@General

So the same friend (actually family) who I was discussing Quantitative Easing with yesterday that prompted the long post continued the conversation with me today. I responded again with novel-sized response laying out why QE isnt really a bad thing (or at least less bad than doing nothing). Since I think it might be informative for some people I want to reshare his comment and my rather long response here for anyone who wants to read more about Quantitative Easing and the recent COVID economic “bail-out”.

Mike’s Assertion

My cousin mike originally made the following assertion to which I will be responding WRT the 2020 economic bailout:

of course if you ride the wave you’re going to make money.
I wouldnt advise anyone to bet against the fed for that reason. They have more money.
But the fact is not everyone is a trader or investor.
This is going to have a horrible lasting inflation tax on the average american.
And we’ve printed
22% of the total money in circulation in 2020 alone
Weve matched 08-16
Not so we could do it in a shorter time
But because as the bubble inflates it needs more
It’s similar to a drug
We’re building a tolerance to injections.
But now we’re at the point where if the feds stop printing it will likely be devastating
Because they never allowed us to fully recover in 2008
Bail outs and QE entices poor behavior in businesses who are in bed with government.

My Response

That is all very misleading for a few reasons. I’m not sure if your missing some key concepts or it is a difference of opinion, let me try to address them each.

I will reply to each in its own comment so I dont get a runaway like before (and in case you want to discuss it without dealing with a wall of text).

22% of the total money in circulation in 2020 alone

Ok so two major problems with this.. 1) the money supply printed in 2020 was preceded in the two years before hand with a reduction in money supply of 700 billion. So ignoring that we reduced the money supply just one year prior, and then re-increased it, and only citing the money created in 2020 and ignoring the money supply decrease in 2018-2019 is highly inaccurate.

Second, the percentage of physical notes and bills has absolutely no effect on inflation of any kind and never has, because it is not representative of the money supply, the money supply consists of 6 tiers of money: M0, MB, M1, M2, M3, MZM. They are guaranteed to have fixed value between them and be interchangeable. The value of the dollar, and the effect on inflation has 0 to do with the physical notes and bills in circulation and instead is determined by the total money supply.

This should be obvious if you consider it. Imagine there was 1T in circulation (MB minus M0), 0.5T held in bank vaults (M0) backing half of all bank balances with another 0.5T of bank balances without physical cash (M2, including M1, but excluding MB and M0) to back it. You wouldn’t have 1.5T of money, you would have 2T of money. Paper money has no special value, it is determined by the total monetary value. If everyone started taking out their cash as the 0.5T in reserves is depleted M0 would shift into MB. As this happens more money is printed to allow withdraws to take place but the actual supply of money remains fixed. Likewise if everyone starts depositing their money then the notes are destroyed as there is an excess of notes, but your balance goes up by an equal amount, so again the total money supply remains fixed.

Paper money is not money, they are IOUs, they are effectively cashier checks written by the central bank and nothing more. So talking about how much money is printed or not printed has no value what so ever when talking about inflation, if you wish to talk about inflation then we would have to talk about the total value of MZM instead, of which physical notes is a very small percentage, on the order of 10% of the total money supply.

I wouldnt advise anyone to bet against the fed for that reason.

This seems to presume the federal reserve is a for-profit entity out to make money at the expense of the people whom it bets against, none of that is true.

1) The federal reserve is not owned by anyone, it is run by a board that is democratically chosen (the president selects them). If the fed makes money there are no owners who are able to cash out on that money.

2) The federal reserve is a non-profit, entity, in fact, they are even less capable of earning profits than a non-profit. A non-profit can earn profit so long as that money is used to expand the business and cant get withdrawn by owners. But the Fed cant even do that much, any profit they earn, minus some minimal operating expenses, must by law be transfered to the US Treasury, they cant make money if they tried.

3) The 12 reserve banks which make up the Fed are also similarly non-profit, and they do not have owners, their profits, again, can not be kept anyway.

In short the fed is an autonomous, democratically elected body. They are not privately held, their member banks are not privately held. The only difference between them and a typical government agency is that they have some level of autonomy in how to implement policies.

To put it another way, any money the fed makes is your money. It cant be used for anything else other than to give it back to the people in one way or another. You are never “betting against the feds”

But the fact is not everyone is a trader or investor.

The huge benefits we are seeing are not limited to investors, not in the least. You need to keep in mind everyone generates wealth, not just investors they just do it in different ways, and it all benefits from the same factors.

