Is another bout of QE a good thing?

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Quote from maxpi:

are banks still in the lending business or can they make more by trading derivatives?

AFAIK, the real insanity of the derivatives market has not been re-regulated.. I can sell a derivative that pays me when your house burns down... what's to stop me from torching it?
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yeah, but why do you, or I, or the government care what the banks do?

It really is none of our business as long as we don't have to bail them out next time.

Same goes for health care. I use to be able to smoke and drive without a seat belt until it became the governments business and my risky behavior became your problem.
 
Quote from plyka:

You don't have a proper understanding of money/debt/derivatives. Even under a true classical gold standard (take the one from end of the civil war until the FEDs creation in 1913), has a pyramid shape to it in the sense that $1 worth of real gold can support $9 or so of debt/money. It's the very essence of fractional reserve banking. But just because there is $9 of debt/money doesn't mean that it is being used at once. Let's give an example:

I deposit $100 in the bank. Bank loans out $90 into someone's bank account. Now, there is technically $190 of money out there in our deposit accounts with only $100 of real money. However, only $100 of it can be used at once. If both of us use our money, let's say we take $190 out of the bank, then $90 of it must come from someone else's deposit of real money. In that sense, the bank does not create more money, it just seems like there is more money because it is shown in multiple bank accounts.

Further, currency/coins is irrelevant, as it only represents a fraction of the monetary base. The monetary base is the amount of actual money out there, but its not needed to be completely represented by currency/coins because only a fraction of it is usually outside of the system. If necessary, the FED could print the currency to represent 100% of the monetary base without actually creating any more money than already in circulation, since the only difference is that before 25% of the monetary base was represented as currency while 75% of represented as bank deposit, but now 100% is represented as currency.

And to go even further, your involving derivatives into the picture is completely and utterly off the mark. The $14trillion does not need to "pay off" the $55 trillion. Derivatives are a ZERO SUM GAME. There is NO DEBT there. No one owes this money to anyone and thus does not need to be paid off. As an example, let's say that you sell me a gold futures contract for August at $1565. This derivative has a notional value of $156,500, but this does not create $156k of new debt just because we signed this contract or created this derivative. All that's happened is that you have told me that you will sell me 100 ounces of gold at $1565 per ounce. Even if you lose $10 on the trade, that means you have to give me $1000k extra once the derivative expires, all that happens is the money exchanges hands, hence the zero sum game. This has nothing to do with debt.
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Does ZERO SUM create WEALTH?
 
Quote from morganist:

It is not the action of the reserves to increase prices. The inflation from QE comes about as a result of the loss in foreign investment in the country and currency reducing its ability to purchase goods from abroad. The simple of act of QE in the first place will create a reduction in demand for the currency which will result in an inability to goods at the previous price creating inflation from the appearance it makes to the rest of the world about the state of the economy.
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well, now I'm confused. Now you say that the market (supposedly well informed and efficient) will grossly mistaken adding reserves to banks as "money printing" and abandon the currency. Hasn't happened the first two rounds. Dollar is higher after QEs and twisting. But this is not what your article says at all. Your article certainly claims that QE will somehow lead to more lending. In fact it is technically incorrect right out of the gate. The first paragraph says

"The plan is to provide high street banks with up to £80 billion of funds to lend to businesses and potential homeowners, with the intention of creating jobs and sustainable growth throughout the economy"

Once again banks don't lend reserves. Reserves are used for only two purposes – to settle payments in the overnight market and to meet the Fed’s reserve requirements. Aside from this, reserves have very little impact on the day-to-day lending operations of banks in the USA. This was recently confirmed in a Fed paper

“Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.”

http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

This is very important to understand because many have assumed that various Fed policies in recent years would be inflationary or even hyperinflationary. But all the Fed has been doing is adding reserves to the banking system in exchange for (mostly) government bonds. Because banks are not reserve constrained, i.e, they don’t lend their reserves or multiply their reserves, this doesn’t necessarily lead to more lending and will not result in the private sector being able to access more capital. Because banks are not reserve constrained it can only mean one thing – banks lend when creditworthy customers have demand for loans. Loans create deposits, not vice versa. Banks create new loans independent of their reserve position and the Federal Reserve is in the business of altering the composition of outstanding financial assets in an effort to maintain a target interest rate and maintaining the smoothly operating payments system that it oversees. In the loan creation process, banks will make loans first (resulting in new deposits) and will find necessary reserves after the fact (either in the overnight market or via the Fed).
So, contrary to what we are all taught in school, loans actually create deposits and not the other way around, as the money multiplier would have us all believe. When a bank makes a loan it debits the Loans Receivable account on its books. To balance this transaction it will create a new liability in the name of the borrower. This loan will create a deposit somewhere else in the banking system (possibly at the same bank) that will cause this new bank to also account for its new liability (the deposit) and change in reserves at the Fed.

How does adding reserves to banks balance sheets keep housing price artificially high? It certainly doesn't increase bank loans. If anything it's deflationary, as it reduces the incomes of the private sector. Having the same impact on the private sector as a tax or a government surplus.The efficient market should flock to the dollar not run

One can't give good advice or accurate outcomes if starting form a technically inaccurate framework.
 
Quote from morganist:

It is not the action of the reserves to increase prices. The inflation from QE comes about as a result of the loss in foreign investment in the country and currency reducing its ability to purchase goods from abroad. The simple of act of QE in the first place will create a reduction in demand for the currency which will result in an inability to goods at the previous price creating inflation from the appearance it makes to the rest of the world about the state of the economy.
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Also why doesn't Canada suffer from this. Under the above premise a country without reserve requirements should have a comparatively worse loss of foreign investment when it announced it no long had reserve requirements.
 
