Quantitative Easing - Why is it damaging our society and what can be done to fix it?

[Duke of Marmalade]

Below is my more considered response to OP. I have concentrated on the areas where I differ, though that does not mean that I agree with everything else.

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..

As Derkaiser points out buying a bond does not increase overall profit as the proceeds will be invested at the reduced yields. This is a timing thing and not a transfer of wealth.

6) Money goes into buying equities, forcing up equity prices, making profits for those who own equities.

Transactions in equities themselves are merely the transfer of money between the holders, it does not make the holders as a class profits. The extent to which prices go up on paper is merely that class of persons agreeing amongst themselves that they value equities higher because of the low yields. Again as Derkaiser says, no extra wealth is created or re-distributed per se. Of course, if equities were being purchased directly by the authorities that would amount to a morally unjustifiable transfer or wealth from the less well-off to the more well-off.

All these profits make those who have assets (those relatively better off) much more relatively better off.

On paper - there is no re-distributitive transfer of wealth taking place.

The profits create a significant wealth effect which stimulates the economy.

This last being a good thing of course. This is the main point of QE; whether through the wealth effect or through more money sloshing around the more well off or indeed those of an entrepreneurial spirit will start spending and investing. Colm calls this "trickle down" but it is the whole rationale of monetary easing. Deflation is because of reduced spending and investing - clearly any attempt to reverse this phenomenon must be targeted at the better off.

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.

Agreed, but the implication is that this is bad. Would Colm prefer that inflation came in the prices of goods bought by the less well off?

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.

This is a non sequitur. The increase in wealth is on paper, no case has been put forward that incomes of the well off increase disproportionately, indeed because interest rates have fallen the well-off are less income rich than hither-to-fore.

Those who gain employment will gain ...

Not to be dismissed.

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.

Repeating earlier point, would Colm prefer that the inflation came in the prices of food rather than of Mercs?

The end effect of QE is economic growth fuelled by big increases in incomes for the better off

Non sequitur.

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.

Profoundly disagree. The only asset which is relevant for the deflator is property and this is allowed for in CPI through rents.

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.

Maybe the public are more astute than Colm gives them credit for. They know that QE is not taking money out of their pockets in the way that water charges are.

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.

Now this really is contradictory. So the well off benefit disproportionately from the bubble and the less well off lose disproportionately from the bust. That just doesn't stack up. If Colm argued that the less well off were relatively unaffected by either phenomenon it would at least be consistent.

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.

I have argued that the increase in wealth is on paper, these are not "profits". Colm predicts that the bubble will burst. Would this tax on unrealised gains then be returned? If not, Colm is in fact recommending a massive confiscation from the well off, which of course can be argued in its own right but cannot be justified as a reversal of some earlier re-distribution in the opposite direction wrought by QE.

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.

This concluding oratorical flourish is simply OTT.

 

[ColmFitzgerald]

blogs.wsj.com/economics/2014/12/26/how-to-save-like-the-rich-and-the-upper-middle-class-hint-its-not-with-your-house/

 

[Brendan Burgess]

Hi Colm

While the article is interesting, I don't see its relevance to the QE discussion, apart from

The research helps explain part of why the recent recession, which hinged on a housing bust, was so much more difficult for the middle class than a typical recession. It also helps explains why the recovery has been so disappointing to many. Housing has regained its ground only slowly while corporate profitability has boomed. In other words, we’ve seen slow growth in the major middle class asset, but substantial growth in the assets held by the wealthiest.

Brendan

 

[Jim2007]

blogs.wsj.com/economics/2014/12/26/how-to-save-like-the-rich-and-the-upper-middle-class-hint-its-not-with-your-house/

This is the thing that Irish people are determined not to learn - investing in property will not put you in the top flight when it comes to wealth....

 

[ColmFitzgerald]

The graph in the link shows the distribution of wealth

QE, given that it increases asset prices, makes the wealthy much more wealthy. The graph puts into context the size of the gains for the middle class from QE compared to the gains that arise for the top 1% and top 10%.

