ColmFitzgerald
Registered User
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Quantitative Easing (QE)
– Why is it damaging our society and what can be done to fix it?
What is Quantitative Easing?
“Quantitative Easing (QE) is a monetary policy used by some central banks to increase the supply of money. It usually involves both a direct increase in the money supply and a knock-on effect from the fractional reserve system. QE is usually implemented by a central bank first crediting its own account with money it creates out of nothing (“ex nihilo”). It then purchases financial assets, for example, government bonds, quasi-government debt, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as “open market operations”.”
In short, QE is printing money, and using the money to buy different types of bonds, typically government bonds.
What is Quantitative Easing supposed to achieve?
QE is supposed to provide an economic stimulus to increase economic growth, to increase employment and to increase inflation (to combat deflation).
Buying bonds causes bond prices to go up, which lowers bond yields, which should lower longer-term interest rates – making borrowing cheaper and so stimulating the economy.
As bonds are purchased by central banks, more money should flow into circulation. Banks are assumed to get more deposits from the new money created and are assumed to sell some of their bonds giving them more money and liquidity in place of these bonds. This extra money available to banks should help banks provide additional lending into the economy boosting economic growth.
What has Quantitative Easing achieved in the US and the UK?
The US and the UK have pursued QE policies in recent years. Their economies have recovered, albeit in an unequal way. Wage growth has been low, but corporate profits have been buoyant, aided by lower interest rates and wealth effects from rising asset prices. Despite money printing, inflation rates in the US and the UK are still low and QE does not seem to have increased inflationary expectations to any significant extent.
Quantitative Easing in the EU
The US and the UK economies have outperformed the EU which remains in recession. The EU has just launched a QE policy which is supposed to stimulate the European economy and to combat deflation in the EU. Some are concerned about the QE policy, particularly in Germany which has a history of hyperinflation which was caused by excessive money printing.
How does Quantitative Easing work? What are the mechanics of it?
Quantitative Easing works as follows
1) The central bank print money, increasing the amount of money in the economy.
2) They use it to buy certain types of bonds, forcing up the price of these bonds, lowering bond yields and making profits for those who own these bonds.
3) Those who sold the bonds typically use the money to buy other types of bonds, for example corporate bonds, forcing up the prices of corporate bonds and making profits for those who own the corporate bonds.
4) Those who sold the corporate bonds, typically buy other types of assets to replace their bonds, forcing up the prices of those assets and making profits for those who own them.
5) A general shortage of corporate bonds is created. The excess demand for corporate bonds causes corporate bond yields to drop to low levels making corporate bonds less attractive to investors. This makes other investments relatively more attractive, e.g. equities.
6) Money goes into buying equities, forcing up equity prices, making profits for those who own equities.
7) Money also goes into buy property, similarly forcing up prices and making profits for those who own property.
8) Lower corporate bond yields make it attractive to companies to issue more corporate bonds (making borrowing easier and cheaper for large companies), enabling them to raise cheap capital on the financial markets. This enables companies to use this money to buy back shares, further forcing up equity prices (and the value of the directors stock options) and making further profits for those who own equities.
All these profits make those who have assets (those relatively better off) much more relatively better off. The profits create a significant wealth effect which stimulates the economy.
Those with relatively smaller amounts of assets also gain. But they have fewer assets in the first place, so they gain proportionately less. Those who have no assets get nothing.
The poor are supposed to gain from ‘trickle-down effects’ because governments can borrow at lower interest rates. But, offsetting this, governments are likely to need more money for social expenditure to combat the rising inequality. The ‘trickle-down effects’ might be compared to ‘crumbs from the rich man’s table’. All-in-all QE should directly increase inequality in society.
What effect will QE have on ordinary members of the public?
Assets prices will rise.
- If you have shares or other investments, these should have risen in value.
- If you have property, it should have risen in value.
- If you have a pension fund, the value of the assets in the fund should have risen.
The more assets that you have the more you will have gained. Those with the most gain the most. But relatively speaking, everybody becomes poorer than those who were richer than them in the first place. If you have no assets you will have gained nothing and have become relatively much poorer.
