Some Reddit Comments on QE & Monetization…
I popped over to Reddit to try to help clarify some of the confusion on QE and debt monetization. I think my comments there were a bit more succinct than my previous comments:
Hi Everyone. I saw this link from the site. Hopefully I can clarify the message here since I think it’s an important one.
When the Fed implements QE they are creating reserves and swapping these reserves for bonds (in this case MBS). This is a clean swap of private sector financial assets. Before the bank enters into the QE sale with the Fed they hold the MBS (an asset of the bank). After they sell the bond they hold bank reserves (also an asset of the bank). Their net financial asset position HAS NOT CHANGED. So there’s no “money printing” occurring here. The private sector doesn’t have MORE money after the Fed buys the bonds.
Further, it’s impossible for the Fed to be financing the govt’s spending here because they are purchasing on the secondary market from the Primary Dealers who are REQUIRED to bid at Tsy auctions. The US monetary system is designed in this manner to ensure that the US govt can never have trouble procuring funds from the banking system. So some people might say the Fed is artificially propping up demand by giving the banks someone to sell to, but we know that’s not true because this is what people like Bill Gross said before QE2 ended. He said rates would rise. I said they would not. Rates ultimately fell due to VERY HIGH demand for govt debt (in the absence of this supposed Fed “backstop). So we know the Fed isn’t merely propping up the govt bond market.
I’ve created a page for understanding QE here:
http://pragcap.com/understanding-quantitative-easing
And as always, please see my page on the monetary system if you want a more in-depth look:
http://pragcap.com/understanding-modern-monetary-system
Thanks,
Cullen
…The strangest part about QE is that it’s just open market operations. Anyone who understands how central banking works knows that this is what central banks do. They alter the amount of reserves in the banking system to manipulate interest rates. Usually, they do this by targeting a specific rate in the overnight market. But once they move out the curve a little bit everyone starts claiming the program has magical powers. The funny thing though, is that rate targeting at the short end is powerful because they actually name a rate and challenge the market to move against them. Whereas in QE they just let quantity float and don’t target a price. It’s a highly ineffective form of monetary policy and I think the effects of QE on interest rates are vastly overstated because of this lack of rate targeting.
…
Reserves are deposits held at the Fed banks. The banks don’t “use them” for anything except interbank settlement of payments and meeting reserve requirements. Think of reserves as cash locked up in a separate market ONLY for banks. It’s commonly believed that banks lend their reserves. This is wrong. Loans create deposits. Banks make loans first and then find reserves as needed in the overnight market or by borrowing from the Fed AFTER THE FACT. Banks are never reserve constrained. They are capital constrained. The money multiplier we all learned in econ class is dead wrong. It’s just not how banks actually operate in the real world. Thank your ivory tower professor for getting this one wrong.
In QE, if a non-bank sells bonds to a bank who then sells to the Fed then this increases deposits in the non-bank private sector. But that’s like changing your savings account into a checking account. Do you always go spend more just because your bank changes the TYPE of account you have with them? Of course not. You spend based on your current saving relative to expected income. QE doesn’t force more lending, more money printing, more spending, or more anything really. What it does is cause lots of confusion and a portfolio rebalancing effect that forces Wall Street’s traders to shift their allocations up the risk curve to make up for lost yield. That’s about it.
Hope that helps.
See more here.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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61 Comments
Reddit… You’re a masochist, Cullen.
Cullen,
Expanding on this thought a bit, how do banks reduce their excess reserves with the Fed? How do banks react when they have too much excess reserves? I assume they would want to reduce them . . . why have all that excess capital tied up at the Fed? Am I missing something here?
Banks can’t control the amount of reserves in the banking system. This is controlled by the Fed. The banks indirectly control reserves by making loans (ie, if the Fed has to supply reserves then there’s no Fed choice in the matter), but that’s not really applicable in an environment like today where the banking system is awash in reserves.
Cullen,
I’ve been trying to get this question answered over the past few days, but no luck so far.
What happens to excess reserves if the Fed holds 100% of its current assets to maturity? I understand that if the Fed decides to hold assets to maturity, the asset side of its balance sheet will shrink accordingly. By definition, the liability side of its balance sheet will shrink by the same amount, and I assume it is the excess reserves that will decrease as treasuries/MBS mature.