QE along with the 0% interbank interest rate that goes along with it bolsters every aspect of the economy, not just the stock market. For example it means mortgage rates are at the lowest they have been in history, as are the rates on personal loans. This means people can now afford to and are encouraged to, buy the car they need to get a job, the business location they need to start a small mom & pop store, the home they need to raise a family, or if they want cash monies to go investing in the stock market. Low interest rates and QE encourages people not to hoard cash, which is generally a horrific money management technique to begin with, and instead to use that money to generate wealth. The worst thing for an economy or for an individual is to sit on liquid cash monies.

So yes, not everyone is a trader or an investor. But everyone (almost) does work and make money in countless ways. Have access to as close to free a loan as you can get means everyone, at every level, is now far more enabled to generate wealth and good financial practices (IE not sitting on liquid cash) is encouraged which benefits us all.

In short it means everyone is making money more easily either directly or indirectly, that’s why we do it, we don’t do it just for investors.

This is going to have a horrible lasting inflation tax on the average american.

Well no, not really, inflation is a very misunderstood concept. The absolute value of inflation means nothing on its own. The absolute level of inflation would be like saying is the amount of dollars in $1 increments it takes to buy things in general.. for example the amount of money it takes to buy bread, or to afford the cost of living, or a home. If the same home costs twice the amount of money in 100 years it does now we would say inflation doubled, and most people would look at that and say it is universally bad, or at least, worse than the situation 100 years ago, but this isn’t true, the absolute inflation has no meaning on its own of any real use, that’s not how economic analysis use it either. In reality “bad” and “good” inflation is a very different concept than most people understand.

The way you would measure if inflation is good or bad, roughly speaking, is by taking the rate of inflation (not the actual amount of inflation) and taking it as the ratio of new wealth generation (not to be confused with new money generation, which is completely unrelated to wealth).

Lets take a simple example to show why this is.. Lets talk about wealth in terms of the number of homes I own (though it could just as easily be loafs of bread or anything else), lets presume one “standard” home costs 50K, we will call a single home, or the cash equivalent “one unit of wealth. At the start of this scenario if i have 100K then I have two units of wealth, even though its all cash and not in the form of a house.

If the cash I have in this scenario is experiencing inflation at 100% per year (real inflation is nowhere near this, just picking easy numbers for the math), then if all i do is sit on a pile of cash, then by the following year that cash can only buy one home instead of two. So I would have one unit of wealth the following year instead of two. Each year my wealth is cut in half. Since inflation is high, and I am doing nothing to generate wealth, the effect of the inflation is bad, very bad.

However instead imagine I buy one home for 50K and the wood and materials (but not labour) to build 2 additional homes. Presuming a home costs half its price in parts to build and half in labour. So I spend 50K for one pre-built home, and 50K for the parts and supplies to build 2 homes, leaving me with no cash to pay for anything else, including the labour to build the homes. At this point I still have two units of wealth, it is just in the form of a home and supplies rather than cash.

Next assume I don’t even use the supplies to build a home, lets say I just sit on the supplies and my personal home with $0 in an account for a year. Because inflation means in a year it costs twice as much to buy a home as it did the year before in a year I will have 200K in assets instead of 100K. You might think this means I now have more wealth, but because the money is worth half what it was the year before I actually dont, I have exactly the same amount of wealth I did before. That’s why we are measuring wealth in the number of homes I either have, or can buy.. So after a year I still have exactly 2 units worth of wealth, one home, and supplies that are worth the value of another home (but capable of building two)… So if i convert my money to homes + lumber then instead of my wealth being cut in half each year it remains constant. In this case the even though we have a 100% inflation rate it is neither a good nor bad thing. Each year I am just as well off as I was the year before, the inflation causes no harm.

Finally consider a third scenario, I buy the home and supplies as before, but now instead of just sitting on it I trade with a few people who are poor and have no money (as they are suffering from the recent recession that caused the inflation due to QE or whatever else). I offer them a free home to live in, and food, and in exchange I ask that they do the labour of building a home for me, which I already have the material for. Now I start out with 100K in cash which is 2 units of wealth, convert my liquid wealth into a home and supplies, still at 2 units, and then turn the 50K worth of supplies into two homes. So now after a year I have three homes, no supplies and no money. In a year I can sell my three homes for 300K, meaning I started with 100K and in a year have tripled the money I have. So I went from having 2 units of wealth to 3 units of wealth.