Pension funds are likely to see the expected cost of providing pensions in the future to have risen due to lower bond yields. Pension fund assets will have risen, but their liabilities may have risen by more than their assets reducing their funding levels and putting more pressure on pension schemes to close down.
If your employer becomes more profitable, some of this may trickle-down to you, but much less than your employer is getting.
If you are self-employed and your customers are the relatively rich, you will likely see business improve. If your customers are relatively poor, you will likely to see very little upturn in business.
What effect is QE likely to have on lending and interest rates?
QE is supposed to lower interest rates and give banks more liquidity so that they can lend more money to individuals and to businesses to stimulate the economy and create more employment.
However, banks will only lend to customers who they consider will be able to repay their loans. The extent to which they lend the additional money available to them, rather than purchasing other types of bonds, will depend on borrowers’ creditworthiness. The only customers likely to be sufficiently more creditworthy are the relatively better of, who have been made better off by QE. The increase in lending driven by QE will mostly just improve credit availability to the better off, with only ‘trickle-down effects’ for other borrowers.
Those on tracker mortgages will have seen their mortgage interest rates come down as the ECB cut interest rates, but will see no impact from QE. Interest rates on other mortgages and other personal loans are supposed to fall. But mortgage rates and personal loan rates are mostly being kept high to offset loses than banks are making on tracker mortgages. Lower tracker rates means less scope for banks to cut other interest rates.
Effect on inflation
The dangers of deflation are often put forward as one of the main reasons for QE.
However, QE is unlikely to significantly increase inflation. This is because better off individuals mostly spend their money on different types of goods and services than less well-off individuals, and since the CPI is mainly based on goods bought by the less well-off, and since the less well-off are really no better off (and relatively worse off) the CPI is unlikely to increase. This lack of increase in inflation may be used to argue for more QE, but in doing so is missing the point.
This is consistent with what has happened in the US and the UK. Despite enormous amounts of QE, inflation has been muted (albeit assets prices have ballooned and asset prices are not counted in CPI).
Effect on economic growth
As QE makes the better off even more better off, it is likely to lead to higher incomes for the better off, thereby increasing economic growth. The impact on the poor will be marginal. Those who gain employment will gain but stagnant wage growth limits any significant benefits. The benefits to the less well-off are mostly limited to trickle-down impacts.
However, the less well-off will suffer because the types of goods which the better off buy, which the less well-off also aim to buy, will rise in value, pushing them further beyond their horizons.
The end effect of QE is economic growth fuelled by big increases in incomes for the better off, offsetting stagnant incomes of the less well-off. The growth numbers might be called into question as they are discounted by CPI, which does not include the rising cost of assets. So in ‘real’ terms the growth figures may not be as real as they are made out to be.
Making the rich richer
In summary, the main effect of QE is to make the relatively rich richer, both directly and indirectly. The rich gain immediately from rising asset prices fuelled by the bond purchases. They also gain from improved credit availability and from lower interest rates.
The gains for the poor are mostly negligible and indirect. The media, which is typically owned by the richer elements of society, usually makes a big deal about reductions in the costs of borrowing for governments. These are the governments who have significant debts due to bailing out banks in the financial crisis.
The complicated nature of QE means that most of the public seem to be unaware that the rich are getting much richer and there has been no real public protest about QE policies.
Dangerous asset bubbles
A further problem with QE is that it is creating a bubble in the bond markets and a bubble in the equities market. Asset prices have frequently risen sharply on bad economic news in recent years as this has been a signal that more QE might be on the way, so more asset purchasing. Assets prices risk being artificially stimulated to levels above their long term fair-values. These types of bubbles usually last as long as the money printing (QE) is happening, but they usually end badly for society. And the less well-off will usually pay the price for them.