The middle class are getting crumbs and consider themselves better off - but really are relatively much worse off. Plus they are probably closed to the idea of giving back some crumbs to reverse the situation somewhat.

The lower classes are being screwed - and too busy being kept on the hook to see it.

If people can't see this, then fair play to those who came up with QE, they are smart people! They've engineered it so that the middle class are actually supporting them.

 

[ColmFitzgerald]

This graph shows the distribution of wealth and puts into perspective the disproportional effect that QE will have on society.

"My own opinion is that when the whole ship of state is on the right course it is a better thing for each separate individual than when private interests are satisfied but the whole state as a whole is going downhill" - Pericles

 

[Duke of Marmalade]

The inequality in our (all) society and M. Pickety's thesis that it is only going to get worse is a very interesting topic in its own right. So too is the pathetic smugness of the middle classes with their Semi-Ds whilst the real elite are laughing all the way to their Swiss banks. However I suggest we stick to the specific effects of QE and it would be good if Colm addressed some of my particular comments, notably:

1. Does he really believe that QE is white collar corruption on a grand scale? This later amplification suggests that he does indeed believe that this is a satanic conspiracy by "smart people".

If people can't see this, then fair play to those who came up with QE, they are smart people! They've engineered it so that the middle class are actually supporting them.

2. Does he still think that a 75% confiscation of the, largely paper, gains since QE was introduced, is justified, especially as he believes that this bubble will burst.

3. Indeed when the bubble does burst won't this massive wealth distortion disappear? Who will look the fools then? Still the pathetic middle classes?

4. Again on that bubble burst and the 75% confiscation would Colm reverse it?

5 Can he explain why the effect of the bursting of this bubble in the paper wealth of the elite will disproportionately disadvantage the rest of us? (bio note - no, unfortunately I do not have a Swiss bank account and my Title is purely an honorary one. I guess I am one of the duped middle classes).

6. The UK has been doing this QE thing for some time now. The Labour Party in particular do not seem to be making an election issue of this "massive white collar corruption" and they have plenty of lefty academics advising them. Does Colm believe that they too and their advisors have been duped?

7. A new point. Colm asserts that the cost of social cohesion in the light of this wealth distortion will offset any societal gains. But he later asserts that very few of us have a clue that this massive corruption is taking place, so where will the pressure for social cohesion measures come from?

8. A minor point but I am curious to know what type of inflation Colm would approve of.

[broken link removed]for a balanced view on the distributive effects of QE.

 

[Duke of Marmalade]

Colm has actually put up a very strong case that it is the elite who are being conned, certainly if you believe that this is an asset bubble going to burst.

Here's how the alternative narrative goes. QE=government buys back its own bonds at inflated prices. Hey, what's the big deal, they have reduced the returns on the money to nuffin anyway so the elite only think they have made profits. Then they will start bidding up the prices of their silly equities and they will convince themselves that they really are much better off. Then the rub, they will start spending their illusory increased wealth on the rest of us. And then the bubble bursts. This is socialist corruption on a grand scale

 

[ColmFitzgerald]

