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Furor over QE3 is groundless

published by Heydrich on Thu, 2012-09-27 06:00

On 13 Sep 2012 the Fed announced that it would embark on a third round of quantitative easing. This caused the “sound money” doomsayers to start pumping out articles with titles such as “QE3 Will Unleash Economic Horror On The Human Race.”

The economy could use a good dose of “aggregate demand” (new spending money in the pockets of consumers) but QE3 won’t do it.  Nor will QE3 trigger hyperinflation.  In fact, QE3 won’t do much at all.  There are better alternatives.

The Fed calls QE an asset swap, meaning it will trade Fed-created dollars for assets on the banks’ balance sheets.  Critics call this “reckless money printing.” Critics say it will produce hyperinflation.  They say that too much money will be chasing too few goods, forcing prices up and the value of the dollar down. It will be the end of the world.

They are all incorrect. The money created by the Fed will go straight into bank reserve accounts, and banks can’t lend their reserves.  The money will just sit there, drawing a bit of interest.  The Fed’s plan is to buy mortgage-backed securities (MBS) from the banks, but according to the Washington Post, this is not expected to be of much help to homeowners.

Why QE3 Won’t Expand the Circulating Money Supply

In its third round of QE, the Fed says it will buy $40 billion in mortgage-backed securities every month for an indefinite period.  To do this, the Fed will simply credit those banks’ reserve accounts. The Fed will alter numbers in the banks’ computers. The banks will get electronic “dollars” (i.e. their computers will be adjusted) and the Fed will get the mortgage-backed securities.  The electronic “money” (consisting of computer digits) will remain in the banks’ reserve accounts. The banks’ balance sheets will remain the same. The amount of money in circulation will also stay the same.  (And thus the depression will continue to worsen.)

No “money” changes hands.  Instead, computers change digits. When the Fed engages in QE, it takes away something on the (computerized) asset side of the bank’s balance sheet (government securities or mortgage-backed securities) and replaces it with electronically-generated “dollars.”

(COMMENT: the exact same process happens with federal spending, which has nothing to do with QE.  The government does not ship out dollars. Instead, the government simply credits accounts. If you receive a Social Security check, then a bank takes the check and changes the computer numbers of your account. Voila, you have “money.” Thus, there is plenty of government “money” for social programs. The government can simply credit people’s accounts.  However the One Percent and their puppet politicians don’t want that. They want you to starve. They don’t care how much money they have. They only care how much MORE money they have than you. Wealth is not an absolute. Wealth is comparative. Thus, austerity has only one purpose: to make you suffer.)

As noted above, the electronic “dollars” are held in the banks’ reserve accounts at the Fed.  They are “excess reserves” that cannot be spent or lent into the economy.  They can only be lent to other banks that need reserves, or used to obtain other assets (new loans, bonds, etc.).  As Australian economist Steve Keen explains:

Reserves are there for settlement of accounts between banks, and for the government’s interface with the private banking sector. Reserves are not for lending.  Banks themselves may swap those reserve assets for other forms of assets that are income-yielding, but they are not able to lend from them.

This was also explained by Prof. Scott Fullwiler, when he argued a year ago for another form of QE—the minting of some trillion dollar coins by the Treasury (he called it “QE3 Treasury Style”).  He explained why the increase in reserve balances in QE is not inflationary:

Banks can’t “do” anything with extra reserve balances.  Loans create deposits, but reserve balances don’t finance lending, or add any “fuel” to the economy.  Banks don’t lend reserve balances, except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its interest rate target. Widespread belief that reserve balances add “fuel” to bank lending is incorrect, as I explained here over two years ago.

Since November 2008, when QE1 was first implemented, the monetary base (money created by the Fed and the government) has indeed gone up.  But the circulating money supply, M2, has not increased faster than in the previous decade, and loans have actually gone down.

(COMMENT: That is, the Fed has electronically increased the banks’ reserves, but the actual money supply in circulation has been shrinking, since the government is spending less, and banks are lending less. Because of this shrinking money supply, we have a depression.)

Quantitative easing briefly boosts the stock market, because investers falsely believe that QE increases the money supply, providing more money to invest. Because of this false belief, investors jump in and buy, which temporarily boosts stock prices. When the deception wears off, the Fed announces a new round of QE to keep the game going.

That is what happened with QE1 and QE2.  The Fed claimed it was done to boost employment, which of course was a lie.  What QE1 and QE2 did was temporarily boost the overall price level of stocks.  The rate of price inflation has actually been lower after QE than before the program began.

So why have QE3 now? What's behind the timing?