Philosophical background
The philosophy behind QE is that of neo-liberalism and the philosophy of Ayn Rand. Rand’s philosophy considered the ‘little guys’ to be mostly irrelevant and relatively worthless compared to ‘type-A’ individuals. She considered that without ‘type-A’ individuals there would be no employers, no managers etc, so no jobs for the ‘little guys’. So the ‘little guys’ should be grateful for anything that they get. This philosophy is very attractive to the strong in society who are happy to brutally seek wealth and power or who are just willing to turn a blind eye – it gives them a moral defence to their actions. The philosophy has a seeming truth to it, but the seeming truth is used to entrap those who read it.
According to Rand’s philosophy, if lots of small guys get hurt (or relatively hurt) for the benefit of ‘type-A’ individuals, well then that’s not such a bad thing – it will make everybody better off (the seeming truth but really the lie that advocates much greater inequality).
References:
“The Fountainhead” and “Atlas Shrugged” by Ayn Rand
“Capitalism - the Unknown Ideal” by Ayn Rand, Alan Greenspan et al (1967)
Note: Alan Greenspan, former US Federal Reserve Chairman, advocated Rand’s philosophy and the philosophy is an influential force in current world political elites.
How to fix it?
Two immediate things can be done to fix the problems being created by QE:
1) Tax profits on the financial assets impacted by QE: on a mark-to-market basis (not on a realised basis), at say 25% of any capital appreciation since 2009 (since QE began).
2) Use the money to invest in education, to improve public services, health, to encourage real enterprise and to improve the social fabric of the state.
A braver option would be taxing 75% of the profits (these profits are effectively free money given to the rich) and redistribute the money across society in a more productive manner.
Likely impact
Those who own assets will have to sell some of their assets to pay the tax. This should lead to lower asset prices as they begin to sell – and should stop the current bubbles growing further.
Lower asset prices also mean greater capacity of the less well-off to buy and to be able to aspire to buy these assets (including property).
Conclusion
Quantitative Easing is white-collar financial corruption on a grand scale. It sells the integrity of our financial system for short term gain – and gives these gains to the better off. It needs to be stopped and the redistributive effects reversed.
– Why is it damaging our society and what can be done to fix it?
What is Quantitative Easing?
“Quantitative Easing (QE) is a monetary policy used by some central banks to increase the supply of money. It usually involves both a direct increase in the money supply and a knock-on effect from the fractional reserve system. QE is usually implemented by a central bank first crediting its own account with money it creates out of nothing (“ex nihilo”). It then purchases financial assets, for example, government bonds, quasi-government debt, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as “open market operations”.”
In short, QE is printing money, and using the money to buy different types of bonds, typically government bonds.
What is Quantitative Easing supposed to achieve?
QE is supposed to provide an economic stimulus to increase economic growth, to increase employment and to increase inflation (to combat deflation).
Buying bonds causes bond prices to go up, which lowers bond yields, which should lower longer-term interest rates – making borrowing cheaper and so stimulating the economy.
As bonds are purchased by central banks, more money should flow into circulation. Banks are assumed to get more deposits from the new money created and are assumed to sell some of their bonds giving them more money and liquidity in place of these bonds. This extra money available to banks should help banks provide additional lending into the economy boosting economic growth.
What has Quantitative Easing achieved in the US and the UK?
The US and the UK have pursued QE policies in recent years. Their economies have recovered, albeit in an unequal way. Wage growth has been low, but corporate profits have been buoyant, aided by lower interest rates and wealth effects from rising asset prices. Despite money printing, inflation rates in the US and the UK are still low and QE does not seem to have increased inflationary expectations to any significant extent.
Quantitative Easing in the EU
The US and the UK economies have outperformed the EU which remains in recession. The EU has just launched a QE policy which is supposed to stimulate the European economy and to combat deflation in the EU. Some are concerned about the QE policy, particularly in Germany which has a history of hyperinflation which was caused by excessive money printing.
How does Quantitative Easing work? What are the mechanics of it?
Quantitative Easing works as follows
1) The central bank print money, increasing the amount of money in the economy.
2) They use it to buy certain types of bonds, forcing up the price of these bonds, lowering bond yields and making profits for those who own these bonds.
3) Those who sold the bonds typically use the money to buy other types of bonds, for example corporate bonds, forcing up the prices of corporate bonds and making profits for those who own the corporate bonds.
