We know part of the precise impact:
We know the $80 billion per year the Fed has been turning over to the Treasury would have otherwise remained in the economy.
U.K.’s Quantitative Easing Has Worked, BOE’s Bean Writes in FT
May 3 (Bloomberg) — Studies of the Federal Reserve’s large-scale asset purchases provide corroboration that quantitative easing has been effective, Bank of England Deputy Governor Charlie Bean writes in the Financial Times.
The precise impact of QE is uncertain and it’s “plausible that the effectiveness of the policy depends on the state of the economy,” Bean writes.
At least the Fed did that.
Here in the UK the Gilt interest remains in a cash account belonging to Bank of England Asset Purchase Fund Facility Ltd (BEAPFF).
So our Treasury had to issue more Gilts to pay the interest – partially reversing the purchase of the Gilts in the first place by BEAPFF.
@Neil Wilson, So we’re left pondering whether two fiat inconsequentialities make an adaptive meaning? How many of those can we fit on policy pinheads? Let’s not find out.
We wonder if fiat accomplis indicates accomplices, or whether 500 monkeys could have blundered into this through institutional momentum alone.
@roger erickson,
What’s mildly amusing is that they are very defensive about it.
They refused my freedom of information request when I asked how much was in the Cash account at present.
Even though they publish it annually in the public accounts.
You couldn’t make this up.
Hi Warren,
Firstly, can I say you are a genius. You, Bill, and Randy will be remembered in the same way we think of Keynes today. Remember, ignorance is finite.
However, with respect to QE, is it not fair to say income is lost from the economy but mainly from the wealthy / financial sector, in return for lower interest rates for the debtors (usually the poor). A sort of tax.
Yes I know the CB’s as monopoly issuers can price any part of the IR curve at any level they wish without QE, but surely QE is the next best option.
You are my daily read. All the best, & keep up the good work.
Regards
Loyal member of the MMT army.
Thanks!
Hard to say on the rate question of who gets hurt the most.
Households are net savers.
Pension funds take more from workers incomes to make up for lower rates.
Seniors lose interest on their savings.
The economy is weaker which costs jobs.
Remember, I like 0 rates in general, and I’d limit the tsy to nothing longer than 3 mo bills to keep long rates low as well, which is the direct way to do QE,
as it means for the size govt we have taxes can be that much lower.
And I’d rather suspend FICA, for example, than hike rates to add to aggregate demand.
@WARREN MOSLER,
I would just add that the Fed is not much concerned with savers but with managing investment to control inflation. The interest rate affects cost of capital. So raising rates >makes investment more costly > contracts the economy > increases unemployment to quell wage pressure by expanding the buffer stock of unemployed. That’s the monetary policy and the strategy is NARIU and Taylor rule, based a “natural rate” of unemployment.
Workers and savers are pawns in the game that the Fed uses as tools to hit its target rate of inflation. “The military calls it “collateral damage.”
another thing it has backwards. interest rates are part of the cost of production and with a large chunk of the economy ‘cost plus’ pricing rate hikes boost costs and consumer prices.
Warren,
“…..$80bn…would have …remained …..in the economy”
How do you define ‘the economy’?
For example:
All parties other than the cb?
All parties other than consolidated govt (on federal level), i.e. tsy and cb?
All parties other than govt (all levels: federal, individual states, municipalities)?
non fed govt sectors.
@WARREN MOSLER,Thanks.
We touched on this point in your post on this blog of May 2nd, but did not finish to get things clear. Please follow my reasoning below and correct me if I am wrong.
This definition of ‘the economy’ as ‘the non federal govt sector’ matches with what we normally define as ‘currency users’ right?
In the US ‘the economy’ excludes cb (FED) and tsy at federal level.
In the Eurozone ‘the economy’ excludes only the ECB, since there is no European Treasury.
