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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My cousin mike originally made the following assertion to which I will be responding WRT the 2020 economic bailout: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
#Economics #Economy #money #BailOut #QE #QuantitativeEasing #Investing
Only sort of.. the loans arent to "unreliable agents", they were given out as free market-provided loans. The loans were auctioned on the free market (stock) open to everyone and the price set was free-market price, not fixed. The interest rates were not fixed, the rate was determined by bidding in the same way they are on all securities.
Moreover ther are like "more likely to fail at turning the money back" because these are **secured**, it basically takes the form of a person like me or you make a short-sale on a money market security (in this case a repurchase agreement). As such it is secured by the usual rules of a reg-t or margin portfolio, or cash account where you must have sufficient securities in your account that should a margin call be made you are guaranteed to have the assets to pay it back.
So there is quite literally no risk of you not paying back the loan as your account forces you to have the collateral to be able to do so.
Moreover it is freemarket not just because the price of the securities and interest rate is not fixed but determined through auction style sale open to the public, but because any funds used from the government to provide the loan is itself the property of the people of the united states in the first place. It is our money/wealth the government just holds it for us to use in our best interest (such as building new roads or schools usually). So by providing the money that is already ours back to us in a way that is fair and open to free market dynamics is, I'd say, all round as close to a free market as you can get and still be able to do some damage control on preventing and reversing a recession.
More importantly though, this isnt the first time we have done this and well, the numbers dont lie.
@L29Ah @General @freemo Why not returning the stolen money to the taxpayers is a worse option then? It's certainly a more flexible kind of financial capital than some loan that you can only spend on an exchange to boost some other securities' valuation or otherwise purely speculate, as opposed to buying and utilizing real capital goods.
Because the money they had didnt come from tax-payers, it came from moving money around. Tax payer funds do not supply the reserve money we have, it comes entirely from past loans of a similar nature.
So it was, in fact, being returned to the very people (more or less) who provided it in the first place. All wealth the fed has comes from past loans it has given through various means, it hasnt come from taxes. So the they have given it back to the same group that provided it.
It also isnt "purely speculative" or any less real capital goods. When you buy a security you ARE buying real capital goods, and the money effectively goes to the underlying real world good or company that you are buying in order to be used as capital towards a real economy. Your comments strike me as somewhat ignorant of how the stock market even works.
You do realize when you buy securities in a company you own an actual part of the company, have voting rights in the company, can decide what decisions the company makes, and the company itself made money off the purchase of its stocks which is how it gets money to grow.
Buying stock is literally no different than taking that money and investing in a friend so he can start a business, or even starting your own business. It goes to the companies in one sense or another so they can grow their assets and increase the value and ultimately allow you to profit as an owner in the company.
Also, just like any other owner, when you buy stock you get paid a portion of the profits of the company as cash for as long as you hold onto the stock, because, your an owner, so you get part of the profits.
> As far as i understand, Federal Reserve profits from its monopoly on money production, otherwise it would be no different to a regular bank.
You got that backwards actually regular banks **do** profit off the money. It is the federal reserve (as well as the 12 reserve banks that make it up) that do not profit. Unlike regular banks, which we call private banks, the banks that makeup the federal reserve does not have owners, and there is no profits that any individuals can pocket.
When the federal reserve happens to have an excess of funds for some reason the bank itself isnt allowed to keep it, the excess must be given to the US Treasury. The reverse is not true, the US Treasury does not give money or wealth to the federal reserve banks except on loan rarely should it be needed.
Its also not a monopoly, it consists of 12 seperate public reserve banks (has no owners). Each one is ran independently, and controlled by democratically elected board. We elect a president every 4 years and the president then selects the people in control of the fed for those 4 years, every 4 years it changes. Not sure how you can have a monopoly when there are no owners and the people in control change every 4 years, and it isnt even allowed to legally have profits of any kind...
> An act of producing and then spending money is equivalent to taxing all the existing money holders, as the cumulative value of the world goods is fixed and distributed over an increased amount of money, thus every unit of money buys you less goods.