4) Those who sold the corporate bonds, typically buy other types of assets to replace their bonds, forcing up the prices of those assets and making profits for those who own them.
5) A general shortage of corporate bonds is created. The excess demand for corporate bonds causes corporate bond yields to drop to low levels making corporate bonds less attractive to investors. This makes other investments relatively more attractive, e.g. equities.
6) Money goes into buying equities, forcing up equity prices, making profits for those who own equities.
7) Money also goes into buy property, similarly forcing up prices and making profits for those who own property.
8) Lower corporate bond yields make it attractive to companies to issue more corporate bonds (making borrowing easier and cheaper for large companies), enabling them to raise cheap capital on the financial markets. This enables companies to use this money to buy back shares, further forcing up equity prices (and the value of the directors stock options) and making further profits for those who own equities.
All these profits make those who have assets (those relatively better off) much more relatively better off. The profits create a significant wealth effect which stimulates the economy.
Those with relatively smaller amounts of assets also gain. But they have fewer assets in the first place, so they gain proportionately less. Those who have no assets get nothing.
The poor are supposed to gain from ‘trickle-down effects’ because governments can borrow at lower interest rates. But, offsetting this, governments are likely to need more money for social expenditure to combat the rising inequality. The ‘trickle-down effects’ might be compared to ‘crumbs from the rich man’s table’. All-in-all QE should directly increase inequality in society.
What effect will QE have on ordinary members of the public?
Assets prices will rise.
- If you have shares or other investments, these should have risen in value.
- If you have property, it should have risen in value.
- If you have a pension fund, the value of the assets in the fund should have risen.
The more assets that you have the more you will have gained. Those with the most gain the most. But relatively speaking, everybody becomes poorer than those who were richer than them in the first place. If you have no assets you will have gained nothing and have become relatively much poorer.
Pension funds are likely to see the expected cost of providing pensions in the future to have risen due to lower bond yields. Pension fund assets will have risen, but their liabilities may have risen by more than their assets reducing their funding levels and putting more pressure on pension schemes to close down.
If your employer becomes more profitable, some of this may trickle-down to you, but much less than your employer is getting.
If you are self-employed and your customers are the relatively rich, you will likely see business improve. If your customers are relatively poor, you will likely to see very little upturn in business.
What effect is QE likely to have on lending and interest rates?
QE is supposed to lower interest rates and give banks more liquidity so that they can lend more money to individuals and to businesses to stimulate the economy and create more employment.
However, banks will only lend to customers who they consider will be able to repay their loans. The extent to which they lend the additional money available to them, rather than purchasing other types of bonds, will depend on borrowers’ creditworthiness. The only customers likely to be sufficiently more creditworthy are the relatively better of, who have been made better off by QE. The increase in lending driven by QE will mostly just improve credit availability to the better off, with only ‘trickle-down effects’ for other borrowers.
Those on tracker mortgages will have seen their mortgage interest rates come down as the ECB cut interest rates, but will see no impact from QE. Interest rates on other mortgages and other personal loans are supposed to fall. But mortgage rates and personal loan rates are mostly being kept high to offset loses than banks are making on tracker mortgages. Lower tracker rates means less scope for banks to cut other interest rates.
Effect on inflation
The dangers of deflation are often put forward as one of the main reasons for QE.
However, QE is unlikely to significantly increase inflation. This is because better off individuals mostly spend their money on different types of goods and services than less well-off individuals, and since the CPI is mainly based on goods bought by the less well-off, and since the less well-off are really no better off (and relatively worse off) the CPI is unlikely to increase. This lack of increase in inflation may be used to argue for more QE, but in doing so is missing the point.
This is consistent with what has happened in the US and the UK. Despite enormous amounts of QE, inflation has been muted (albeit assets prices have ballooned and asset prices are not counted in CPI).
Effect on economic growth
As QE makes the better off even more better off, it is likely to lead to higher incomes for the better off, thereby increasing economic growth. The impact on the poor will be marginal. Those who gain employment will gain but stagnant wage growth limits any significant benefits. The benefits to the less well-off are mostly limited to trickle-down impacts.
