Title is self explanatory. I have a very simple understanding of QE - fed whips out cash out of thin air, buys bonds and keeps interest rates low. Why is this a good thing? Isnt this just devaluing the dollar by increasing supply?
explanation of QE and its effect on the economy
- Thread starter countercountertrend
- Start date
Quantitative easing is distinguished from standard central banking monetary policies, which are usually enacted by buying or selling government bonds on the open market to reach a desired target for the interbank interest rate. However, if a recession or depression continues even when a central bank has lowered interest rates to nearly zero, the central bank can no longer lower interest rates. 
Here's how the fed works.
You need some money? I print it up for you and loan the new printed money to you at a price. Currently very low, like almost zero percent.
You pay me back the printed money I loaned you and I throw it all in the incinerator and we are right back to where we started minus the vig you paid to the fed for the loan of money printed out of thin air.
The fed buys bonds in the open market (a lot of them). This keeps rates low because banks know they are lend you money to buy a house, package it in a bond and sell it to the fed. They can lend at a lower rate as their risks are less.
The fed isn't printing money and dumping it into the system (like a huge counterfeiting operation). The money will eventually come out of the system when the bonds come due and the homeowner in the above example pays his mortgage off to the bank and then the bank pays the fed off for the bond that it sold.
By keeping rates low and allowing the banks to feel comfortable that they won't have a lot of bad debt on the books if the economy goes south, the banks can lend out more money. The more they lend, the better the economy will perform. Additionally the lower the interest rates, the easier it is to justify making investments (going to the bank in the first place to borrow money). This is also positive on the economy as it increases spending.
As economic activity increases, it begets more economic activity. (I buy a new car (with money borrowed from the bank), the car salesman takes his check and orders a nice steak dinner, and the waitress goes and buys a toy for her kid with the tip she got).
This probably saved the economy in 2008-2009. Today, it's probably not necessary.
The fed isn't printing money and dumping it into the system (like a huge counterfeiting operation). The money will eventually come out of the system when the bonds come due and the homeowner in the above example pays his mortgage off to the bank and then the bank pays the fed off for the bond that it sold.
By keeping rates low and allowing the banks to feel comfortable that they won't have a lot of bad debt on the books if the economy goes south, the banks can lend out more money. The more they lend, the better the economy will perform. Additionally the lower the interest rates, the easier it is to justify making investments (going to the bank in the first place to borrow money). This is also positive on the economy as it increases spending.
As economic activity increases, it begets more economic activity. (I buy a new car (with money borrowed from the bank), the car salesman takes his check and orders a nice steak dinner, and the waitress goes and buys a toy for her kid with the tip she got).
This probably saved the economy in 2008-2009. Today, it's probably not necessary.
Aside from fed policy I am comcerned at the large increase in the component of the money
supply that is M3. This grew at about a 9% yearly rate from 2005-2008 and of course the fed
stopped tracking it in 2006. Granted a few trillion of this was lost in the financial crisis but it
appears to be restored.
Look i know very little, but the fact that so much of this could be lost during the financial crisis
does not bode well for this lengthy risk on cycle. If the past is any indication then M3 is again
out of the regulatory bounds of the fed, not subject to leverage constraints , and utilized in assets where liquidity (in bonds and equity) is a risk due to every central bank and sovereign wealth fumd in the world competimg for these asstes.
Seems like an underestimated component of systematic risk.
supply that is M3. This grew at about a 9% yearly rate from 2005-2008 and of course the fed
stopped tracking it in 2006. Granted a few trillion of this was lost in the financial crisis but it
appears to be restored.
Look i know very little, but the fact that so much of this could be lost during the financial crisis
does not bode well for this lengthy risk on cycle. If the past is any indication then M3 is again
out of the regulatory bounds of the fed, not subject to leverage constraints , and utilized in assets where liquidity (in bonds and equity) is a risk due to every central bank and sovereign wealth fumd in the world competimg for these asstes.
Seems like an underestimated component of systematic risk.
that's cool, I get a car, the salesman gets a steak, and the waitress gets a toy.
and the fed gets their money back when I pay off my auto loan.
this is great stuff .... thanks for making things understandable
What happens with all the sub prime auto buyers that don't pay?
not much, they will get the same bailout as everyone did back just 6 years ago...
No such thing as free markets, you do know its all about free bailouts and stimulus....I know many won't believe this, but QE 1 QE 2 and QE 3 is the reason for record car sales....there are records happening around the world for all car companies, MB posted its best month in history in MARCH selling over 180,000 cars world wide, (Sales at Mercedes-Benz rose 16 percent in March to 183,467, the highest-ever level recorded for any month in the automaker's history
http://www.autonews.com/article/201...obal-sales-rise-16-in-march-to-monthly-record.....) this is all because of record stock market gains and the stimulus being pushed around by central banks, especially in europe and japan now.... if it were not for QE 1 QE 2 and QE 3 along with all the free bailouts 16,500,000 cars would not have been sold in 2014, that matches the same amount of cars sold in 2006, so the US is selling more cars now than ever before, if it were not for the free money and all those QEs and record breaking stock market gains car sales in the US would be still sitting under 12,000,000 sales a year....right now for 2015 it looks like car sales will break 17,000,000 by end of 2015....
Notice the turn around in car sales from 2009 all the way into 2015, they have gone up with the historical 200%+ stock market rally, take away this rally and go into a single bear market correction and you will see car sales fall very quick, until then car sales will up tick with each move higher in the stock market...
CAR SALES US 1999-2015
Year
U.S. Total Market Sales
1999
16,958,568
2000
17,410,320
2001
17,177,445
2002
16,848,180
2003
16,675,648
2004
16,913,361
2005
16,997,203
2006
16,560,989
2007
16,154,064
2008
13,245,718
2009
10,431,510
2010
11,589,844
2011
12,778,885
2012
14,492,398
2013
15,582,136
2014
16,531,070
2015 YTD *
3,954,946