Tuesday, 30 September 2014

QE (quantitative easing) in short

On the QE side, it's just a monetarist tactic that is aimed at increasing lending. The thing is, monetarists (like the neolibs and the neocons) ignore private debt, money, and bank loans. Reserves have always been pretty much inconsequential with regard to lending. All that matters is the actual demand for loans, not the bank's reserve position. No banker is going to turn away a customer if the bank's reserve requirement is below the minim. It's simply gonna go on the interbank market and obtain them or go at the CB's discount window.

QE is basically the Central bank buying up bank bonds and treasuries with reserves. So, it's a swap operation. Each time the CB creates, say 100 billion in reserves, it takes away 100 billion in private sector assets (typically split 50/50 between mortgage-backed securities and treasuries). This, in turn, drives interest rates to 0 in the market. And it also sparks an asset price bubble. The value of these assets go up, because the central bank is buying them (with treasuries).

QE helps out the financial sector only; it doesn't help nonfinancial firms and labor. QE practically limits government interest payments to the private economy. Reserves earn around a quarter of a percentage point on interest, whilst treasuries earn more. So in practice, QE does not increase economic growth - because it doesn't increase lending - because the private sector is trying to deleverage and it doesn't want to contract more debt, no matter how attractive the interest rate is. Japan wasted more than a decade on QE and lost 10 years of economic growth - simply because they failed to increase the fiscal deficit accordingly to shorten the deleverage phase by as much as possible.

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