Quote from antitrust:

well, now I'm confused. Now you say that the market (supposedly well informed and efficient) will grossly mistaken adding reserves to banks as "money printing" and abandon the currency. Hasn't happened the first two rounds. Dollar is higher after QEs and twisting. But this is not what your article says at all. Your article certainly claims that QE will somehow lead to more lending. In fact it is technically incorrect right out of the gate. The first paragraph says

"The plan is to provide high street banks with up to £80 billion of funds to lend to businesses and potential homeowners, with the intention of creating jobs and sustainable growth throughout the economy"

Once again banks don't lend reserves. Reserves are used for only two purposes – to settle payments in the overnight market and to meet the Fed’s reserve requirements. Aside from this, reserves have very little impact on the day-to-day lending operations of banks in the USA. This was recently confirmed in a Fed paper

“Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.”

http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

This is very important to understand because many have assumed that various Fed policies in recent years would be inflationary or even hyperinflationary. But all the Fed has been doing is adding reserves to the banking system in exchange for (mostly) government bonds. Because banks are not reserve constrained, i.e, they don’t lend their reserves or multiply their reserves, this doesn’t necessarily lead to more lending and will not result in the private sector being able to access more capital. Because banks are not reserve constrained it can only mean one thing – banks lend when creditworthy customers have demand for loans. Loans create deposits, not vice versa. Banks create new loans independent of their reserve position and the Federal Reserve is in the business of altering the composition of outstanding financial assets in an effort to maintain a target interest rate and maintaining the smoothly operating payments system that it oversees. In the loan creation process, banks will make loans first (resulting in new deposits) and will find necessary reserves after the fact (either in the overnight market or via the Fed).
So, contrary to what we are all taught in school, loans actually create deposits and not the other way around, as the money multiplier would have us all believe. When a bank makes a loan it debits the Loans Receivable account on its books. To balance this transaction it will create a new liability in the name of the borrower. This loan will create a deposit somewhere else in the banking system (possibly at the same bank) that will cause this new bank to also account for its new liability (the deposit) and change in reserves at the Fed.

How does adding reserves to banks balance sheets keep housing price artificially high? It certainly doesn't increase bank loans. If anything it's deflationary, as it reduces the incomes of the private sector. Having the same impact on the private sector as a tax or a government surplus.The efficient market should flock to the dollar not run

One can't give good advice or accurate outcomes if starting form a technically inaccurate framework.
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It is the signal it gives about the state of the economy and the future buoyancy. One bout of QE will look bad, two bouts of QE will look worse, three bouts of QE will look like they don't know what they are doing and throwing money at the situation. Besides it is just a matter of time before the market confidence goes, each of these actions is just another stage in that process. To be fair America is unique in that it has some economic factors that protect it. The trading of oil in dollars for example.
 
Quote from morganist:

It is the signal it gives about the state of the economy and the future buoyancy. One bout of QE will look bad, two bouts of QE will look worse, three bouts of QE will look like they don't know what they are doing and throwing money at the situation. Besides it is just a matter of time before the market confidence goes, each of these actions is just another stage in that process. To be fair America is unique in that it has some economic factors that protect it. The trading of oil in dollars for example.
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So private captal needs the governemnt to hold their hand and signal how bad the economy is, then they all act in unison. I didn't know they were so incompatent. The numbers are not a secret. It's hard to believe that markets act on the feds perception of the economy rather that economic reality itself. If it was actual money printing the orthodox strategy would be to buy dollar denominated assets to get in on the ground floor of asset price inflation. Historically hot money is attracted to these events rather than repelled. When Canada ended it's reserve requirement nobody ran for the exists, which would certainly be a more profound signal than just adding reserves.

But their not throwing money at the situation thier just swapping an interest bearing asset for a non-interest bearing asset. You might also consider making a correction to your blog entry you certainly give the impression that QE is "money printing". Unless accuracy is not what your going for.

I see "market confidence" thrown around by mostly inept cable news personalities. Academic clap trap more or less. Markets respond to reality not the FEDS perception of it. if consumers flooded their stores, they would feel confidant regardless of the insignificant bookkeeping actions of the FED (QE)
 
Quote from 4thaugust1932:

Does ZERO SUM create WEALTH?
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It depends. Yes, it can.

Wealth is almost entirely dependent on efficiently allocating resources in the economy. As far as this zero sum game goes, in creating a more efficient economy, it does create wealth. It creates a more efficient economy by transferring risk to people more willing to accept it, but more importantly, more ABLE to aprehend it. It creates an atmosphere where corn producers can concentrate on producing corn as opposed to guessing future revenues.

But MOST importantly, this zero sum game creates efficiency because it is the epicenter of the most important pieces of information in the entire economy, the very center of how it is decided where capital/resources are allocated. PRICES! It is HERE, in this zero sum game, where Nat Gas prices fall and crude oil prices rise, telling consumers through prices that it is best to substitute nat gas for crude oil when possible, and perhaps viable to spend resources in creating a permanent nat gas use operation. It is where soy bean prices rise, telling food producers to substitute wheat or corn where and when possible, to raise prices on their soybeans products, and at the same time, it tells soybean growers to give more land/capital/labor towards soybeans as opposed to towards wheat, etc.

In a free capitalist economy, only those operations which truly produce WEALTH for a society can exist and prosper. The more money making is possible in an area, the more this area produces wealth for society. Remember, i said a truly free market, laissez-faire capitalist society. We don't exactly live in one now. So ask yourself, if you were in a free market economy, would this area exist? If it would, then it does create wealth.
 
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