1) I don't believe in conspiracy theories. I believe in the human condition. All of my comments so far are based on an assumption that people are NOT rational but that they are human. I should probably start a new thread on this as it is not something easily explained here and I'm going to try to stick to your questions.
QE is not a satanic conspiracy of smart people, of course not. The strong mostly do as they have the power to do. There is a notable absence of noble leadership these days so the strong and wealthy will mostly get stronger and wealthier. My point was QE is clever if it enables this and there is little if any backlash from others.
Some of the strong and wealthy will naturally agree with Ayn Rand and feel justified in being better off from QE, or more precisely their egos will feel justified.
2) Confiscation? Money was printed which directly resulted in asset price inflation. My point is taxing this. Realistically the taxation would concentrate on certain assets and exempt others (like a person's home). Have you assets and do you feel it's unfair that you might be taxed?
Yes bubbles arise when natural relationships between economic variables are pushed way out of line with historical or natural norms, e.g. house prices in south Dublin when to 16 times average earnings in the last bubble (norm is closer to 5) and given that houses are mostly bought from income such a high multiple of earnings was unlikely to be sustainable in the long-run and would probably revert at some stage.
If QE is followed by general printing of money or more and more QE, the bubble could last a long time. Are you suggesting that asset gains not be taxed? Surely taxation would inhibit any bubbles and be better in the long-run for the economy?
3) I think you are ignoring my point in 1) the strong and wealthy mostly have power so they will protect themselves in any crash, the average guy will pay the price probably - just like in the last crash.
4) I think your viewpoint thinks that a QE tax would be robbing you - I don't think that is a fair point, the money printing gave the gains in the first place.
5) The same way as what happened in the last crash. The bondholders got bailed out. Wall Street got bailed out. Etc. Taxes went up. Health and Education spending was cut.
6) I don't think many people get QE, yet alone how it works and what are the implications.
7) From those with a social conscience.
8) Approve of inflation?? I don't understand the question.

Re the balanced view. Do you think the world is benign or otherwise? Are those in power trying to help you or help them?
Do you think BOE communication is direct and honest - or are the tools of Public Relations being used?

Where do you see the BOE paper differing from the initial post?

 

[Duke of Marmalade]

Colm, I will not at this stage riposte point for point. But on the last I will comment now. Yes indeed the BoE analysis did back up your description of the wealth transmission mechanism almost verbatim - I accepted it myself. But they did not conclude that this was white collar fraud on a massive scale. It is that interpretation which I simply can't buy and neither do the socialists in the UK.

 

[Duke of Marmalade]

And my point for point response

1) I don't believe in conspiracy theories. I believe in the human condition. All of my comments so far are based on an assumption that people are NOT rational but that they are human. I should probably start a new thread on this as it is not something easily explained here and I'm going to try to stick to your questions.
QE is not a satanic conspiracy of smart people, of course not. The strong mostly do as they have the power to do. There is a notable absence of noble leadership these days so the strong and wealthy will mostly get stronger and wealthier. My point was QE is clever if it enables this and there is little if any backlash from others.
Some of the strong and wealthy will naturally agree with Ayn Rand and feel justified in being better off from QE, or more precisely their egos will feel justified.

I read your tone as implying that QE was a clever conspiracy by a tiny elite against the rest of us. Apologies if I have misinterpreted you.

2) Confiscation? Money was printed which directly resulted in asset price inflation. My point is taxing this. Realistically the taxation would concentrate on certain assets and exempt others (like a person's home). Have you assets and do you feel it's unfair that you might be taxed?
Yes bubbles arise when natural relationships between economic variables are pushed way out of line with historical or natural norms, e.g. house prices in south Dublin when to 16 times average earnings in the last bubble (norm is closer to 5) and given that houses are mostly bought from income such a high multiple of earnings was unlikely to be sustainable in the long-run and would probably revert at some stage.
If QE is followed by general printing of money or more and more QE, the bubble could last a long time. Are you suggesting that asset gains not be taxed? Surely taxation would inhibit any bubbles and be better in the long-run for the economy?

75% taxation on gains in financial assets is confiscation in anybody's book - especially if the gains are largely on paper and a mere adjustment of the yield level. Rezoning gains by contrast are direct and windfall wealth transfers from the community to the lucky landowner/speculator and should justifiably be taxed at very high levels. Not so QE induced pricing level adjustments.

3) I think you are ignoring my point in 1) the strong and wealthy mostly have power so they will protect themselves in any crash, the average guy will pay the price probably - just like in the last crash.

Let's take that crash. One can argue that the big losers were those who lost their jobs and that the people who lost on the markets or on their property suffered only paper losses. But you have to be consistent - when this phenomenon is reversed it should be judged by the same criteria.

4) I think your viewpoint thinks that a QE tax would be robbing you - I don't think that is a fair point, the money printing gave the gains in the first place.