Now here is the interesting part. If we had the same scenario but without inflation I would have turned 100K into 150K in a year, I would have made 50% cash profit in a year, 50K profit total. But that sane scenario with a hyperinflation of 100% in play means I made 200% in a year instead of 50%, a profit of 200K on top of my 100K instead of just 50K. So because of inflation I am making money FASTER than I would otherwise. So the increased rate of making money counters the increase rate at which the money devalues, which means they cancel eachother out and even with insane hyperinflation I am still making both money and wealth.

This isn’t just limited to homes or large investments mind you.. Inflation also means you see an increase in the average salary too. Everyone benefits, the only caveat is that you aren’t just hoarding money but actually using it to be productive. This is a good thing, we don’t want people hoarding money, money hoarding is an economy killer.

So back to QE, what this means for QE is simple… QE, as we already see with the stock market boost, causes two things:

1) an increased rate of inflation
2) this is offset with an increase rate of wealth generation.

During times of recession the benefits of #2 outweigh (by far) the draw backs of number one. so while there will be some inflation in the absolute sense, the wealth generation will exceed the inflation rate and overall wealth and prosperity grows and doesn’t decline…

In short, inflation isnt a bad thing, it can be good, it can be bad, it depends on what causes it.

But now we’re at the point where if the feds stop printing it will likely be devastating because they never allowed us to fully recover in 2008

Not true, and we have the cold hard numbers to prove it.

We stopped “printing” (really you mean QE, printing money is only a small part of that) in 2013, yet new wealth generation remained at an alltime high despite this. As covered earlier from 2009-2013 QE was in effect, we saw an increase in DJI growth rate from 7% to 18%… from 2013 to 2018 QE stopped entirely and there was no new delusions, despite having stopped “printing” whether generation remained at an all time high, twice above the baseline of 7% at 14%. Not only was stopping printing not devastating, but we were flourishing. In fact we even took it one step further, from the start 2018 to most of the way through 2019 we had reverse QE (reducing money supply and fed hold assets), and even with a reverse QE it still wasn’t devastating. We saw a higher than base rate generation of new wealth with the DJI growing at 8.37%, that is still higher by 1.4% over the 20 year base rate on wealth generation.

Not only is none of this statement true, we have all the numbers and facts to show the exact opposite is true. While I use DJI as an example this is true on all levels. Yes even individuals are better off now than they were before and wealth of everyone, of every class, is growing.. Consider:

  • Prior to the COVID lockdown the unemployment was the lowest it has ever been in 66 years.. the last time unemployment levels were as low as they were just before COVID was in 1954, which only lasted breigly

  • The Gross National Product Also reached record high prior to covid, the highest we have seen in the entire history of the USA. Moreover the rate at which the GNP was increasing was growing, not diminishing. We saw record and unprecedented rates of growth.

There is really no way you can dice it that makes your assertion true when weighted against the facts.

Bail outs and QE entices poor behavior in businesses who are in bed with government.

On this i somewhat agree. Bailing out an industry or company with a wad of cash to keep them from going bankrupt is bad policy, and it is harmful. That is not what QE is however, we did do this, in addition to QE, back in 2009 when we bailed out mortgage companies. This was a bad move and ultimately harmful to the economy, so I agree on this point.

However QE itself is not a bailout, it is not industry specific (usually) and it does not preferentially help businesses, whether they are in bed with government or not. The funds injected into the economy by QE is done in such a way that anyone, individuals and companies, can benefit from it. The very reason I encourage QE is because of this point, because it is fair and the value is auctioned to everyone freely. It is a better alternative than an actual bailout which would help companies.

The way QE works is the government will buy some sort of a secured or semi-secured loan at a fixed interest rate on the open market it, then buys it back later. These can be short-term or long-term in nature. This is done in the form of an open-auction such that anyone can buy it, you, me, and investor, at an affordable rate determined by free market. In effect they are giving out low-interest loans to anyone who wants one without credit checks or approvals. There is no favoritism to corporations in such a deal.

For a more specific example lets talk about how this worked in the 2020 QE. In this case the government purchased a type security called a “repurchase agreement”. This is where you can short them a repo agreement and they give you cash, which you then have to pay back the next day at a fixed interest rate, or pay the interest and you can hold it longer. Because QE means the mass shorting of these repurchase agreements it means their normal rate was extremely low, near 0. Effectively this means anyone could borrow some money for a short period of time at a very low interest rate. They are sold on the free market and not preferential to investors, anyone with a brokerage account can get them. they are a type of “Money Market Security”, you just hop on, and buy it or short it like you would a stock and you have near-free money in your account to invest with short term.