But what exactly happens to the excess reserve balances of these banks? Do the reserves in these accounts simply vanish as assets mature (un-created in the same manner that they were initially created at the onset of QE), or do banks have the ability to transfer these reserves from the excess reserve accounts at the Fed over to cash on their own balance sheet?
Reserves are the offsetting liability of the central bank. When the asset matures the liability will disappear also.
Doesn’t that mean that the banks are losing money? In theory, the banks had $1.8 trillion worth of assets, now they have $1.8 trillion worth of excess reserves. So you’re saying that if the Fed holds $1.8 trillion worth of assets to maturity, the banks are left with nothing?
Why would the banks agree to this?
They’re loans. Banks expand their balance sheets by making more loans. So the Fed won’t and can’t let their balance sheet decline until the banks are making loans again and rebuilding the balance sheets.
Presumably when that Treasury Bond matures the Treasury Dept simultaneously will be issuing a new Treasury which the primary dealers will be required to buy. Just thinking out loud here, but does that new purchase by the PD’s essentially extinguish their reserves associated from the Treasury bond maturity?
After the swap, who owns the MBS?
Does the bank still own the MBS? … except now it’s held at the Fed as a reserve instead of (cash, money, electonic pixels, whatever it is called.)
Or is the Fed now the owner of the MBS? I guess I don’t understand that. Did the Fed create a reserve to buy the MBS or did it buy the MBS with the bank’s reserve (in which case shouldn’t the bank still be the owner?)
The Fed buys the MBS and swaps it with the reserve they created. The Fed creates reserves all the time and buys and sells assets to implement monetary policy. That’s one of Cullen’s biggest points. This is all just monetary policy. Not that different from setting the overnight rate.
Thank you.
I can see that the private sector still has the same net assets (then: an MBS … now: cash) if we forget for a minute that the cash is more valuable than the MBS.
However, now the Fed has a real asset (an MBS) rather than a hypothetical reserve. And won’t that asset eventually get out into the private sector?
…
Or, is this exercise really a subterfuge to replace a bad asset (the MBS) with a real asset? Again, that would be printing. The Fed would be saying that all that paper wealth created in the last decade is real.
The asset may, or may not, go back into the private sector depending on whether the Fed decides to sell the MBS it has purchased at some future date.
You make the assumption that all MBS are bad. This is not true. If you’d bought certain classes of MBS back in 2008/2009 you’d be up two to three times on your money. It’s all about the price you pay and the quality of the asset. Not all MBS are created equal.
Also, understand that the banks really can’t do much with the reserves. As Cullen said, they’re awash with them, they barely earn the bank anything and private sector banks can’t decide how many there are in the system at any one time.
Well, assuming the MBS are good, at some point they will mature and the money presumably will enter the private sector.
What kind of maturities are on these MBS?
MBS don’t mature. They expire/get paid off. A point you made elsewhere.
You can probably go to the Federal Reserve website to get a good idea of what they’re purchasing. Despite Ron Paul’s jeremiads to the contrary, the Fed is pretty damned transparent about what they do.
Cullen what is the appropriate level for interest rate on reserves given the Bsheet recession. The Fed set it to 0.25% – why not lower it to 0% given inflation rate is low?
They tried this and it wrecked havoc on Money Market Mutual Funds.
Anyways, do you really think cutting an extra .25 bps would create a new found demand for credit?
No lending wouldn’t change that much. That said, I don’t understand the function and purpose behind why the banks can “pocket” that .25% on reserves.
Cullen, Please elaborate on this statement:
“When the Fed implements QE they are creating reserves and swapping these reserves for bonds (in this case MBS).”
What do you mean when you say “creating reserves”? Where did the reserves come from?
Also, while you are on a crusade to educate people about what QE really is (or isn’t) the fact remains that somehow, by some magic, two things have happened:
1) Bank leverage has improved as they have exchanged toxic debt for reserves which served to stabilize their leverage ratios and avoid bankruptcy.
2) This process has been enabled by the Fed by shifting these toxic debt instruments to it’s own balance sheet. As we all know, this is in the trillions (who’s counting?) and the fed only has/had $50B in capital to use as leverage itself with. So how did it do this without “printing money”?
Perhaps the question should be “are reserves money?”. In my mind, reserves in this context create the “potential” for money to be created as the leverage ratios of the banks are improved through this process. The “potential” to sell credit is dependent upon the bank leverage ratio, and aggregate credit demand. So, leverage has been improved, but in order for “money” to ulimately circulate (as your ill advised econ professor espouses) the demand for credit must begin in order for the potential to create money to realize itself. Until then, the money remains “trapped” at the banks in the form of reserves.
