

Quantitative easying explained - albertcardona
http://jwz.livejournal.com/1321625.html

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henryprecheur
1M people viewed this cartoon ... This is scary.

The guys who did this clearly don't understand macro-economics. And yet many
people will be convinced that QE2 "is bad" because "deflation is good, I can
buy more stuff for less money" or "Bernanke didn't see the subprime crisis
coming, therefor is incompetent".

QE2 might not be the right thing to do. But this movie doesn't educate people
or make them understand why QE2 might be a bad idea (hyper-inflation is the
main risk). It just make people angry and suspicious, while keeping them
ignorant.

~~~
ahi
You're right about the macro-economics, but the Goldman Sachs angle is still a
wtf.

~~~
henryprecheur
There's nothing fishy about it. They buy treasury bonds from primary dealers,
which include Goldman Sachs.

<http://en.wikipedia.org/wiki/Primary_dealers>

~~~
arohner
How about the part where Bush's Treasury Secretary
(<http://en.wikipedia.org/wiki/Henry_Paulson>), and Clinton's Treasury
Secretary (<http://en.wikipedia.org/wiki/Robert_Rubin>), and the NY Fed
Chairman (<http://en.wikipedia.org/wiki/William_C._Dudley>) are all ex-Goldman
Sachs. Doesn't that sound a little fishy?

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sfard
I saw this on my friend's facebook feed and left this comment.

Yo this whole thing fascinates me like crazy so I've spent some time
researching shit, and I still only understand the crust of it. But since I'm
bored, here's what I know. Alright, so there's two camps. First is the paul
krugman camp which thinks that during a recession a government needs to spend
like crazy to cause consumption and inflation. Consumption is good since
spending has ripple effects on an economy. It's not obvious (and definitely
not proven) that deflation is necessarily bad though. The main case is that in
a deflationary economy, people spend less and save more since there's a
natural yield to holding your money, which in turn can cause more deflation.
And since it's hard to cut wages (or they say it is), wages become out of wack
with the economy.

Japan is always pointed to as the example of a zombie economy and what could
happen to the US. This is the thing though - economists are so fucking caught
up in their own theories and numbers that they forget about reality. They
mistake symbols for economic growth (indicators) for real well being in a
country. Japan is still one of the largest economies in the world, has one of
the largest middle classes, lowest income disparity, and lowest unemployment
in the world. I frankly can't understand why people keep shit talking Japan's
economy as this nightmare when they seem to be doing pretty fucking well. They
still MAKE things there like cars and have a nice mix of industry. They don't
fit the economist mold of success and despite the reality that they're in many
respects doing better than the US, they're the example of the worst case
scenario of a deflationary spiral. Fucking academics...

Anyways, back to the point at hand. Even if you believe the krugman camp, it
seems to me that all they are really doing is trying to control economic boom
and busts and by doing so, only causing more of them. For example, let's say
deflation happens - as long as you have an open economy (and the US does) -
wages will decrease and eventually people will start spending again. The fact
is that spending was way out of wack before and falsely propped up the
economy. During the last two booms, the US was the only country where spending
was higher than income - or negative savings, which is "good" for the economy
by economist's standards, it's clearly something you can't maintain. So rather
than let shit calibrate itself and fall in line, the government is like "woah
- we need to spend for the people since they wont".

Anyways, capitalism is fun yo.

Oh and I forgot to mention that reading up on this stuff, my respect for
economists has fallen like crazy. This is a blanket statement that I'm sure
it'll turn out I'm wrong about, but seems to me that economic theory is really
just a game of anyone's best guess with the addition of math to make the whole
thing look sophisticated, when it's really just one big exercise in false
precision and dick measuring.

~~~
SpacemanSpiff
I remember a college "introduction to economics" class where the professor
asserted that in this new technological age, the typical economic cycles of
growth and recession were obsolete; that from here on out it was just growth
growth growth. This was in 1999.

~~~
aero142
This is the basis for my new bubble investment strategy. You wait until you
start reading articles about how X is going to go up forever, then you want 3
months, and short X. They said the same thing about housing prices.

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dnautics
Here is my prognostication on what will happen. There will be short-term
inflation on account of QE2. This will put the squeeze on most americans,
resulting in an increased drive to clear debt and an increased rate of debt
default. Both of which are deflationary. Since inflation can be brought about
by quantitative easing OR by debt expansion, and deflation can be brought
about by quantitative tightening OR by debt contraction... Because the private
debt markets still exceed the public debt and unfunded obligations by at least
a factor of three, we'll see a year to two year period of deflation. The stock
market will crash, gold will trend slightly downward or flat, and PGMs will go
through the bottom (they're in a bubble right now that looks like it's
starting to burst).

The question is: How will the government respond. I think it's highly likely
that the Fed will respond with QE3... Alternatively, congress will vote to
default on the public debt, which I think is highly unlikely. With QE3,
considering the money multiplier, we'll finally see that hyperinflation that
the tea partiers are (rightly) scared about, will be incredibly painful for
anyone who is not really wealthy now. Unfortunately, because of the
intermediary deflationary period, academic economists and punditry like
Krugman will incessantly make fun of goldbugs like Ron Paul (who is ascending
to chair the congressional subcommittee on monetary policy).

So. You have about year to shore up your debts, save some money, and buy
nonperishable commodities, formulate an escape plan. Godspeed.