The reason QE works, and is so much better than the other solutions is exactly this, it represents a free market transaction and not a favoritism towards businesses. Once you realize the feds money is the peoples money you cant even think of it as breaking the free-market, it only helps encourage the market to be more liquid to encourage wealth generation, everyone benefits

@L29Ah @ravenclaw @General @freemo The global amount of land, lumber or labor haven't changed in this transaction. You've just steered those resources from their current business to yours. Why do you think this would result in bigger amount of wealth than was produced otherwise?

@L29Ah

Yes they have changed actually...

The lumber is no longer lumber, it is now a house, the labour is not the same skill level they were before, they have learned new skills building the house, therefore they represent a higher intrinsict wealth value than they did previously. The land didnt have a home on it before, therefore it was not as useful, not it has a home on it and thus is more wealth.

Wealth is not the quantity of mass you have, it is the useful function something can server. a pile of sane is less wealth than an equivalent weight of glass because glass serves more functions and is not in as much abundance as the sand.

Thats like say if you have two cows and they made and you have three cows that you didnt actually create anything, and have the same wealth because all you did was convert the light into growing grass and the growing grass into a cow. As if somehow a cow is the same quantity of wealth as a pile of grass. He is not, you can eat cows, you can use cows as beast of burden, they have more value thus represent more wealth than a pile of grass.

@ravenclaw @General

@L29Ah @ravenclaw @General @freemo > Yes they have changed actually...

They didn't change when the money was created. They changed as a result of your steering of the resources away from their current allocation. If there weren't you grabbing the resources using your money, they would have changed to something else at the discretion of other people, and the resulting value was addressed with my second question that you've opted to ignore.

@L29Ah

the resources were owned by someone else. I could not simply "steer" them away, they arent mine. First I had to buy the resources to steer them, and then once i had the resources where they needed to be they could be used to create new wealth by applying those resources to producing something new.

Without the money I wouldnt have had any wealth to buy the resources, so there would never have been a house built in the first place. Thus why liquid wealth (money) is needed in order to generate new wealth.

@ravenclaw @General

@L29Ah @ravenclaw @General @freemo > I could not simply "steer" them away, they arent mine.
> Thus why liquid wealth (money) is needed in order to generate new wealth.

You aren't the only possible holder of liquid wealth, and there is liquid wealth already on the market, so there's no need to print any more for you for wealth to be created from more basic resources. By gifting you some liquid wealth, the gifter entitles you to control a bigger share of global resources than you otherwise would. What makes you think you're in a better position to control the resources than the people that would do it in case you weren't given the extra money by the benevolent printer?

> I had to buy the resources to steer them

The commodity resources are basically sold at a spot market price. A shop hodling its stock forever is bankrupt, as it costs money to keep the goods stored, also goods are frequently becoming less scarce over time, since the technologies to extract/produce them are improving. So if you don't buy the goods, the goods are sold to another customer, possibly at a lower price to attract more buyers (and the resulting wealth options). This way your newly printed money increases the prices, devaluing the money of other buyers.

@L29Ah

> You aren't the only possible holder of liquid wealth, and there is liquid wealth already on the market, so there's no need to print any more

this statement is very ignorant of why and when we do Monetary and Quantitative easing... We do not engage in Qe or ME when markets are liquid, this is why its only done during recessions. In a recession the definition quality of any recession is that liquid wealth has evaporated and markets are no longer liquid. The very reason we inject money in to the system is to promote liquidity **only** when economic fallout has removed that liquidity int he first place.

In fact this is so extremely disconnected from how the system works that I think its hard for you to see just how much so. Putting aside that we only inject money into an economy when it is not liquid, you have to keep in mind that **all** money that entered the economy did so via the transaction of some form of an IOU (such as a government bond) that was garunteed to be paid back at a high rate later (with interest).

This produces a very unique and counter intuitive property common to **all** fiat economies.. That is that there is **always** less money than the debt owed. Effectivally a 100$ bill is a contract for a loan of a price higher than 100$, as is every other bill in the USA.

Therefore if they did as you proposed and stoped creating new money all together you would have whats called hyper deflation, within 30 years (the term on the bonds used to issue the money) literally all money everywhere would be at $0.. everyone would still owe money and no one would have money to pay for it.

The idea of "why cant we just stop printing money" is completely at odds with the most basic principle of fiat currency, that all fiat currency in circulation is balanced by a larger amount of debt, and always will be.

@ravenclaw @General

@L29Ah @ravenclaw @General @freemo > liquid wealth has evaporated

So do you tell me that bucks, commodity futures and metals have magically vanished from the planet?