In the end, this is a debate about semantics. There should be little doubt that the fed has created (printed?) the potential for enormous sums of money to enter the system – but only if the system returned to some “normalcy” with respect to credit demand.
What are the banks going to do with the reserves? They can’t do anything. The reserves are used for payments in between banks. They do not go outside of the banking sector and into the real economy, nor do they impact how banks loan. Banks take hits on asset degradation based on the equity, not reserves, they have on their balance sheets.
Does the fed-provided reserves free up other assets on their balance sheet for speculation, that would otherwise have been conserved?
YES – that’s my point – bank balance sheets are improved by the removal of “toxic” assets which are replaced with cash or reserves. This improves their capital ratio and thereby frees up capacity to lend/speculate.
The suggestion that these “reserves” don’t go outside the banks is hilarious…
Cullen:
I have seen you in many places say that QE is NOT debt monetization, and I have read your rationale.
However, in order to say what something is not, one must have a clear notion of what that something actually IS. It would be helpful to me (and perhaps others if you could define and provide an example of what debt monetization IS.
Thank you.
James A. Kostohryz
James,
In a previous post on QE Cullen has a note on what he considers monetization
“2) Monetizing the debt implies that there is not enough demand for government bonds and that the Fed needs to backstop the market for government bonds. This can’t be true though because the Primary Dealers are required to bid at auctions and would only reject this mandated duty in case of a hyperinflation where it became unaffordable for them to serve as the government’s funding agent.”
I don’t know if this is what you are looking for or if you have your own idea of what you would call monetization.
It would be great if you could say how you would differ on how you understand QE vs Cullen .
Your posts at Seeking Alpha are always full of comments so having your opinion here would be enlightening.
Also check out JKH here and at the MR site because he seems to understand the accounting on QE and central banking in detail.
good comments LRM…
my issue with the way the term “monetization” is being used among commentators is that it alway carries extremely negative scenario – “… the Fed is monetizing the huge deficit…its a ponzi scheme…they system is broken and will collapse… the Fed is so far down the path that it must keep going and if it stops yields will explode and the USA will be exposed as the next Greece…” etc etc
The fact that the Fed is buying bonds at the same time the govt running a large deficit is more coincidence than anything. You can call it monetization if you want, but based on my views of how the monetary system works I don’t believe there’s some huge conspiracy behind it to stop the financial system imploding…
Hi LRM:
Thanks for the quote. I still think it would be helpful for Cullen to provide a clear definition of debt monetization. Otherwise, how can one say what it is not?
I may write an article on this, and if so, I will offer it to Cullen for publication on his site.
I still hopes he answers my question.
Cheers!
Don’t you think there is a little moral hazard here with this QE? MBS are inside money assets that are being “made good” by outside money. I was all for QE1, it did much to stabilize the banking system, but this goes outside the purview of the Fed to my mind, in continuing to purchase inside money assets.
This has been my one concern as well. Just as you note, QE1 served a reasonable purpose in proping up the banking system. This, not so much.
aide form getting some bad prices on their trade executions (the banks wouldn’t have it any other way!), I don’t see anything too sinister with what’s going on – as I understand it the MBS they buy are agency debt – i.e. backed by Fannie and Freddie and thus already backed by the governement. The Fed is not exposing themselves to any additional loss – if the bonds go bad, the government has already agreed to make the owner whole.
It would be different if the debts weren’t already guaranteed by the government – in that case it would mean that if there were losses on the bonds their purchase would amount to FISCAL policy and not monetary policy.
I think it’s straddling a fine line between fiscal and monetary policy.
“The US monetary system is designed in this manner to ensure that the US govt can never have trouble procuring funds from the banking system. ”
This might be true but only half of the story. At some point the Primary Dealers will not buy (junk) bonds at ever lower rates.