No! No! No! Read Derkaiser again. The initiating transaction is the Government exchanging its bond liabilities for less expensive money liabilities (because of reductions in interest rates). If QE is successful the resulting inflation increases still further the real transfer TO the Exchequer. Your insistence that this is a massive wealth transfer helps explain your revulsion of QE. If I believed that, I too would by shouting "corruption on a massive scale"

5) The same way as what happened in the last crash. The bondholders got bailed out. Wall Street got bailed out. Etc. Taxes went up. Health and Education spending was cut.

This is a plausible argument. There does seem to be a Bernanke PUT at play. On the other hand what was done was done to save our economic system. True some have more at stake in that system but by and large in modern Western democracies we all have an interest in preserving the system.

6) I don't think many people get QE, yet alone how it works and what are the implications.

To me the reaction of the British Labour Party to QE is the dog that didn't bark. If even a part of your "massive corruption" theory was true it would surely have gained some political momentum. We should be careful that we two do not convince ourselves that we are part of a tiny intellectual elite who understand QE. The British Labour Party will have plenty of learned advisors looking for any chink.

7) From those with a social conscience.

Yes indeed and when we consider the Venn Diagram intersection of that small set with the even smaller set who understand QE we are not going to have a very influential group.

8) Approve of inflation?? I don't understand the question.

You observed that any inflation wrought by QE will only serve to put the goods that the well off buy further beyond the reach of the less well off. I was asking did you prefer that it was the price of food which underpinned any pick up in inflation.

 

[darag]

...This is a timing thing and not a transfer of wealth.Transactions in equities themselves are merely the transfer of money between the holders, it does not make the holders as a class profits. The extent to which prices go up on paper is merely that class of persons agreeing amongst themselves that they value equities higher because of the low yields. Again as Derkaiser says, no extra wealth is created or re-distributed per se. ...

If you hadn't repeated variants of this claim many times, I would have assumed a misunderstanding on my part. To claim that there has been no transfer of wealth makes no sense.

I, as an owner of equities, am wealthier as a result of rising equity prices. Similarly government bond holders are wealthier as a result of falling bond yields.

This isn't just 'on paper' - I can sell my bonds or equities any time I want and use the extra profit to buy TVs, fillet steaks, pints of beer or Armani underwear. The losers are those who were not owners or such assets before the price increases but want/need to buy now.

If the increases in prices in certain assets are caused by government or central bank behavior, then it's fair to say that the behavior has resulted in a transfer of wealth.

If the government could cause property prices to double for example, would you really try to argue that this wouldnt constitute a transfer of wealth to property owners from non-owners (either through higher rent or cost of 'getting on the ladder')?

I personally am wealthier as a result of QE (equities represent a significant portion of my savings) - while those with little or no net worth coming into QE, starting to save e.g. for a pension are poorer. Ignoring the Picketty flavoured hyperbole, colmfitzgerald's summary of QE seems spot on.

 

[Duke of Marmalade]

Ignoring the Picketty flavoured hyperbole, colmfitzgerald's summary of QE seems spot on.

We are in violent agreement. I have on several occasions said that Colm's summary of how QE works is spot on, directly in line with the BoE's description. Where I have taken issue is on the "Picketty flavoured hyperbole". Colm asserts that this is white collar fraud on a massive scale, that a tiny but smart elite have not only duped the poorer in society but the middle classes (I will count you as MC rather than Elite, but stand to be ejected) as well. His assertion that the little guy (which seems to mean the vast majority of us) are always on the losing side does not stack up.

I fully accept the BoE and Colm's analysis that there has been a "wealth effect" and you seem to exemplify that perfectly. The extent to which this is largely "on paper" does not detract from its effect in making you feel better and switching you from Dunnes Stores to Armani in your choice of under garments. If Colm's proposal that 75% of your unrealised gains should be confiscated would you shrug your shoulders and say "oh heck, I'm still the remaining 25% ahead of "the losers" who didn't have any equities."? You would be badly mistaken to take that view.