This would imply that:
a. In the US the deficits of the fed govt (cb+tsy together) add net financial assets to the economy.
b. In the Eurozone the deficits of the member states do NOT add net financial assets to the economy. They merely replace net financial assets within the economy (or even withdraw nfa from the economy if the ECB would be the beneficiary of the member state deficit).
In other words:
a. in the US the deficits of the fed govt would have a downward impact on the currency because they create extra supply of the currency to the economy.
b. in the Eurozone the deficits of the member states would not have a downward impact on the currency because they do not create extra supply of the currency to the economy. (and in case of a withdrawal of nfa it would even have an upward impact on the currency)
OK, but start with this- deficits of one sector add to other sectors
So any agent spending more than his income adds net financial assets to ‘everyone else’ combined.
if you borrow 100,000 to buy something, your nfa drops, but ‘everyone else’s’ nfa goes up.
So spain’s deficit spending adds nfa to ‘everyone else’ if you value spanish bonds over 0.
and anyone’s deficit spending of a currency can have a downward influence on the currency, not just the issuer’s deficit spending.
@walter,
“and anyone’s deficit spending of a currency can have a downward influence on the currency, not just the issuer’s deficit spending”.
Could you explain that last sentence?
Of course if there are more sellers than buyers prices go down, but only deficit spending by the currency issuer adds to the total nfa outstanding right?
yes
however when the point of the analysis is ‘what’s the currency going to do’ or ‘what’s the economy going to do’ any agent deficit spending can be adding to aggregate demand. a housing boom, for example, is an example of private sector deficit spending adding to demand. the difference is private sector, state, euro member nation credit expansion is revenue constrained vs the currency issuer
@walter, Well, OK. If we agree that deficits of ez member states do NOT add nfa to the economy, but merely replaces nfa within the economy then: how and by whom nfa are added to the economy in the euro zone?
member govt debt doesn’t add nfa to ‘the economy’ by your definition of ‘the economy’ so the answer here would be spending by the ECB
however, I suspect what you are interested in is what the channels are for economic growth. If so, they include any/all means of credit expansion, including larger deficits from the member nations and private sector credit expansion, as well as exports. Unfortunately all those channels seem to not be open currently, leaving only the ECB
@walter,The definition of the economy is yours that you mentioned above “non federal govt sectors”.
In the ez context that would mean that only the ecb is excluded right?
If you have another definition of the ‘economy’ for the ez than for the US please let me know.
I thought there was a direct link between: deficit spending by the currency issuer, increase in nfa in the economy and downward impact on the currency rate.
From what I understand you say now: Any deficit spending, from currency issuer or currency user, has a downward impact on the currency rate.
I agree with you. Deficit spending in a currency is de facto short selling the currency.
It’s interesting to see this inverse relation between the negative influence of deficit spending on the currency and the positive influence it can have on the economy.
PS: Of course the goal is to try to figure out what the currency and economy/economic growth are going to do :). Let’s say, there is nothing more practical than a good theory!
the direct link is between any agent spending more than his income and the economy.
the reason to divide into two sectors- the govt of issue and ‘the economy’- is to make the distinction between those revenue constrained and those not revenue constrained.
so for me the division into sectors is always for some further purpose of analysis and I divide accordingly
Warren – picking up on your comments to Warren, do you think GDP growth can ever occur without one of the sectors swinging into a flow deficit, whether it be govt (US 1980s), foreign sector (Germany 2000s, Canada/Sweden 1990s) or private sector (US/UK 2000s)?
Are there examples of GDP growth accelerating with the sector flow balances staying the same?
This seems quite an important result, if it generalises.
@Anders, sorry, your comments to Walter
the problem is the ‘automatic demand leakages’ like pension fund contributions, corporate reserves, a bit of cash in circulation, etc. that requires sufficient spending in excess of income somewhere to sustain output and employment
@WARREN MOSLER, Yes, and they even stimulate all these savings by making them tax deductible.
yes. that type of institutional structure drives the larger demand leakages.