> hyper deflation

Have this already happened in the human history, or are these purely theoretical elaborations?

> everyone would still owe money and no one would have money to pay for it.

Nah, this is only true if everyone is indebted. No one forces you to get a credit for some (positive) interest rate.

> you have to keep in mind that **all** money that entered the economy did so via the transaction of some form of an IOU (such as a government bond) that was garunteed to be paid back at a high rate later (with interest)

Some economical agents elect to get indebted and then i get money by selling them some wealth. If they can't repay their debts in time (by failing to make a good use of the wealth they bought from me), they ought to be liquidated, not gifted some more liquid assets for their economical mismanagement.

@L29Ah

None of those things are called liquid wealth they are however assets that can, under normal circumstances, be converted to liquid wealth, not the same. That being said, no they didnt dispear, but they have stopped being owned.

Liquid wealth would be M0, MB, M1, M2, M3 and MZM, none of the ass=ets you listed are in those categories they are not liquid, only easily made liquid

Again there are just so many fundamentals of economics here that we really need to go back to if your really trying to understand why these ideas aren't correct.

When a market becomes insolvant then liquid wealth has dried up... what that means is first recession hits, people stop buying things or investing,t hey keep their money to eat and susvive.. First they live off cash (their liquid wealth).. they do this until they run out. Next they start taking out loans from banks with their homes as collaterl, their assets are lost as well(or in your example the futures they own would be put up as collateral to the bank). If the depression continues then you even default on those lones and loose even your non liquid assets.

What this means is in extream cases of insolvancy where a recession is allowed to go on without intervention all of the liquid wealth is no longer in the publics hands, they are all sitting in a bank as what is called "bank researves" they are no longer owned by the population.. So the liquid wealth is gone..

You also have to keep in mind the principle of money loaned through banks is a money multiplier. The total amount of money in the USA if you add up everyone's checking accounts and physical cash is about 10x higher than the amount of money issued by the federal reserve itself. This is only true so long as the money remains in circulation... as money moves out of peoples hands and back into bank reserves, and we move away from a liquid economy, then it has a x10 effect where the money multiplier stops being seen. that means for every $1 that a bank takes from someone who either defaulted on a loan or is paid as interest on a loan causes nine other dollars to disappear from the economy (yes like magick.

So yes, liquid wealth magically disapears, all those metal futures were you collateral for that loan you defaulted, they are now the property of the bank, not you, their liquidity has been taken from society.

> Nah, this is only true if everyone is indebted. No one forces you to get a credit for some (positive) interest rate.

This is starting to irk me a little.. this is really basic economic and really simple math. If you spent anytime studying economic systems you d know the very simple point that if you add up all the debt in a society it is **always** and garunteed to be higher than all the money in a society.. This is obvious when you cosnider that all money that has ever entered society has entered society as a loan that requires it be paid back at a higher price than the money that was borrowed. That is how we put money in the economy at all. So basic subtraction quickly proves thatthere will always be less money than what is able to cover the outstanding debt created to put that money into the economy in the first place.

> Some economical agents elect to get indebted

No **you** are the one in debt, not the other agents, you just dont know it. The act of owning money, is by definition a debt on your part. You may not have any loan out of any kind, yet you are still indebted by the intrinsic nature of having money.

The inflation of the dollar is how you pay back the debt you owe by possessing a dollar. If the government stops printing money as liquidity dries up and everyone becomes insolvent, even those holding onto cash will see the "real money" (the buying power adjusted amount of money they have) go to 0,.

You can not escape the fiat debt, even if you never took a loan in your life.

@ravenclaw @General

Follow

@L29Ah @ravenclaw @General @freemo > None of those things are called liquid wealth

They are fungible, they are liquid, they are durable, they are divisible, they are scarce, they are portable, they are quite convenient to deal with. There's no reason to argue about the exact "accepted" definition of "liquid wealth", as we only care about whether an asset can function as a medium of exchange in an economy.

> When a market becomes insolvant then liquid wealth has dried up

See my question about magic disappearance of money.

> all the debt in a society it is **always** and garunteed to be higher than all the money in a society..

Even if it's true, it is not relevant to your statement that some debt is being owed by every single economical agent.

> No **you** are the one in debt, not the other agents, you just dont know it. The act of owning money, is by definition a debt on your part. You may not have any loan out of any kind, yet you are still indebted by the intrinsic nature of having money.

Now take that to the court. This is a sort of term mangling i cannot comprehend.

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