No this isnt true either, and it breaks the first-principle of economic systems in fact. when you say "world goods" we tend to call that wealth. Wealth/goods are not in fact fixed as you say, wealth is not a zero sum game and more money does not imply an individual persons dilution of wealth.
Wealth, just like the goods that in part make it up, are constantly being created and destroyed. We call it wealth generation and its when the total wealth of the planet increases (which it does even if the amount of dollar and cents remains the same).
As such when you print money, so long as that money is used to create an equal amount of wealth as the percentage of money created, then the value of the dollar is not diluted, in fact when done correctly the act of printing more money can **increase** everyones wealth rather than decrease it as you suggest.
Money and wealth is not a zero-sum game and when you think of it as such you will have a ahrd time understanding the mathematical principles that govern it.
> No, it can only be returned to the companies that have offered their stock on the exchanges. Most companies don't have such a luxury.
This is also incorrect in multiple ways... First off most companies, at least ones who operate under good practices will not keep their funds in cash, they will store that money in an investment fund. Therefore any company has the luxury of being represented on the exchange.. If I own company A that isnt ont he change and I buy 5% of stock from company B that is on the exchange than company A is now 5% owner in B, they get 5% voting control, and get 5% of the distributed profits as well. In fact if the company you buy stock in is small enough on the exchange (and there are a lot) you can buy 51% at a very affordable price, and as a controlling interest merge your own company into them and as such they now exist on the exchange. No matter how you slice it though if they own a few shares, or merge into the exchange itself, they are directly profiting from the money on the exchange through the company they own. So yes, quite literally **everyone** has that luxury. Btw it is pretty cheap to get on the stock exchange to, I have a company im starting that hasnt made a penny and doesnt have a single employee, I was offered a ticker on an exchange by a business friend of mine.
The other way in which this is wrong is that the exchange isnt just dealing in corporate stock, the exchange has many different types of securities most of which dont represent shares in companies at all, and many represent ownership over physical goods, or loans, or bonds, futures, forex, government notes and bonds, countless things.
Honestly there is no good excuse to even have your money in a bank at all, just buy secured bonds that have a garunteed return and it acts much like a bank where you store you money in the bond or similar security and get a fixed interest rate on it which you can cash out of at any time
@freemo @General > As such when you print money, so long as that money is used to create an equal amount of wealth as the percentage of money created, then the value of the dollar is not diluted, in fact when done correctly the act of printing more money can **increase** everyones wealth rather than decrease it as you suggest.
How do you create wealth out of money? Well, except using it as a toilet paper (as this is a strictly worse kind of toilet paper, more expensive and steering resources away from the proper toilet paper manufacturers).
Wealth is created out of labor, natural resources and capital goods. Money is a medium of exchange. You can't magically spawn more goods just by writing some more digits at someone's bank account.
Money is by definition wealth, specifically what we call "liquid wealth". Natural resources and capital goods is also wealth, we call these comodities, they are not liquid in nature.
In general wealth allows for the creation of wealth...
For example lets say you have no wealth, and have no skills to do any labour yourself. you can not create new wealth, you would likely just starve to death if you cant figure out a way to provide your own labour, and even then youll barely scrape by.
However say I give you 100K in money, you now have 100K in liquid wealth. If you spend 50K on land and then 25K on lumber, and 25K on labour you have traded your liquid wealth for commodity based wealth. If you now instruct that labour to build a house on your new land, you now have a house of 500K value.
Because you were given 100K, which is really the only reason it was possible for you at all, you were able to use that wealth to generate 400K of new wealth that didnt exist before.
@L29Ah @General @freemo > Because the money they had didnt come from tax-payers, it came from moving money around.
As far as i understand, Federal Reserve profits from its monopoly on money production, otherwise it would be no different to a regular bank. An act of producing and then spending money is equivalent to taxing all the existing money holders, as the cumulative value of the world goods is fixed and distributed over an increased amount of money, thus every unit of money buys you less goods.
> So it was, in fact, being returned to the very people (more or less) who provided it in the first place.
No, it can only be returned to the companies that have offered their stock on the exchanges. Most companies don't have such a luxury.