Martin Armstrong — Is Quantitative Easing the Same as Printing Money?

Gets this right. He is out of paradigm in other ways that don't come up in this post.

Armstrong Economics
Is Quantitative Easing the Same as Printing Money?
Martin Armstrong

Here's a nice graph showing what QE actually did

An post unrelated to QE at Advisor Perpsectives included this nice graph:

This image clearly demonstrates what we have previously discussed here at MNE- that despite the common predictions, the Fed's Quantitative Easing programs actually brought 10yr bond yields up, not down! The story goes something like this: 

So the Fed announces each round of QE and stokes off inflation fears, causing prices to go down. Then, when the boys over at the NY Fed SOMA desk actually begin buying, they put in bids near this newer, lower price, and actually end up locking in these lower prices. Further, the quantity of their purchases during each QE isnt actually enough to affect prices substantially. Then when QE ends, inflation fears go away, and bonds rally. Prices go up to where they were before each QE announcement, and the Fed can book gains (ie, losses to the private sector) if they ever have to sell. Somehow, this is perceived as "getting the best deal for the taxpayers", as if taxes have anything to do with this process.

Takeaways here are:

1)The quantity of the Fed’s Tsy purchases are actually too small to bring prices up

2) But they are large enough to scare other bondholers into selling...(more are net sold than bought?), so prices actually go down

3) QE ends, then inflation fears subside and people go back into bonds, (the risk-off trade), bringing prices back up

4) and the Fed is bidding too low anyway, because they are afriad of taking too large a loss if prices go down more, even though this would not matter at any fundamental level. The fed is monopoly issuer of reserves, so it doesnt matter if they take big losses, since they are self funding. This may hurt the amount they can put towards operating costs, and reduce their contribution to “deficit reduction” which they may like doing, due to the politics.

MMT was right yet again!!!

It must suck being the other guys!

Randy Wray — News Alert: Fed Announces Round Four Of Quantitative Easing!

Snark.

Economonitor — Great Leap Forward
News Alert: Fed Announces Round Four Of Quantitative Easing!
L. Randall Wray | Professor of Economics, UMKC

Ralph Musgrave — Richard Werner says government should borrow from private banks – I’m baffled.

I didn't realize that Prof. Werner went insane. Or is this a sudden onset? Pity.

Why not just privatize the Bank of England again, and leave the banks alone in setting Libor? Then maybe they would feel warm and fuzzy and lend more.

Ralphonomics

Richard Werner says government should borrow from private banks – I’m baffled.
Ralph Musgrave

What stimulus?? Fed actions completely offset wage and salary gains!

Every time the Fed announces another round of QE we hear the "know-nothings" in the media, on Wall Street and in the mainstream economics community tell us that we're getting more stimulus. And when the Fed does nothing, they scream about how we need more stimulus.

Well, be careful what you wish for!

For as the chart below clearly shows, the Fed actions have removed an enormous amount of interest income from the economy. In fact, it has removed over $100 bln more in interest income than the total net gain in private wages and salaries since it began undertaking these extraordinary measures.

Followers of Modern Monetary Theory (MMT) know why this is true: Quantitative easing is nothing more than an asset swap. The Fed removes one asset--a Treasury, for example--and replaces it with a cash balance (reserves) in the banking system. The result is that the private sector is stripped of the interest it would have earned on that Treasury, which is more than the zero-percent it earns on cash balances.

Case in point, the $80 bln in profits that the Fed earned and turned over to the Treasury last year, was from income earned on the assets it bought. That was income that would have been earned by the private sector if it still had those bonds and securities.

So while the net change in wages and salaries since 2008 has been an increase of $317 bln, personal interest income dropped by $425 bln. That's not a stimulus by any means. It's mind boggling that the mainstream economics community and the Fed itself, doesn't understand this when they incessantly call for more "stimulus."

QE3 announced, ho-hum

Much ado about nothing. More asset swapping, nothing that might boost effective demand directly, and low probability it will have much of an effect indirectly either — or to increase NGDP by increasing inflation rate.

