

Fed Announces Open Ended QE3 - chailatte
http://reason.com/blog/2012/09/13/fed-announces-open-ended-qe3

======
gph1
Not surprising to see a libertarian-oriented site refer to QE as "money
printing". It's not. Monetary policy doesn't increase the net financial assets
available in an economy; that's only achieved by fiscal deficit spending. QE
is just an asset swap (reserves for tsy's)--it's shifting the yield curve, but
not adding anything new.

~~~
dstanchfield
You would have a point if the 'libertarian-oriented site' referred to QE as
"asset printing." It didn't though. QE may not increase financial assets in an
economy, but it does increase available money. The money used to purchase the
bond did not exist prior to the swap.

Now if you really wanted to argue that this is not money printing, I might
accept the claim that the Fed will at some point unwind this position. But
even that is highly dubious.

~~~
nhaehnle
Your post contains a great example of what was called the Worst Argument in
the World on LessWrong:
<http://lesswrong.com/lw/e95/the_worst_argument_in_the_world/>

To be more precise, you are using the moniker "money printing" to confuse the
issue. See, inflation isn't caused by _printing_ money, inflation is caused by
_spending_. If there is too much spending power going around and the
productive capacity of the economy cannot keep up, then prices are going to be
bid up.

QE isn't going to cause much more spending, because as grandparent correctly
stated, nobody's total amount of assets is going to be changed by QE. After
all, suppose you hold long term treasury bonds. Now the Fed offers to buy them
at a higher price. Maybe you will take that offer. And maybe you'll use that
money to buy some other class of assets. But will you now actually put that
money into the real economy, buying some produced goods or services that you
would not otherwise have bought?

Most people won't do the latter, and that's why QE isn't going to cause
additional spending, and this is why it isn't going to cause inflation.

Note that this is _very_ different from historical episodes where money was
printed by the government for direct spending, e.g. by the southern US states
during the civil war.

~~~
chii
I m not an economist, so i might've understood your point wrong, but you just
argued that the Feds offered to purchase your long term bonds for a higher
price - logically this must mean you've made some money (ala, profit).

So having made profit, wouldn't you then spend that profit on something that
you otherwise wouldn't have afford to spend? Thus, this introduces more
spending power, and thus, introduce the inflation that you said wouldn't
happen?

~~~
nhaehnle
Let me clarify what I wrote: you have a choice between (a) just keeping the
money, (b) buying some other kind of asset, and (c) spending the money in the
real economy.

Asset prices can indeed go up, because people do (b), but (c) is almost non-
existent, which is why these Fed operations are neither going to help the real
economy nor create inflation there.

Keep in mind that those transactions are mostly done by insurances, pension
funds, and other types of "money managers".

------
ilaksh
I've heard people say that the Fed is deliberately creating inflation in order
to sabotage the American and global economy. This makes it easier to
consolidate real estate and business assets, so it is beneficial to the
wealthiest individuals and companies.

But I'm sure I'm just latching onto a simplified explanation because I am too
ignorant and stupid to comprehend the complexities of "economic science".

~~~
nhaehnle
While I'm sure that there are some people who are quite happy about what the
Fed is doing, that sounds very much like conspiracy theory nuts.

From what I understand, the Fed is politically in a very crappy position: they
have a mandate for high employment (which is a good thing!), but they cannot
really do anything to meet that mandate.

To create jobs, somebody needs to actually spend money. Spending money means
moving money around so that afterwards, person A has less monetary assets and
person B has more monetary assets.

However, the Fed is not allowed to engage in such actions. All it can do is
asset swaps. So it can swap short term for long term bonds, for example, but
when they do that, everybody still has the same amount of monetary assets
afterward. It is only the maturity and interest rate structure that changes.

The hope is that lower interest rates encourage private investment and thus
private spending on jobs. However, that's not very realistically going to
happen on a larger scale, because demand for products matters much more to
firms than a tiny change in interest rates does. And as long as unemployment
is high, demand remains low, which means that firms have no incentive to
create jobs.

It's a vicious cycle, that in theory the government (the union of legislative
and executive branch) should break out of, because they are in a unique
position to do so: they are not bound by market constraints. But the
government is instead bound by partisan politics and an unscientific belief in
the religion of austerity.

So with the government not doing anything, the Fed at least tries to do the
best they can to help the situation, which happens to be almost nothing - but
they still try, because of the miniscule hope that there are, after all, some
positive effects.

------
bfung
opposite opinion to the submitted article:
[http://www.calculatedriskblog.com/2012/09/analysis-
bernanke-...](http://www.calculatedriskblog.com/2012/09/analysis-bernanke-
delivered.html)

------
lmg643
This is great news for startups because it supports asset prices generally,
and means that high valuations will continue.