And what are the banks doing with the excess reserves? When the banks sold bonds or MBS to the FED they “lose” money, since they don’t get interest payments from the securities anymore. So they are looking to invest the excess reserves to get again interest payments and this might fuel new bubble. And the banks have plenty of excess reserves looking for investment. And what happens if the next bubble burst? The FED will purchase even more securities so the banks stay liquid again. But this will eventually end since nothing is infinite (except MR Theory). What happens if the Primary Dealers request 15% or 20% interest on treasuries? What are all the credit institutions and insurance companies do with their money which doesn’t obey the Federal Reserve’s policies? What will happen if the FED wants to sell all the securities back to the banks to soak up liquidity? What happens then to the bond market? And since bonds are highly liquid, what will happen if the banks buy the securities from the FED just to sell them to individuals? They will have again the liquidity the FED tried to soak up. And what happens if the FED keeps the bonds until maturity? Will they know with their lagging indicators when they have to stop money destruction? Or do they actually know with their lagging indicators when to stop inflationary policy?
One can claim 1’000 times that QE’s are not inflationary (which is true) but one should not ignore individuals expectations – which Monetary Realists constantly do. If individuals expect inflation in the future they will act counter inflation as the gold price probably reflects. Doesn’t matter what MR or MMT or whatever theory tells the outcome might be different to what is expected.
All these things are never questioned – in fact all these questions are permanently ignored because they are unpleasant to the pure theorists.
People feel comfortable to see all the monetary coherences in the MR Theory but in fact they are even not able to distinguish between the different types of inflation or deflation.
This FED experiment might end very bad…
Dave, you’re half-right with some of your points, but you’re missing an important point regarding the investing of “excess reserves”.
You may have heard Cullen or others say how the banks really can’t get rid of their reserves. This is the key. And the easiest way to explain it is to refer back to the iron law of “equilibrium” which must prevail – every asset must be held by someone at every point in time until its retired.
So a bank sells some MBS to the Fed (their reserves at Fed go up)and their prop desk decides they want to use some of it to punt on Apple stock. To buy the shares, they must convince someone to sell to them. So then the seller has the cash and the bank has the shares. The “new reserves” may leave that bank, but end up in the AAPL sellers’ account at his bank…..which will then be back at the Fed as reserves.
There’s no doubt that QE is distorting markets and could even cause destabalising bubbles. But it won’t cause a bubble due to all the new money “flowing into” shares – just as much money has to by definition leave shares as flows in…
Dear Anon, thanks for your lucid explanation. But the example with AAPL is clear to me and I didn’t claim something else. In fact I “tried” to express something else and never get a proper answer: How will the FED get the excess liquidity (reserves) out of the system by time? This will only happen if the securities mature or expire and this might take weeks.
Let us assume that there won’t be any unintended consequences and all the market participants act like in Bernanke’s dreams and in favor of MR. But the FED uses lagging indicators as a measurement for the policies it applies. As I described a money increase carried out by the FED is instantly but the money decrease lags for weeks (depends on maturity and expiration) and the problem is aggravated by the use of lagging indicators.
And when you claim that the money flowing into shares won’t cause a bubble: One should know that the stock market is out of reach for the FED. The FED can only control the credits that are used to speculate on the stock market which might have an impact on stock prices. But the FED actions are not always correlative to the market. But at this point one can see that the cheap credits and excess reserves show already an increase in speculation on the stock market. Since March 2009 Market Participants outbid each other day after day. One should think that we are in the heydays of 2007 when “everyone” still believed in infinite rising stocks and home prices. Having said that, the banks themselves are stock speculators and can act against FED policies like all individuals on the market (=unintended consequences).
BTW as far as I’m concerned the “wealth creation” at the stock market (and hoarding) is ignored by MR theory.
Then another problem is always ignored. The government finances itself favorably through short term credit but uses the money for long term (even tax payments are only once a year). There we have a dangerous set-up. Every new banker knows that you shouldn’t finance long term investments with short term money…
There are many questions open at this time and people ignore these serious questions.
The FED should act as counterpoise to the economy and individuals (corporations and so forth). But if the FED is not able to determine the root causes they most likely do not counter act so disequilibrium is amplified.
Pierce, Dunce Cap, Anon, Dave,
Excellent string of comments and education. I think you are getting into the issues I’ve been complaining about in other strings…..and the “whys” I have perhaps been too inexperienced to explain well.
Cullen, Bernanke et.al have been claiming QE is demand neutral, value neutral, price neutral, rate neutral, inflation neutral……and I can agree with that, “by definition” (of course the next question would then be, what’s the point then?). The reality is that it IS “distorting” every one of these variables…..hence my “common sense” view that QE is clearly NOT neutral and IS having an impact…..and in reverse, if QE were to end (so there’s no expectation and front running), prices, rates, etc. would clearly be different from what they are now with QE.