The Fed claims it will engage in QE3 (buying mortgage-backed securities) in order to lower interest rates for homeowners and other long-term buyers. However, politics may also play a role.  As noted above, QE drives up the stock market in a false anticipation of an increase in the amount of money available to invest. This is a good political move for a Wall Street that plans to re-install Obama.

Because of the deception (that QE increases the money supply) QE also causes a temporary increase in the prices of commodities (oil, food and precious metals), since “hot money” floods into them from investors. 

There is also evidence that commodities are going up because some major market players are colluding to manipulate the price, just like the banks manipulate the LIBOR interest rate. These are criminal rackets, but big banks are immune from the law.

The Fed does bear some responsibility for the rise in commodity prices, since QE creates a false expectation of inflation, and the Fed has kept interest rates low (which encourages investors to buy stocks, bonds, and commodities, rather than T-bills).  But the price rise has not been from flooding the economy with money.  If dollars were flooding into the economy, then housing and wages (the largest components of the price level) would increae as well, and we would move out of this depression. But wages and the housing market remain flat, and overall price increases (in the real economy) have remained within the Fed’s 2% target range. 

Some Possibilities That Might Be More Effective at Stimulating the Economy

Getting money into the pockets of consumers would ease the depression, but QE3 won’t do it.  The Fed could give production and employment a bigger boost by using its lender-of-last-resort status in more direct ways.

The Fed could make the very-low-interest loans to banks, or to state and municipal governments, or to students, or to homeowners.  The Fed could rip up the $1.7 trillion in government securities that it already holds, lowering the national debt by $1.7 trillion (as suggested a year ago by Ron Paul).  Or the Fed could buy up a trillion dollars’ worth of securitized student debt and rip those securities up.  These moves might require some tweaking of the Federal Reserve Act, but Congress has done it before to serve the banks.

(COMMENT:  All these moves would show that hysteria over the “national debt” is false. However the Fed and the government must maintain illusions so that the masses submit to austerity, so that the One Percent can continue increasing the gap between themselves and everyone else. The call for a “balanced budget” is also a scam. With a growing population, even a perfectly balanced budget (federal spending = federal taxes) reduces per-capita GDP, so for the economy to grow, the deficit must grow. But politicians want to “reduce the deficit.” This is yet another scam.)

Another possibility would be the sort of “quantitative easing” first proposed by Ben Bernanke in 2002, before he was chairman of the Fed—just drop hundred dollar bills from helicopters.  (This is roughly similar to the Social Credit solution proposed by C. H. Douglas in the 1920s.)  As Martin Hutchinson observed in Money Mornin

With a U.S. population of 310 million, $31 billion per month, dropped from helicopters, would have given every American man, woman and child an extra crisp new $100 bill per month.

 

Yes, it would produce an extra $31 billion per month on the nominal Federal budget deficit, but the Fed would have printed the new bills, so there would have been no additional strain on the nation’s finances. 

 

There would have been no bureaucracy involved, just bill printing and helicopter fuel.

 

The money would nearly all have been spent into the economy, increasing consumption by perhaps $300 billion annually, creating perhaps 3 million jobs, and reducing unemployment by almost 2%.

(COMMENT:  Exactly. I favor dropping money from helicopters, as I have explained before at WUFYS. We have a depression because there is not enough money changing hands. Whenever someone suggests increasing the money supply – i.e. the amount of money changing hands – some idiot falsely screams that this will cause “hyperinflation.” The truth is that inflation can be easily controlled by controlling the money supply. Bernanke was much more truthful before he was installed in his position. Same with Obama.)

Dropping money from helicopters would not cause hyperinflation.  According to the Fed’s figures, the money supply in July 2010 was actually $4 trillion LESS than it was in 2008.  This means that $4 trillion more needed to be pumped into the money supply just to get the economy back to where it was before the banking crisis hit.

(COMMENT:  And yet, politicians want to “sequester” (i.e. slash) federal spending on social programs, thereby reducing the money supply even further, thereby worsening the depression. This is deliberate. Politicians want you to grovel before them.)

As the psychological boost from QE3 wears off and the “fiscal cliff” looms, perhaps Congress and the Fed will consider some of these more direct approaches to relieving the economy’s intractable doldrums.

(COMMENT:  The “fiscal cliff” means automatic reductions in federal spending on social programs. The cuts are known as “sequestration.” Politicians like Carl Levin, John McCain, and Lindsey Graham voted for “sequestration.” They openly admit it will devastate the economy and worsen the depression, since it will reduce the money supply even further. Now the same lying politicians are suddenly panicking that  “sequestration,” which they voted for, could slightly reduce the river of money that flows to war and to military contractors.)