However, the less well-off will suffer because the types of goods which the better off buy, which the less well-off also aim to buy, will rise in value, pushing them further beyond their horizons.
The end effect of QE is economic growth fuelled by big increases in incomes for the better off, offsetting stagnant incomes of the less well-off. The growth numbers might be called into question as they are discounted by CPI, which does not include the rising cost of assets. So in ‘real’ terms the growth figures may not be as real as they are made out to be.
Making the rich richer
In summary, the main effect of QE is to make the relatively rich richer, both directly and indirectly. The rich gain immediately from rising asset prices fuelled by the bond purchases. They also gain from improved credit availability and from lower interest rates.
The gains for the poor are mostly negligible and indirect. The media, which is typically owned by the richer elements of society, usually makes a big deal about reductions in the costs of borrowing for governments. These are the governments who have significant debts due to bailing out banks in the financial crisis.
The complicated nature of QE means that most of the public seem to be unaware that the rich are getting much richer and there has been no real public protest about QE policies.
Dangerous asset bubbles
A further problem with QE is that it is creating a bubble in the bond markets and a bubble in the equities market. Asset prices have frequently risen sharply on bad economic news in recent years as this has been a signal that more QE might be on the way, so more asset purchasing. Assets prices risk being artificially stimulated to levels above their long term fair-values. These types of bubbles usually last as long as the money printing (QE) is happening, but they usually end badly for society. And the less well-off will usually pay the price for them.
Philosophical background
The philosophy behind QE is that of neo-liberalism and the philosophy of Ayn Rand. Rand’s philosophy considered the ‘little guys’ to be mostly irrelevant and relatively worthless compared to ‘type-A’ individuals. She considered that without ‘type-A’ individuals there would be no employers, no managers etc, so no jobs for the ‘little guys’. So the ‘little guys’ should be grateful for anything that they get. This philosophy is very attractive to the strong in society who are happy to brutally seek wealth and power or who are just willing to turn a blind eye – it gives them a moral defence to their actions. The philosophy has a seeming truth to it, but the seeming truth is used to entrap those who read it.
According to Rand’s philosophy, if lots of small guys get hurt (or relatively hurt) for the benefit of ‘type-A’ individuals, well then that’s not such a bad thing – it will make everybody better off (the seeming truth but really the lie that advocates much greater inequality).
References:
“The Fountainhead” and “Atlas Shrugged” by Ayn Rand
“Capitalism - the Unknown Ideal” by Ayn Rand, Alan Greenspan et al (1967)
Note: Alan Greenspan, former US Federal Reserve Chairman, advocated Rand’s philosophy and the philosophy is an influential force in current world political elites.
How to fix it?
Two immediate things can be done to fix the problems being created by QE:
1) Tax profits on the financial assets impacted by QE: on a mark-to-market basis (not on a realised basis), at say 25% of any capital appreciation since 2009 (since QE began).
2) Use the money to invest in education, to improve public services, health, to encourage real enterprise and to improve the social fabric of the state.
A braver option would be taxing 75% of the profits (these profits are effectively free money given to the rich) and redistribute the money across society in a more productive manner.
Likely impact
Those who own assets will have to sell some of their assets to pay the tax. This should lead to lower asset prices as they begin to sell – and should stop the current bubbles growing further.
Lower asset prices also mean greater capacity of the less well-off to buy and to be able to aspire to buy these assets (including property).
Conclusion
Quantitative Easing is white-collar financial corruption on a grand scale. It sells the integrity of our financial system for short term gain – and gives these gains to the better off. It needs to be stopped and the redistributive effects reversed.
My understanding is that the money supply doesn't really work that way any more especially after QE. Currently the M1 Multiplier in the US is actually around .75 i.e. actually less money created by the banks than they have in CB reserves; it used to be about 3.0. The requirement to hold CB reserves is no practical impediment any more to banks creating money. The focus these days is all on asset quality and having sufficient capital to meet the risks. In other words the focus has gone off liquidity ratios and on to solvency ratios.