I’m uncomfortable arguing/debating with Cullen, but insisting QE isn’t affecting rates, prices, etc. seems beyond silly to me. krb
Cullen, loan creates deposit. What happens to deposit if the loan is defaulted?
When a bank makes a loan it increases its balance sheet by adding a liability (the deposit) and an asset (the loan). When a loan is repaid or default on the asset and liability sides both contract. This is why the money supply declines during a de-leveraging.
When the loan is repaid, bank gets cash. When default, bank get nothing. Are you saying the end result is the same? In the booming days, loans get repaid. In the dooming days, loans get defaulted. What am I missing here?
Not the same. The banks writes down its assets and liabilities which will reduce its net worth and its ability to make loans in the future. The borrower who default will have their spending power reduced due to the fact that no one else will lend them money.
Yes, but if I default on my loan to you, then your situation is worse but mine is better.
It’s a net zero!
Meanwhile, the money that you loaned to me has been spent and is still rattling around out there in the economy. And it doesn’t have to be taken out of circulation to pay a debt.
That depends. If you take out a loan and spend all the money and then default on the loan then your credit gets wrecked for years. All you did was front-load your potential purchasing power into the economy and your inability to obtain credit in the future comes out in the wash.
Loans don’t really get destroyed in the aggregate. The monetary system requires a continual expansion in loans creating deposits, etc. Extrapolating the micro into a macro concept here misses the point. The banks can’t operate if they’re not expanding their loans perpetually. Just like the economy can’t sit still or your blood can’t stop circulating. The economy is a system of flows and the banking system is the center of the flows.
Interesting:
“QE3 Good for Homeowners, But Even Better for Banks”
“The interest banks pay on mortgage bonds has dropped from 2.36% on September 12, the day before the Fed announced its program, to as low as 1.65% last week. It edged up to 1.85% on Monday.
That means the profit, or spread, banks earn from creating new mortgages for homeowners paying around 3.4% and selling the loans into the secondary market has risen to around 1.6%. That is higher than the 1.44% spread they pocketed before QE3 and significantly greater than the 0.5% they earned on average in the decade between 2000 and 2010.”
http://finance.yahoo.com/blogs/daily-ticker/qe3-good-homeowners-even-better-banks-143731568.html?l=1
David Stockman in a video I linked to in prior post on QE mentions a profit for the banks of $50 billion in a very short time as a result of the advance speculation on this rate move. Is a number like this possible and was it realized or just how much the portfolio of MBS being held went up ? Cowpoke, that is a big move in rates given the low starting point. Did the MBS value go up in proportion to rates going down?
LRM, This is what I have been suspecting, Banks have not really been passing the Savings along to the common man.
I have been suspicious because Citi bank which holds my mtg is now offering me a HARP2 plan to refi my 6% down to 4.125 and wave the fees. However, for 2 grand in fees from another lender I can get 3.65. So I am thinking why is the bank that has my loan giving me the worst deal?
Well this info is why, because as the FEDS monetary policy is lowering interest rates, IT’s ALSO INCREASING the SPREAD for banks.
PLUS fewer players in the MTG game now:
“The jump in revenue for the banks is not coming from charging consumers higher fees. Instead, it comes from the their role as middlemen. Banks make their money from taking the mortgages and bundling them into bonds that they then sell to investors, like pensions and mutual funds. The higher the mortgage rate paid by homeowners and the lower the interest paid on the bonds, the bigger the profit for the bank.
Mortgage lenders may also be benefiting from less competition. The upheaval of the financial crisis of 2008 has led to the concentration of mortgage lending in the hands of a few big banks, primarily Wells Fargo, JPMorgan Chase, Bank of America and U.S. Bancorp.
“Fewer players in the mortgage origination business means higher profit margins for the remaining ones,” said Stijn Van Nieuwerburgh, director of the Center for Real Estate Finance Research at New York University.”
http://dealbook.nytimes.com/2012/08/08/with-rate-twist-banks-increase-mortgage-profit/
MBS is originated by the private sector (unlike Tsys). You only need enough working capital to securitize and flip to the gov. The faster they can flip the less working capital required. I don’t think this is like QE2+3 at all.
