QUANTITATIVE EASING: âTHE GREATEST MONETARY NON-EVENTâ
"There is perhaps, no greater misunderstanding in the investment world today than the topic of quantitative easing. After all, it sounds so fancy, strange and complex. But in reality, it is quite a simple operation. JJ Lando a bond trader at Goldman Sachs has eloquently described QE:
âIn QE, aside from its usual record keeping activities, the Fed converts overnight reserves into treasuries, forcing the private sector out of its savings and into cash. This is just a large-scale version of the coupon-passes it needed to do all along. Again, they force people out of treasuries and into cash and reserves.â
Some investors prefer to call it âmoney printingâ or âstimulative monetary policyâ. Both are misleading and the latter is particularly misleading in the current market environment. First of all, the Fed doesnât actually âprintâ anything when it initiates its QE policy. The Fed simply electronically swaps an asset with the private sector. In most cases it swaps deposits with an interest bearing asset. Theyâre not âprinting moneyâ or dropping money from helicopters as many economists and pundits would have you believe. It is merely an asset swap.
The theory behind QE is that the Fed can reduce interest rates via asset purchases (which supposedly creates demand for debt) while also strengthening the bank balance sheet (which entices them to lend). Unfortunately, weâve lived thru this scenario before and history shows us that neither is actually true. Banks are never reserve constrained and a private sector that is deeply indebted will not likely be enticed to borrow regardless of the rate of interest. On the reserve argument the BIS explains in great detail why an increase in reserves will not increase borrowing:"
"In addition, there is one great irony in all of this misunderstanding. The hyperventilating hyperinflationists and those investors calling for inevitable US default are now clinging to this QE story as their inflation or default thesis crumbles before their very eyes. The new hyperinflationist theme has become a story of âif this, then this, then THIS!â â the ludicrous 3 step investment thesis that the economy will become so fragile that the government will pile on with more stimulus, which will worsen matters and force them to stimulate further which will then result in hyperinflation and/or default. Most investors have enough trouble predicting what the next event will be â connecting the dots two or three steps down the line is not only ill-advised, but is hardly even worthy of considerationâ¦.Letâs just call a spade a spade â the inflationistas have been wrong and the USA defaultistas have been horribly wrong."
Overnight Reserves into Treasuries.
Overnight reserves is all the extra reserves that banks have at the end of the business day. Sometimes banks give loans with this money to other banks overnight with these reserves, but has to be payed back the next day before the start of the business day plus interest. The overnight market involves the shortest term loan. Anything less than a year.
The fed takes that cash from the overnight reserves and buys U.S. Treasuries with it. Forces you and I out of our savings and cash at the banks into U.S. Treasuries so that they can fund the governments nonsense.
Then when the bond matures they force the issue again, force the U.S. Treasury back into cash and into reserves.
The only problem is this is supposed to help banks make loans. The Bank of Japan proves this doesn't work. The only thing that happens is the tax payer is screwed over by interest again. We are left paying for the interest on the U.S. Treasuries. So they are using our deposits and savings to tax us. Which in reality is just like stealing our savings and taxes. This is what happens when people decide to spend and not save. You can't win against the banks. They will get your money one way or the other.
http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event