QE1 was purchasing of mortgage-backed-securities, not treasurys. At some point the Fed actually exchanged Treasurys for the MBSs, so there are some government bonds on the banks asset sheets as well.
Otherwise you are right about everything else Jon.
Thank you for your concern. I dont have 23,000 posts. As I mentioned earlier, read more carefully till you comprehend what you read.
Sending you to the supermarket was hoisting you on your own petard. That even by your definition of inflation, rising prices, go the supermarket, my son.
Your second and third paragraphs confirm my opinion that we differ widely in our basic understanding of things. So let us part amicably until we reach the same level of background knowledge.
I read it fine, I simply stated it wrong - you have 23,000 points. You are awfully confident of your own knowledge, but if the supermarket is your proof of inflation then you truly do lack basic knowledge. Start with Friedman then work your way up to the Austrian school?
It’s the electronic equivalent of starting up the Fed’s printing presses to create money for buying financial assets in the market – in this case long-term U.S. Treasury bonds. Buying bonds pushes down their yields, and the interest rates across the debt markets that are closely tied to U.S. Treasury rates.
To Jonathan: Why do you think the QE2 is going to creditors? They are never going to get their money. QE2 is going to buy new T notes, meaning lent right to the hands of the US govt.
Which answers the OP’s first q. Why is all this being done? Because nobody else wants to buy those Treasuries, that’s why.
First, they’re not trying to destroy the U.S. dollar and the entire global monetary system. The problem is that their theoretical frameworks are severely flawed, which yields extreme confusion and leads to absurd policy recommendations. Mainstream monetary theorists spend their entire academic careers learning about the deflation and hoarding bogie man that allegedly caused the great depression. Next, they don’t have much choice considering the institutions that are currently in place. They can either (a) continue to inflate in order to prevent the necessary correction (another great depression) and hope for the best, or (b) they can allow the deflationary correction to take hold along with all of its consequences (both economic and political).
Without getting too technical, the central bank really should increase the supply of money, but because it’s a centrally planning institution, it lacks the necessary mechanisms that would guide efficient action.
This is complete nonsense. Treasury securities and mortgage backed securities do not facilitate exchange; they are not money. When you exchange securities for money, in this case base money, which is created ex nihilo, then you are by definition increasing the supply of money. Next, it’s true that this will not in itself increase the total supply of money in circulation. In order to do this, the banks need to put this base money “to work,” that is, they need to lend that money and/or buy securities in financial markets. Additionally, there is a money multiplication process where every one dollar that the FED “exchanges with securities” potentially turns into ten dollars. In other words, if the FED increases the monetary base by 1 trillion dollars, then the total supply of money may expand by 10 trillion dollars.
Basically, Bernanke is full of shit.
QE1 didn’t “fail.” It did exactly what it was supposed to do. Ben Bernanke does not want the banks to lend, which is why he’s paying them not to lend (he’s paying interest on these reserves). It succeeded in propping up asset prices and inflating a bond bubble.
You’re correct. The point is that the purpose of the Fed is to create money out of thin air when the banks want or “need” it. Furthermore, under a fiat-currency standard, fractional-reserve lending also involves creating money out of thin air. What Bernanke is trying to do is defuse opposition to QE2 by claiming that it’s not “printing money”. Although he’s certainly not firing up the printing presses so that more physical dollar bills can be created (which could then be dropped from helicopters, right, Ben?), he is creating more dollar digits.
Yes, this is what the Fed has done all along. Only the magnitude is different this time. Note that, over the 97 years of the Fed’s existence, the dollar has lost about 95% of its purchasing power. That is not coincidence. Also note that QE1 did increase the monetary base, and greatly at that. The money has largely stayed out of circulation because banks are apparently scared to lend. Hence the “liquidity trap” that Bernanke believes we’re in. Like a good Keynesian, he’s trying his darnedest to get those “animal spirits” moving again.
My point all along in this thread, was that Ben is creating money in the same way that fractional reserve lending makes money. If I am a bank and have 1k in deposits, but make a 900 dollar to someone, who then turns around and makes a 810 dollar loan to someone else - money was created. To me, what Bernanke is doing is not any different.
That is an interesting QE1 perspective. I suppose I never thought of it that way. I figured Ben was always interested in maximum inflation, because as we know they are trained to fear deflation. Blowing asset bubbles is hardly a good solution because they are not based on real demand and will pop. Similarly when Greenspan encouraged lending to cover up the Dot Com bust, I dont know if he necessarily saw a housing bubble coming. They never see where the bubble blows, because cheap money just flows wherever it must go - granted, housing/stocks/etc are the most likely of places as they breed speculation.
I think he looked at the banks sitting on cash, refusing to lend and got pretty worried. Maybe because the concept of mal-investments has not gotten through his thick scull?
The bottom line, I think the whole printing thing is being too hyped and not different than the dangers of Fractional Reserve Banking.
We agree then, this is FRB at work. I am aware what the Fed has done to our dollar, it is an evil institution.
What are you using to track money supply?
Btw, its not that money stayed out of circulation, its more than that. Total credit has gone done across the board, there is a ton of deleveraging happening and the commercial banks are not lending. This is what I mean when the inflation was marginal, as it just spilled out from the banks directly in the form of them chasing better returns in currencies/commodities/etc.
Right, it’s really not any different. Fractional-reserve banking under a fiat-currency regime is inflationary, period. Whether it’s the central bank or another bank doing it is a detail.
Thanks. I can’t claim originality for it, though. I first saw it in Gary North’s writing.
Central bankers may not be able to predict exactly where the new money and credit will go. Their belief is that it’s better overall to have extra money and credit than not. Rather than seeing malinvestments for what they are, they see the problem as businesses somehow (probably due to the “animal spirits”, amirite Keynes?) lacking enough money and credit to cover all of their obligations.
Fractional-reserve banking is source of this view. Under the gold standard, it was purely fraudulent – people thought that all of the money substitutes they held were backed by real money. When the going got tough, rather than “man up” and admit they were mistaken, they demanded more real money to magically come into existence. It was this attitude that lead to the creation of the Fed (and thus the institutionalization of fractional-reserve banking) and the fiat-currency regime that we “enjoy” today.
So no, I don’t think Bernanke understands the concept of malinvestments like Austrian-School economists do. Or he’s just corrupt and trying to bail out his friends and backers. Either way, the effects are the same.
People get hung up over the semantics of phrases like “printing money”. To followers of Austrian Economics, “printing money” is typically treated as standing in for “increasing the money supply”. So when Bernanke says he’s not printing money, they go all a-rage. “How can he say he’s not printing money?!” Well, Bernanke is using different semantics than they are. He’s treating the phrase “printing money” literally. And he’s doing it because he surely knows that most people see “printing money” (taken literally or not) as signalling inflation. Other phrases like “creating reserves” don’t do that, because most people don’t really understand what that means. That’s how he’s able to get away with this stuff.
Yes, you’re right. I wasn’t trying to imply otherwise – sorry if I came across that way.
From one point of view, QE1 was a way to hedge against the banks’ risks, so that they could deleverage in an “orderly” fashion (i.e. without going bankrupt or otherwise collapsing). Still, there’s an easier way to get the banks to lend their excess reserves. Just start charging a “negative interest rate” (i.e. a fee) for continuing to hold them at the Fed. (I got this from Gary North as well.)
I think QE2 may be less about getting banks to lend and more about monetizing more of the US federal government’s debt. “Fed independence” indeed!