When is debt being monetizing? The Fed is the lender of last resort. if they are purchasing assets aggressively when total credit is increasing substantially, then it could be argued they are monetizing if they are buying gov credit. It’s pretty clear that is not the case now. Shadow stats M3 is anemic, ABCP has not recovered, total mortgages have declined. Only HY has been breaking records. Just watch out for Euro credit and Chinese collapse (rebalancing consumption and the reduction of the trade surplus will contract global liquidity even more).
What would I call monetization? I would call it monetization when the pvt banking system is unwilling to fund the govt’s spending. Then the govt is making its own money for its own spending purposes and unable to procure it from the pvt sector. To me, that’s monetization and that’s not what’s occurring here.
I agree with your def. I was trying to take a different tack, because the most common line of discussion is …
reader: QE is monetization!
cullen: tsy auctions can’t fail except in hyperinflation
reader: if auctions can’t fail, then how can government not procure funds … monetization = hyperinflation?
Given your new Bio pic, you can probably appreciate a different tack.
;-}
First: I am totally on board with how switching bonds for bank reserves does nothing for the everyday economy. Not going to argue that.
But I have to ask myself – what happens in the scenario below?
1. I decide to buy $10000 of govt bonds.
2. The govt spends the vast majority into the everyday economy via wages and whatnot.
3. My $10000 is now in circulation and I hold an IOU.
now..
4. I decide that I need my $10000 before maturity and put the bond up for sale.
5. The Fed snaps it up because it’s doing a round of QE.
6. I now have $10000 again which I spend into the economy.
Didn’t my original $10000 in the regular economy just turn into $20000?
I agree that Joe Citizen isn’t a major holder of bonds and also isn’t very likely to liquidate a lot of them before maturity, so either way it wouldn’t be a major factor, but I’m curious.
Am I wrong in any of my assumptions?
I think you’re leaving out the specific point about your spending though. Spending is a function of saving relative to income. You don’t spend more just because you sell a bond to someone and have cash. That’s like saying that swapping a saving account into a checking account makes you more likely to spend. Of course that’s not true. My guess is much of your saving is held at the bank in deposits. You don’t spend it because you have some certain goal for the future which is based on your current saving relative to your income. So what really changes the dynamic there? Higher income, right? So the real question is – what part of QE causes higher incomes? Does trading a bond (a saving account) for reserves or deposits (a checking account) make you more inclined to spend? It shouldn’t. And I can’t find the transmission mechanism in QE that adds to incomes since it doesn’t force more lending and it doesn’t have any other real sustainable long-term impact. There’s a debatable wealth effect in the near-term, but that’s just front loaded asset price increases. Sort of like a stock buyback that doesn’t have any impact on the corporation’s underlying operations.
From a technical perspective, the example you gave increases the amount of checking accounts in the economy. But unless the amount of income was also increased this is likely just due to the fact that someone wanted to sell a bond and just so happened to sell it to a bank who then sold it to the Fed. So as I said in the comments in the post, when a non-bank sells to a bank it is doing this willingly because the economic agent wants to liquidate the bond position for whatever reason. This isn’t adding net financial assets though or making people more inclined to spend.
Hope that clarifies my thinking there….
Like I said I’m totally on board with the noneffect of QE3 (it’s all voodoonomics). I just wanted to make sure I understood all the mechanics correctly and it seems I did.
So, yes, the amount of money in everyday circulation can be increased. But it probably won’t in any meaningful way because of what the Fed chooses to buy.
Dumping all of QE3s money in everyone’s checking account might do things through supply and demand. But that’s not what we’re talking about.
Just think of it like this. What if all the saving accounts in the USA were suddenly changed into checking accounts. Would consumers suddenly run out and spend? Or would they moan and groan about how the govt stole their interest bearing saving? That’s the contradiction you have occurring here. The people who complain about money printing and the govt creating too much debt are the same ones complaining that the govt has reduced the interest on their saving accounts.
Cullen, you seem to becoming more myopic on your view of how people view savings vs checking. I think you should use caution here because as we deal with a population in the millions, expecting people to understand the basics of simple checkbook balancing 9is a reach.
I am starting to differ in my feelings that people view Checkbook vs Savings Book differently mentality..
Hell, I am starting to believe that we humans are more of the female thought process of well I still have Checks in my check book so I must have money….
I think you are falling into a trap of ascribing rationalization to an end process even though the parts involved are irrational. Not saying the end results are not the same, Just saying I think descriptively you are not applying the proper all inclusive metrics.