The article above was written by Ellen Brown. She is saying that the masses desperately need more money. But if the masses had more money to spend, and the depression eased, then the gap between the One Percent and everyone else would not continue to grow so rapidly.

That, of course, is unacceptable. For the rich, their pleasure is directly proportionate to your agony. And the more you are in agony, the more the rich and the U.S. religious right wing can disparage you as a lazy free loader who has adopted what wealthy Mormon Mitt Romney sneeringly calls “the culture of dependency.” (Mormons also adore Israel. They also believe that god is a man who lives on the planet "Kolob" and spends all his time having sex with young nubile girls. If you think this is a distortion of Mormon beliefs, then you do not know about those beliefs.)

As you can see, Romney's speechwriters work for Wall Street. By deliberately making Romney seem nauseating, they ensure that Obama will be re-installed.

Comments

Submitted by Crimes of Zion on Fri, 2012-09-28 04:53.

Heydrich, I've seen you do this many times with articles by authors like Ellen Brown and Pepe Escobar, but this time I'm going to query you on it. You say:

The article above was written by Ellen Brown.

But that's not quite true. Looking at what Brown actually wrote, we see that what you've reproduced here is not really her article. You've not only interspersed your own commentary between paragraphs (which is fine), but you've fiddled with her piece. Here are some examples:

Brown:

The economy could use a good dose of “aggregate demand”—new spending money in the pockets of consumers—but QE3 won’t do it.  Neither will it trigger the dreaded hyperinflation.  In fact, it won’t do much at all.  There are better alternatives.

 

The Fed’s announcement on September 13, 2012, that it was embarking on a third round of quantitative easing has brought the “sound money” crew out in force, pumping out articles with frighting titles such as “QE3 Will Unleash’ Economic Horror’ On The Human Race.”  The Fed calls QE an asset swap, swapping Fed-created dollars for other assets on the banks’ balance sheets.  But critics call it “reckless money printing” and say it will inevitably produce hyperinflation.  Too much money will be chasing too few goods, forcing prices up and the value of the dollar down.

Heydrich:

On 13 Sep 2012 the Fed announced that it would embark on a third round of quantitative easing. This caused the “sound money” doomsayers to start pumping out articles with titles such as “QE3 Will Unleash Economic Horror On The Human Race.”

The economy could use a good dose of “aggregate demand” (new spending money in the pockets of consumers) but QE3 won’t do it.  Nor will QE3 trigger hyperinflation.  In fact, QE3 won’t do much at all.  There are better alternatives.

The Fed calls QE an asset swap, meaning it will trade Fed-created dollars for assets on the banks’ balance sheets.  Critics call this “reckless money printing.” Critics say it will produce hyperinflation.  They say that too much money will be chasing too few goods, forcing prices up and the value of the dollar down. It will be the end of the world.

For starters, the beginning of Brown's article has two paragraph breaks; yours has three. Secondly, your version starts with the second paragraph of Brown's article, and follows with the first. Thirdly, you've gone to the trouble of manually editing out her dashes and replacing them with brackets in your second paragraph (which is her first). Finally, you've removed words in one place and added your own in another. Brown wrote: "...articles with frighting [sic] titles such as “QE3 Will Unleash’ Economic Horror’ On The Human Race.” You manually delete her "frightening" adjective, but add your own words here:

They say that too much money will be chasing too few goods, forcing prices up and the value of the dollar down. It will be the end of the world.

The third paragraph of Brown's article goes like this:

All this hyperventilating could have been avoided by taking a closer look at how QE works.  The money created by the Fed will go straight into bank reserve accounts, and banks can’t lend their reserves.  The money just sits there, drawing a bit of interest.  The Fed’s plan is to buy mortgage-backed securities (MBS) from the banks, but according to the Washington Post, this is not expected to be of much help to homeowners either.

Yours goes like this:

They are all incorrect. The money created by the Fed will go straight into bank reserve accounts, and banks can’t lend their reserves.  The money will just sit there, drawing a bit of interest.  The Fed’s plan is to buy mortgage-backed securities (MBS) from the banks, but according to the Washington Post, this is not expected to be of much help to homeowners.

These inconsistencies continue throughout the article. Here is the next part of Brown's piece:

In its third round of QE, the Fed says it will buy $40 billion in MBS every month for an indefinite period.  To do this, it will essentially create money from nothing, paying for its purchases by crediting the reserve accounts of the banks from which it buys them.  The banks will get the dollars and the Fed will get the MBS.  But the banks’ balance sheets will remain the same, and the circulating money supply will remain the same.