Let me address the purchase of government bonds by the government, as my argument that there is no wealth transfer is a mathematical truism in that case. Let's say the government pays way over the odds and buys a 10 year bond off you at 2% yield. You (or somebody else) then keeps that money earning .5% from the same government. That is in fact a transfer from you to the government of 15%. If in addition the QE ploy works and inflation ticks up by 1% p.a. then you have been pilfered in real terms by 25%. It could be argued that there has been a transfer of your future wealth to the present albeit subject to that 25% real leakage. One could even argue that this is an attempt to dupe you into buying those fillet steaks from your future wealth - however, I try to avoid spinning any moral tales into these transmissions.

The math is not quite so obvious when it comes to equities. But to the extent that the increased share prices are a reflection of lower yields then it is precisely as for the bonds, an advance of your future wealth to today. To the extent that it reflects improved prospects for the economy, then despite what Colm says, that is good news all round. When you sell an equity it is most likely to someone of your same class, it is not dipping into the poor box as Colm suggests.

Perhaps these matters are best exemplified by the price of houses. If house prices go up no wealth has been created and no wealth has been transferred. Nonetheless, people feel "wealthier" and though they never have any intention of cashing in their newly acquired equity they will be more inclined to buy those fillet steaks.

The recession was largely due to the "haves" retrenching on foot of the massive collapse in asset prices wrought by the financial crisis. The way to reverse this is to coax the same people back into spending and investing. QE tries to achieve this. If QE involved the government buying up the equities, houses and even mercs of the "haves" there would rightly be an outcry, but as described above the initiating transactions are merely rebalancing of the State's own liabilities between long term and monetary. (I remind you that there hasn't been a peep out of the socialists in the UK, and that is not because they don't understand it, I have more respect for socialist analysis than that.)

The fact is that all monetary policy is directed at managing the spending and investing habits of the "haves". To manage the economy through the "have nots" is to use fiscal transfers, which certainly has been tried and was a favourite of Keynes but as the mountain of sovereign debt testifies has been (ab)used beyond its sustainable limits.

 

[darag]

Let me address the purchase of government bonds by the government, as my argument that there is no wealth transfer is a mathematical truism in that case. Let's say the government pays way over the odds and buys a 10 year bond off you at 2% yield. You (or somebody else) then keeps that money earning .5% from the same government. That is in fact a transfer from you to the government of 15%. If in addition the QE ploy works and inflation ticks up by 1% p.a. then you have been pilfered in real terms by 25%. It could be argued that there has been a transfer of your future wealth to the present albeit subject to that 25% real leakage. One could even argue that this is an attempt to dupe you into buying those fillet steaks from your future wealth - however, I try to avoid spinning any moral tales into these transmissions.

The math is not quite so obvious when it comes to equities.

Well it's not obvious at all to me in the case of bonds either! Why would anyone voluntarily sell bonds yielding 2% in order to buy bonds (or the equivalent - say put the money into government backed term deposit accounts) which paid 0.5%? How would the government be paying "way over the odds" buying back bonds paying the former yields given the best yielding equivalent product yields a quarter of that rate? Surely they'd be paying way under the odds. The only thing I can take from this is that if I agree (why?) to a 75% cut in income from my bond holdings, I lose and the counter-party (the government) wins but that would happen with or without any QE wealth affects.

And surely inflation is a red herring in your calculations? It indiscriminately takes value from all asset classes, not just the ones which have been inflated by QE. It does the same to someone who has only held cash, commodities, property, art or anything else. So I don't see it's role in recovering the gains achieved by equity and bond holders.

 

[Duke of Marmalade]

Well it's not obvious at all to me in the case of bonds either! Why would anyone voluntarily sell bonds yielding 2% in order to buy bonds (or the equivalent - say put the money into government backed term deposit accounts) which paid 0.5%?

Why indeed? But it happens, that is the essence of QE. So who is being ripped off?