Case in point is what got us here in the first place… Easy Credit.. When credit is easy sponsored by the Gubmant, does it distort the real world? I would say yes, look at Healthcare and Education and even Home mtg financing. The Govt’s ability to manipulate the free THINKING mkt has to be considered when we say that people act rational via a Checking or savings account. I think people act more along the here and now vs future.So to say that Checking/ Savings matter, well yes it does in the fac6t that people who could take loans out via seconds based on govt p[olicy distorted the market.
So Govt Policy in effect changed peoples mtg into a checking account so they could go out and spend and look where it got us…
Absolutely. Increasing house prices sponsored by cheap credit moves more money into the everyday economy (via the sellers hands). Credit cards extends the amount of effective money in the everyday economy.
Ongoing, in a large enough scale and it WILL have an impact on the everyday economy (positive!).
Of course, all of this is needed to sustain status quo in a world where the tub of money in everyday circulation has a big siphon in the bottom where money gets moved into the financial sector and offshore accounts. (Yes, I know that part of it actually finds its way back into the everyday economy via honest-to-god investments. But a very big chunk does NOT, and spends the rest of its life rent-seeking.)
Mikael:
You’ve got it, except the money is doubled as soon as you buy the bond. When you buy the bond, the government immediately spends your $10,000 and you have the IOU (the bond), which is equal to $10,000, as that is a cash equivalent.
A few years ago, you might have worried that a bond has some risk, as maybe the bond wouldn’t be redeemed, but now we know that the Fed can buy back your bond at any time. That’s the lesson of QE. Debt is monetization.
It begs the question…
What if, on pay day, everyone went out and bought as much newly-minted bonds as they could afford. And the next day put them up again.
Would banks absorb those or do they only do it when the tsy is the seller?
Michael, you’ve gotta think really carefully about this (go back to Cullen’s responses).
Financial transactions likethese don’t create or destry anything. Think about it – on “pay day” money is being transferred from your employer’s account to yours – the money already exists. Your employers bank may have had a lot of its reserves tied up in treasuries in order to get a higher rate of return than reserves. So it may have sold some treasuries to do the transfer for your boss. If you then turn around and buy treasuries, you’re probably buying the same ones just sold back. In sum, nothing gets created or destroyed – the same “money” just passes around the economy.
With regard to “newly-minted bonds” you seem to be thinking about it from the perspective that the government must procure funds before it can spend – this is not true in the USA – the government creates money by spending it. The best way to illustrate, what if your employer was the government? If on pay day you did go out and buy “newly-minted bonds” you’d in essence be using the money they just credited your bank account with! The money has already been created. If the next day you wanted to sell them, no worries – there would indeed be a buyer for them. You’d have your pay back in your bank (adding to your bank’s reserves) and they may well invest some of the reserves in bonds (essentially buying the bonds you just sold).
It will take you a while to get your head around some of this stuff – just keep thinking hard and follow the flows/transactions…
It seems we’re talking past each other here a bit.
Let me explain my standpoint. In my view of the world, the amount of money actually circulating in the day-to-day economy of consuming and producing has an impact on the velocity. Reduce it to a single dollar swapping hands and velocity turns to rubbish. Increase it and the velocity can increase up to a point dictated by our aggregate willingness to consume. Sure MY salary might not go up. But someone else might get hired to increase production. And small business owners certainly consume in relation to how well their business is doing.
(An extension of this view is: siphoning money out of the circulation and putting it in the financial sector or offshore is bad for the economy.)
So, to me, there is a difference between money circulating in the everyday consumption-production economy, and money stuck in bank reserves.
I don’t call QE printing money. I just muse over what could happen if you tricked banks into moving some money into the everyday economy!
I hope that clears it up?
I’ll also point out that “the government creates money by spending it.” is very MMT and I don’t subscribe to that view. The state is a money user, the way I see it. The state COULD create as much money as it wants. But it doesn’t today. Today it taxes and redistributes. And hands out IOUs for extra money. But in+out is in balance because that’s the way the laws are currently written.
Mikael,
That’s mostly right, as you likely know. But I just want to clarify this point since i think it’s an important one. The state creates “outside money”. Outside money includes notes, coins and reserves. But most of the money in our economy is inside money created by banks in the form of bank deposits. And yes, the govt is a user of inside money. By choice….As you said.
Thanks – I shouldn’t have left that bit out.