When the Fed engages in QE, it takes away something on the asset side of the bank’s balance sheet (government securities or mortgage-backed securities) and replaces it with electronically-generated dollars.

And here's yours:

In its third round of QE, the Fed says it will buy $40 billion in mortgage-backed securities every month for an indefinite period.  To do this, the Fed will simply credit those banks’ reserve accounts. The Fed will alter numbers in the banks’ computers. The banks will get electronic “dollars” (i.e. their computers will be adjusted) and the Fed will get the mortgage-backed securities.  The electronic “money” (consisting of computer digits) will remain in the banks’ reserve accounts. The banks’ balance sheets will remain the same. The amount of money in circulation will also stay the same.  (And thus the depression will continue to worsen.)

No “money” changes hands.  Instead, computers change digits. When the Fed engages in QE, it takes away something on the (computerized) asset side of the bank’s balance sheet (government securities or mortgage-backed securities) and replaces it with electronically-generated “dollars.”

I don't understand why you do this. It's certainly not to abbreviate the article, because your version is longer. And it doesn't seem to be about making the article easier to understand, because her version is perfectly comprehensible and more succinct.

A few months ago I noticed another case of nearly the same thing, except there was no mention whatsoever of an article by Brown. This is from her article on 12 year old Victoria Grant:

But critics said, “Not so fast.” Victoria might be charming, but she was naïve. One critic was William Watson, writing in the Canadian newspaper The National Post in an article titled “No, Victoria, There Is No Money Monster.” Interestingly, he did not deny Victoria’s contention that “When you take out a mortgage, the bank creates the money by clicking on a key and generating ‘fake money out of thin air.’” Watson acknowledged: [...]

We have a big public debt because, starting in the early 1970s and continuing for three full decades, our governments spent more on all sorts of things, including interest, than they collected in taxes. . . .

And this is from a comment of yours:

Now let’s see these lies in action. As an example, we’ll use the National Post of Canada, an ultra-right-wing, Jewish-owned rag that is on the bankers' payroll, and thus favors private banker tyranny.

In condemning Victoria’s speech, the National Post author says that debt does not come from private banker control. Instead, “We have a big public debt because, starting in the early 1970s and continuing for three full decades, our governments spent more on all sorts of things, including interest, than they collected in taxes.”

If it were only here and there I wouldn't mention it, but I've seen it a lot. I'm not attacking you - the information is what's important - but I have to say that if it were my work you were altering I wouldn't be happy about it, and I'd be interested in an explanation on how you think and why you spend time on unnecessary changes.

Submitted by Heydrich on Fri, 2012-09-28 05:43.

Thank you for your comment. I always include the link to the original post, so that people can see what the original contains, and what I may have added. I do not change the meaning of the original post. Sometimes I write a post here at WUFYS in which I clearly say, "The following post was adapted from comments made by such-and-such." Or I say outright, "This post was taken from such-and-such, with additional elements added." No deception is ever involved.

If I disagree with a post, and I wish to critique it, then I include excerpts that are quoted verbatim (word-for-word).

If people out there insist that I simply cut and paste their posts, too bad. They can go elsewhere. WUFYS is an informal blog, not an official news outlet. If I did not include links to the originals, then it would be plagiarism and deception on my part.

The Internet is full of articles I have wrtten that other people changed. The Internet also has countless images I have done over the years that were copied from my own blogs. I get no credit, but I am not offended. I am pleased. I am not interested in getting "credit" for anything. I am interested in sharing ideas. And since I do not get paid, and do not have a professional reputation to uphold, I don't care of people "steal" my work. I do not consider it theft. I consider it flattery.

On a different note, your comments above show that you carefully read my post, and also carefully read the original. In this way you honor me, and I thank you for that. The only thing I'm concerned with is that you understand the points being made, whether you agree with them or not.

Thank you again for your comment.

Submitted by Heydrich on Fri, 2012-09-28 05:48.

Incidentally, COZ, I value your views and opinions very highly.

Submitted by Crimes of Zion on Fri, 2012-09-28 09:34.

Thank you for your comment. I always include the link to the original post, so that people can see what the original contains, and what I may have added. I do not change the meaning of the original post. Sometimes I write a post here at WUFYS in which I clearly say, "The following post was adapted from comments made by such-and-such." Or I say outright, "This post was taken from such-and-such, with additional elements added." No deception is ever involved.

