So since the top in QE The Fed has reduced balance sheet assets a whopping -1.55% up to yesterday's report. Let's see how quickly they get at it ... and how markets react. Along with, importantly, future rate hikes.
FOMC has not stopped QE
- Thread starter Rickshaw Man
- Start date
Thanks for posting this. It is functionally correct, though technically not perfectly correct.
What I don't like about this admittedly simple -- clear or not I'm not sure -- way of explaining QE and QT is that it implies that the Central Bank has sole power to create and destroy money. This of course is wrong!
There is a better way of explaining what's going on here, but unfortunately it can't be done without invoking the concepts of inside and outside money.
Technically, QE does not create money directly, but indirectly. And it is only a certain kind of money, inside money, that's indirectly created by QE. It is the fractional reserve lending within the private sector that actually creates new inside money. Central Bank QE facilitates this lending. I have mentioned in some of my other posts in this Economics Forum that QE, at its core, is removal from the private sector of one kind of money, bonds, and replacement with another kind of money, bank reserves. The money involved in this QE transaction is outside money ! The effect in the private sector is downward pressure on interest rates. The intended result is that more money will being lent, and it is this lending that creates new inside money . Recall that inside money is temporary money; it disappears when a loan is paid off. Whereas outside money is semi-permanent money; it can only be destroyed by Congress having ordered the Treasury to remove it from the private sector by taxing.
On the hand, QT is the reversal of the QE process. As with QE, technically QT does not destroy money directly, but indirectly. And again, it's via fractional reserve lending when loans are paid off that this occurs. QT is the swapping of private sector bank reserves for bonds. Again, it's the exchange of one kind of money for another. Yes, it is the reversal of QE and has the reverse effect in the private sector. It creates upward pressure on interest rates, causing fewer loans to be made. If the rate at which new inside money is being created by lending falls below the rate at which loans are being paid off, the result will be a net decrease in the amount of inside money in the private sector.
I'm not sure it's a good idea to tell folks that QE creates money and QT destroys it, even though this is functionally not wrong. Explaining QE and QT in this way, however, is bound to give people the idea that the Central Bank creates and destroys money at will as though they had unilateral power to do this. In reality, neither the Central Bank nor the U.S. Treasury can unilaterally create or destroy either inside or outside money.
It is more correct, and much less misleading, to think of the Central bank as having the power to interchange the two forms of outside money in the private sector, i.e., bonds and bank reserves, and the Treasury as having the power to spend outside money into and collect outside money from the private sector. Neither of these bodies, however, has any say whatsoever over the amount of outside money that can be created or destroyed. Constitutionally, and as a practical matter as well, only the Congress of the United States has the power to create and destroy outside money. Congress does this when each year it decides the level of spending and taxation. The Central bank does, however, through its regulation of Banking and its control of the wholesale price of money, exercise considerable indirect control over the creation and "destruction" of inside money. It is not a unilateral control however, because this latter feature of Central Banking is not entirely in the hands of the Central bank. It also lies partly in the hands of private sector Banking and its lenders and borrowers.
Retail interest rates can approach zero, but if there is no demand for borrowed money, there will be no new loans made and no creation of new inside money, as Ben Bernanke found much to his consternation during the initial phase of recovery from the Great Recession.
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You've succeeded in making something simple, simpler than possible.
There's a song for that, but I am reaching my quota for music analogies. So just cue up The Beatles Here Comes the Sun.
Better than the inverse, as you've done.
I would disagree of course. Because if you ignore the difference between inside and outside money, you end up making two mistakes : 1) Attributing "Money Printing to QE" when actual money printing occurs when the C.B. covers a net overdraft in the Treasury's reserve account. And it is the Congress, not the C.B., that controls the amount of that; 2) The expansion of the money supply that follows QE should not be referred to as printing. It's the private sector banks that expand the money supply when they make loans via fractional reserve banking. And that money is temporary money!, whereas newly printed money is permanent until removed by taxation and comes directly from deficit spending. Congress, not the C.B., is in charge of that.
Did you purchase the book I recommended ("The Rise of Carry") you read?
I'm guessing no.
good guess!
Ok explains why you are still lost in the weeds.
"No I won't do it again, I don't want to pretend
If it can't be like before I've got to let it end
I don't want what I was, I had a change of head
But maybe someday...
Yeah maybe someday"