 

[Duke of Marmalade]

Darag people do not voluntarily give up 10 year 2% yielding bonds with the intention of holding 0.5% money for 10 years. The money becomes "hot" in their pockets. They look around for better yielding assets or hopefully invest in the real economy or better still start buying those fillet steaks. My point is that the government has replaced 2% liabilities with 0.5% liabilities, a net transfer from the recipients of QE.
The government prints money, buys bonds off people with a view to lowering the value of that money (inflation). What is there to not understand about that?

 

[darag]

Why would people sell their bonds to a central bank for less money than the market is offering?
If market yields are currently 0.5%, the CB has to offer to buy at 0.5% or less.

Maybe it's the use of yields rather than prices that's confusing the discussion. I can state the question equivalently as follows: if the market price for a particular bond is 100k and if I wanted to sell why would I sell to the CB for 98k and not one of the private buyers willing to pay 100k? This bizarre/implausible trade seems to be the basis of your argument.

This has nothing to do with motivation or money being "hot". I've already decided to sell.

 

[Duke of Marmalade]

darag I'm afraid that we are getting to the stage where the medium is not conducive to constructive communication. You are completely misunderstanding me and I presume from your relatively well off financial position that you are not stupid, unless daddy gave you it.

Briefly as a last try. 10 year bonds trading at 3%, say valued at 95K. Money earning 0.5%. This was more or less the market as it would have been if QE was not applied. Government buys bonds at a 2% yield, say 102K. This is Colm's argument - an apparent straight 7K subsidy to the elite. My counter argument is that it is the elite who have been conned, for whilst they think they have made a 7K profit, over time they will lose as a group 15K. If you do not understand that I presume that it is because I am not explaining it well.

 

[darag]

darag I'm afraid that we are getting to the stage where the medium is not conducive to constructive communication.

I actually think it is constructive (ignoring the personal gibe in your last post), but I can accept that it's not pleasant to have your arguments challenged. Your original statement on how bond holders lose money through QE was clearly enough stated:

Let's say the government pays way over the odds and buys a 10 year bond off you at 2% yield. You (or somebody else) then keeps that money earning .5% from the same government.

This was the very basis of your argument that the government immediately gains from the purchase of bonds and I asked why would anyone swap a 2% yield for a 0.5% yield? I simply don't accept that the intersection of bond investors and financial illiterates is large enough to support this "mechanism".

Briefly as a last try. 10 year bonds trading at 3%, say valued at 95K. Money earning 0.5%. This was more or less the market as it would have been if QE was not applied. Government buys bonds at a 2% yield, say 102K. This is Colm's argument - an apparent straight 7K subsidy to the elite. My counter argument is that it is the elite who have been conned, for whilst they think they have made a 7K profit, over time they will lose as a group 15K. If you do not understand that I presume that it is because I am not explaining it well.

This situation simply cannot exist. If things were set up as you describe above, then I just keep buying bonds for 95K and selling them to the government/CB for 102k, over and over. Markets do not allow arbitrage situations like this to exist (for long).

I don't believe I am being stupid; I've genuinely tried to read your arguments carefully because I'm always keen to avoid confirmation-bias in my own beliefs and views. But I've come to the conclusion that I don't think you understand market mechanics very well. I work in financial markets and so these sort of situations you describe immediately strike me as implausible, to put it mildly.

 

[Duke of Marmalade]

darag Scream I had no idea my communication skills were that bad. I should stick to Letting off Steam.

I am not at all suggesting that there are two price levels operating, one in the open market and the other set by the taxpayer. Each QE transaction will take place at the then "market price". But I agree with Colm that the existence of such a massive buyer raises the price level not only for the bonds she is chasing but as a knock on into other financial assets, thus creating a wealth effect. Where I take issue with Colm is that I do not see this as a corrupt transfer of resources from those who are relatively light in financial assets.

Now I perfectly accept that you are much more knowledgeable on the workings of the financial markets than I. Are you saying that even a buyer as big as the taxpayer cannot move the price level - in the words of Mrs T you can't buck the markets? If that is your argument then even this plausible basis for Colm's assertion falls away.