You're welcome, thanks for your reply. I know you always provide a link; that's how I've been able to establish the authors and compare articles. I've also seen you point out explicitly that your post is an adaptation; that's not the case here, but I'm not suggesting intent to deceive. A link to the source is enough to rule that out, in my opinion. The question was, essentially, why spend time on changing the text when a) the original is sufficiently comprehensible and the message the same, and b) your own commentary is right there anyway. As you know, writers and bloggers will usually quote a passage verbatim - leaving it untouched and intact - and comment on it in one way or another, or simply introduce it without comment to bolster a thesis (as Brown has done above with Steve Keen and Scott Fullwiler), but your style is to alter the text with commentary and then comment on that. It's unusual.

The Internet is full of articles I have wrtten that other people changed. The Internet also has countless images I have done over the years that were copied from my own blogs. I get no credit, but I am not offended. I am pleased.

Of course, I feel the same way. Roughly half of the Frank Lowy section of Israel did 9/11 - ALL THE PROOF IN THE WORLD, which is all over the Internet, has been taken verbatim from an article I wrote, and I couldn't be happier about it. The author provided a link to the source and helped to push it to the top of a Google search for his name alone, until it was Orwelled. Who wouldn't chomp at the bit to embarrass one of the world's most loathsome Zionists?

But others might not feel that way, so my own policy is to make a careful distinction between my own words and those of others by using quotation marks or blockquoting as I'm doing here.

The only thing I'm concerned with is that you understand the points being made, whether you agree with them or not.

I agree with the central point made by Brown and yourself: That QE will not result in hyperinflation, providing that the extra liquid isn't moving around. It's pretty simple if I understand it correctly. Money held in bank reserves is not money in circulation, and therefore won't cause inflation.

I disagree on minor points such as this:

For the rich, their pleasure is directly proportionate to your agony.

My problem with shit like that is that it's speculative and grossly general. (No, I'm not rich and neither is my family). But we're in the realm of opinion and outlook now; it appears you're more of a cynic than I am.

Cheers.

Submitted by Heydrich on Fri, 2012-09-28 10:45.

"I disagree on minor points such as this:

For the rich, their pleasure is directly proportionate to your agony.

My problem with shit like that is that it's speculative and grossly general. But we're in the realm of opinion and outlook now; it appears you're more of a cynic than I am."

At least I do not call your comments "shit." Maybe that is standard chatter in your age group, but I consider it childish.

My view is that the rich don’t care how much money they have. They only care how much more money they have than you. Wealth is not an absolute. Wealth is comparative. Therefore, austerity has only one purpose, which is to make the masses suffer.

You may disagree with that if you wish, but when criticizing someone personally here at WUFYS, profanity does not further your cause, especially when you provide no counter-argument. Smug self-righteousness is not a counter-argument, e.g. your personal opinion that I am more of a "cynic" than you are.

 

Submitted by Crimes of Zion on Fri, 2012-09-28 14:37.

Heydrich, you totally misunderstand me when I say shit like that (I'm doubling up my meaning on purpose here). That's just my vernacular, so 'shit' in that context is not at all literal but rather synonymous with 'stuff' ("stuff like that"). Read it again with that understanding and you'll see that being offended by it is like interpreting 'stuff' literally, and saying 'at least I don't call your comments "stuffing."'

The shit I own, the shit I say, the shit I do. I speak like this all the time, in reference to myself and others. Everyone who knows me knows this, and as a long-time member of WUFYS I thought you would too. I've used that phrase a hundred times here. But I apologise for offending you.

As for the 'cynic' thing, I don't see that as an insult either. Reacquaint yourself with the definition of the word:

  • A person who believes that people are motivated purely by self-interest rather than acting for honorable or unselfish reasons
    • - some cynics thought that the controversy was all a publicity stunt
  • A person who questions whether something will happen or whether it is worthwhile
    • - the cynics were silenced when the factory opened

This is your view, in your words:

My view is that the rich don’t care how much money they have. They only care how much more money they have than you. Wealth is not an absolute. Wealth is comparative. Therefore, austerity has only one purpose, which is to make the masses suffer.

Does that outlook not conform to the first of the two definitions? It does, right? My pointing it out, my saying shit like that about you doesn't mean that I'm "smug" or "self-righteous". It just means that I know what the word 'cynic' means.

Again, sorry for the misunderstanding.

Submitted by Crimes of Zion on Fri, 2012-09-28 15:08.

Here's an example I found after a site search, Heydrich.

When I ponder all the deep shit, it often seems to resolve to a paradox. For example, I believe in free will, obviously, but I also believe in precognition [...]

Hopefully it's obvious enough that I don't sit around contemplating actual shit in my spare time.

(By the way, that took longer than it should've because most of my "shit like this's" and "shit like thats" were negative, and I ended up re-reading most of that thread. Four years later I find myself disagreeing with myself on some of it. :)

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