Board of Governors of the Federal Reseve System
For Immediate Release
September 13, 2012

Jobs, the Fed and a real simple way to eliminate our debt

The Fed can't do anything to stimulate demand or create jobs, however, there is one very simple thing it can do to eliminate our supposed debt.

Revisiting my bearish commodity/currency/inflation call that I made back in February and debunking the myth of Fed "money printing"

This was right on the money. Had you sold commodities, currencies, gold, stocks and other risk assets (and bought bonds and the dollar) around that time, you'd be laughing all the way to the bank right now.

Peter Cooper on Quantitative Easing 101

Clear presentation of QE in easy to understand terms. The best summary I am aware of.

With the renewed push for the Fed to "do more," you may want to bookmark this to pass on to friends who are confused or taken in by the "experts."

We need fiscal and we need it now!

Read it at heteconomist.com
Misplaced Faith in Quantitative Easing

by Peter Cooper

BTW, although Peter doesn't mention it specifically, the "enhancement" that NDGP targeting offers to QE is expectation of a falling real rate of interest that will decrease liquidity preference and spur spending, especially on investment. Just more QTM.

Monetary policy is inflationary????

All we keep hearing is that the Fed’s monetary policy measures are a “stimulus” and some say that they cause inflation or are even hyperinflationary and that’s why you should own gold.

Well, if you look at the ratio of gold to the S&P 500, you’ll see anything but that relationship.

During QE, gold barely stayed even with stocks and during Op-twist, gold got crushed.

Only in the brief time that the Fed was NOT INVOLVED did gold go up. And it’s easy to understand why…the Fed’s monetary ops remove income from the economy and, therefore, it can’t be inflationary.

QE and the lunacy of the gov't paying interest to itself

When the Fed conducts QE and expands its balance sheet by buying government securities, it receives interest paid on these securities. Last year it collected $80 bln, paid to it by the government (we, the people). Over the past four years it has collected over $400 bln in interest.

Then what happens?

The Fed turns that interest income over to the Treasury.

In other words, the government pays interest to the Fed, which the Fed then hands back over to the government. You got that?

This is just crazy. The government is paying interest to itself.

The Fed could just tear up those bonds, which it has no need for, and the debt would be reduced by $3 trillion in a single stroke. That’s how to reduce the debt. Too easy. That’s why we don’t do it. Instead, we continue this idiotic exercise of the government paying interest to itself and people worrying about the debt, which is clearly nonsense.

It’s like, if you took $1 out of your left pocket and put it into your right pocket, all day long and then saying all the dollars you put into your right pocket equated to a huge debt that was going to bankrupt you. However, if you just kept the dollar in your left pocket, you’re totally fine and solvent. Crazy stuff!

Exxon vs the Fed

Who's more profitable, Exxon or the Fed?

Results are in...

Final score:

Exxon $252 bln
The Fed $321 bln

It's the Fed by a knockout!

And all that profit without having to drill a single hole or refine a single gallon of gasoline. Plus, no messy spills to contend with. Just clean, neat Treasuries. A whole lotta them. About $2.6 trillion worth to be exact.

But where'd that profit go? Nowhere. To the Treasury and out of the private sector. Wow! What a stimulus!!! Let's have QE3, and 4 and 5 and 6 for that matter!!

QE, inflation and walking under ladders. What these things have in common.

We've heard many so-called experts say that Quantitative Easing causes inflation because the Fed is "pumping the economy with money."

We know this is not true and that whole notion has been debunked here many times.

However, just from the standpoint of common sense one should understand that there is no connection between QE and inflation.

Why would someone who has been sitting in a safe and secure gov't bond suddenly turn around and invest those proceeds in something as speculative as commodities? Maybe on the margin some of that is going on, however, it is not going on in any size that would cause the runnups in materials prices that we have seen.