~~~
dmm
Why would inflation drive people to clear debt? I thought inflation drove
people to obtain more debt because debts are in dollars, if dollars are worth
less, the debt is also less.

In an inflationary environment it would make sense to borrow dollars to buy
goods which increase in price under inflation: stocks, gold, etc.

Congress will never default on the debt. The debt is in dollars and congress
has the power to print dollars. We are going to print our way out of debt.

~~~
devmonk
During the great depression when people had to live with much less, they
learned to save. Saving became part of the culture by necessity. Credit was
offered by merchants and stores, but not to the extent it is used now.

Then gamification of credit card debt and other debt through "credit card
points" and "credit rating" was introduced, and everyone was told that you had
to have to have a credit card and a mortgage or you wouldn't have the credit
rating to allow you to borrow more money for the car, the new furniture set,
etc.

However, if the USD loses significant value (hyper-inflation) and the credit
industry tanks, people will have to start saving again, just like the great
depression.

We can't print our way out of debt, obviously. The more money is printed, the
higher the eventual inflation.

Stocks from companies could fall if their business model relies on buying
goods and services from countries whose currency increases in relative value
and who sell products and services primarily to countries whose currency
decreases in value. When inflation hits, and these companies' stocks fall, it
would be a great time for people to invest, however those companies would have
to layoff quite a few people, so only the rich and the people from other
countries in the world would be able to afford to buy those stocks. When they
buy those stocks and they go up, the rich get richer and other countries start
buying these companies.

So basically, by the government printing more money like this, they will
eventually:

\- Raise unemployment.

\- Raise the wealth divide between the rich and poor.

\- Cause the country to have to convert from becoming a consumer to being a
provider, during which there are many failures and many required changes in
lifestyle and government. (Instead of bankers, accountants, and lawyers, you
have more farmers, miners, and factory workers.)

The wealth divide if significant enough will cause the country to go one of
three ways:

1\. In a country where the citizens are less aggressive but feel a sense of
entitlement (like the U.S.), it may lead to a revolt in the form of Socialism
or Communism by the disenfranchised. (Socialism or Communism are bad ideas,
but Russia and France are good examples of countries that embraced Communism
and Socialism due to wealth divide, so it could certainly happen.) This in
turn may kill off any chance that the country will be economically successful
in the near future, because there is little incentive to work extremely hard
to have an even poorer quality of life than before the change.

2\. In countries where the people are more aggressive, a dictator may arise
military rule will be established. This is much harder to escape from over
time as it leads to a vicious cycle of dictatorships and coups.

3\. In countries where the lower-class had already been mostly established
(perhaps not to the same degree) and there is less sense of entitlement or
aggression, there is a possibility that the country could perhaps convert from
a more taxing Socialist government to a more Capitalistic society. Although
this transition would not necessarily be smooth while government run services
are privatized, eventually the country could become wildly successful due to
the superior work-ethic of its citizens.

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pkulak
I saw this on Facebook. I'm a little dismayed to see it here, since it's such
utter, uninformed garbage. "Deflation makes things cheaper. Yay! I want
deflation!"

~~~
Dawgiedawg
It also makes your pay cheaper, your job cheaper (easier to get rid of) and
your mortgage more expensive (relative).

Yay!

~~~
SkyMarshal
And if you have any student loans, car loans, home loans, credit card loans,
they all stay the same (including their interest rates), while the amount of
money in the system shrinks. The odds of your income shrinking increase, but
your debts don't.

For a nation in which most everyone has debt, and a large chunk of the housing
market is already teetering on the brink of the default, real deflation could
be a huge problem. I don't envy Bernanke's devil's choice one bit.

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klochner
_easing_ not easying

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ramanujan
Everyone here can understand dilution in the context of a VC termsheet.
Printing $600 billion has much the same effect: it dilutes down all other
holders of currency by increasing the US government's share. QE is thus
basically a massive tax -- it does not increase the real productive capacity
of the economy, but puts ever more of it in government hands to allocate as
they see fit.

Whether you think this is a good thing depends on whether you subscribe to
Hayek or Keynes.

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davidj
Quantitative easing is just a fancy newspeak-doublespeak word for monetizing
debt. Basically the treasury bond auction has functionally failed and the Fed
has to step in a buy the bonds because nobody else wants them.

~~~
colindoc84
This is not true. The fed is targeting specific medium term bonds. It isn't
buying every bond on offer, which is what it would do during a failed auction.

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heyrhett
So, why does the fed buy the treasury bonds from the goldman sachs instead of
the treasury?

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dvdt
To make broad generalizations, the point of quantitative easing is to increase
the money supply. You do this by having more money in banks like Goldman Sachs
(and of course there are many other banks that the Fed will be buying
treasuries from).

The idea behind this is that once banks have more cash on hand, they will be
more likely to loan that money out to other businesses and people--and voila,
suddenly the economy has more money in the system.

If the Fed buys bonds from the Treasury, however, none of this happens.
Whereas before the Fed was printing money and injecting it into the economy,
selling to the Treasury is roughly equivalent is printing money and having the
government hold on to it. And of course, having the government hold on to that
money doesn't do the economy any good in term of monetary stimulus.