Moreover, it is important to remember that the Fed conducts monetary operations (buying and selling of securities) with the primiary dealers and it is the primary dealers who sell to the Fed. This makes them "short" and since they need inventory at all times to meet the demand from their customers, they turn right around and cover those shorts by buying government bonds again in the next auction or whatever. (BTW, that's why the auctions go off so well all the time. The Fed has provided the funds.)

The money going into commodities right now is cash that investors and hedge funds have been sitting on and they put it to work ON THE BELIEF that QE causes inflation. You can equate it to the behavior of people walking around ladders rather than under them, because they believe that walking under them is bad luck.

The end of QE and what it means for the market

How QE works.

Whenever Quantitative Easing is mentioned in the media we hear a lot of commentary about “pumping money in” or “injecting liquidity.” Critics decry the money printing by the central bank, etc.

It’s all wrong.

I’m telling you this not that you’ll ever get into one of these discussions with your friends (you may) or even if you did, whether you’d be able to convince them of the fallacies of these arguments, but sometimes it’s just fun to know stuff.

A lesson in QE.

The term quantitative easing applies to a policy whereby the central bank, in this case the Fed, purchases assets (usually government securities) to expand the level of reserves in the banking system and, where desired, target a lower interest rate somewhere along the yield curve.

In the recent QE that was announced last summer, the Fed desired to bring down the interest rate on bonds and so it bought 5yr and 10yr Treasuries.

These Treasury purchases are done in the secondary market with the Fed buying from the public. The Fed doesn’t buy from the Treasury (it’s often misstated as that being the case). In fact, the Fed is precluded by statute from buying bonds directly from the Treasury.

When the Fed buys the bonds it “pays” by crediting the seller’s bank with reserves. Bond purchases (or any asset purchase) results in an addition of reserves to the banking system. Bond prices rise as a result of the Fed’s purchases and yields (which move inversely to bond prices) come down or, at least that’s the intent.

Is the Fed injecting “liquidity?”

No. There is no “liquidity” being injected anywhere.

That’s because all that’s occurred is an asset swap—a Treasury for a reserve balance. Both are exactly the same thing in that they are dollar denominated liabilities of the Federal Government, the only difference being their term and the interest rate they pay: Treasuries have some term, i.e. 2yr, 5yr, 10yr, etc while reserves are zero maturity. Both pay interest, but at different rates.

Therefore, when the Fed conducts QE, it strips the public of one asset—a Treasury—and replaces it with another—a reserve balance. No new money is created.

Is this hyperinflationary or even inflationary?

You can clearly see that it is not. It does not create any “new money” as, say, government spending would. All it does is change the shape of the yield curve, i.e. change the net duration of the financial assets held by the public.

Why did commodity prices run up, then? And why did the dollar tumble?

Perception, pure and simple. There is a belief that QE equates to the Fed “printing money.” Investors and traders act on that belief and push up the prices of commodities and they sell the dollar.

Why didn’t the Fed’s plan result in lower bond yields?

Part of the reason is because QE was widely perceived as being stimulative and a lot of economists started ratcheting up their economic growth forecasts. Bond yields rose on those forecasts.

Another reason why QE did not bring yields down is because the Fed decided to limit the program to a specific QUANTITY of bonds rather than target a specific rate itself. In other words, if the Fed wanted the 10yr to be at 2.0%, say, it should have stated that target and buy as many bonds as necessary to hit the target and then maintain it. This is how it sets the Fed funds target. Instead, the Fed said it would buy $600 bln, without knowing whether or not that would be sufficient to get to its desired rate.

(Now you know how to set rates, in case anyone asks you to run the Fed one day. ;))

What happens now that QE is ending?

Probably nothing.

Operationally, the Fed will stop buying bonds and crediting the banking system with reserves. Rates may move higher because the Fed will not be in there buying, however, to the extent that market participants feel “stimulus” is being removed, bond yields may actually come down. And since QE adds nothing to economic demand, the end of QE takes nothing away, either.

Furthermore, if investors feel that the removal of QE will result in less “inflationary pressure” from the central bank, commodities, gold and oil may come down and the dollar may go up. If so, all this will do is change the composition of the market’s leadership.