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I would like someone to explain to me how the Fed buying Treasuries from bond dealers (i.e. "The Goldman Sachs") creates reserves, i.e. adds liquidity to the national banking system.
BTW, one piece of "nonsense" in this video is the impression it creates that QE is an illegal or underhanded arrangement between "The Goldman Sachs" and the Fed. Quite the contrary, the Fed is legally prohibited from buying directly from the Treasury, that's why it needs to buy from "The Goldman Sachs".
Here's what I do understand:
1. The Fed buys from the bond dealers, i.e. "The Goldman Sachs", hereafter "TGS". Since this is all done electronically nowadays, over at TGS, they will be credited in their accounts for the Fed's purchase.
2. This money represents added liquidity. My understanding is the money will filter down through Wall Street and the national banking system from TGS.
Now here's what's a little odd:
1. TGS needs to turn around and buy the actual Treasury bonds with the credited payments. Doesn't that eat up most all of the money? If it does, where then is the liquidity or "money printing" money coming from.
The video, most of which I think is dead on accurate, makes the case that TGS is able to "front run" the QE purchases. I guess that is the answer.
In other words, TGS doesn't even need to actually go out and buy the Treasury bonds the following day, or week, or even month. TGS already owns tons of Treasury bonds. They can slice it and dice (much like they were doing with the MBS and CDO2 derivatives) so that the Fed gets the correct interest payments at the correct times, and obstensibly gets paid back in full when the bond finally comes due, but so long as TGS is fulfilling that commitment, they can fiddle with it however they like so that they make money on the deal. A lot of money. TGS then uses those profits for their other investment activities, and that's how extra liquidity filters through "the system".
I understand I've probably just lost half the audience here already, but if anybody actually knows if my assumption is correct or not, well, I'd like to hear it please.
My other theory is that these POMO operations ultimately add liquidity through outright fraud. What ends up happening, in a nutshell, is that the Fed agrees that it has created and given a big bunch of money to Wall Street. This is a very similar fraud to the one the Fed uses in it's more traditional policy of lowering the discount overnight rates and Fed funds rates. What happens there is the banks say they've loaned a bunch of money into existence (ostensibly honestly and legally through various bank loans to individuals, businesses, etc.). The Fed basically says "ok", and "please pay (the interest rates)." The banks just dig into their supply of phony electronic "zeroes" on their computers that they just got the Fed to say "ok" to, and they use some of that money to pay the interest and overnight rates and whatever.
So what the layman really needs to understand is that while you are out there five days a week or more genuinely busting your ass for some money (well, okay, a few of us anyway), the super-rich at the top of the heap ultimately just get free money from the Fed through more or less "money printing" or fraud. This is the real problem with a free-floating fiat currency system. BTW, to their credit, I DO understand that some of the rich, and even the super-rich, do honestly EARN some of their income (a small fraction of it).
Go ahead and steal money if you want people, because you're really not stealing anything. Our money is more or less just imaginary money. The whole scam only works because everyone is foolish enough to just agree that "a dollar" is "a dollar".
It's not too hard to figure out that such a monetary system is only going to be a very temporary arrangement. It WILL collapse at some unknown point, and there will be a reset. The way our dear leaders are these days, I wouldn't be surprised at all if they just start over after the "reset" with another new free-floating fiat currency system and put "the masses" through it all over again albeit it will be a new set of "the masses" born several generations removed. (Kinda helps with the scam thing to do it that way, yah know!)
BTW, I should add, by way of addendum, all this "phony money" filters through the system (*takes about a decade or so for each "phony dollar" to completely saturate through) and devalues or debases every dollar already in existence, and that's what they call the "inflation tax".
*The first major round of this Ponzie game in it's contemporary form occurred after the "Nixon Shock" of 1971. The US realized it had to turn on the "printing presses" as the only viable solution to pay for the relatively immense (for it's time) costs of the Vietnam (Laos, Cambodia) War. Well, when did the inflation resulting from that "printing" filter through and hit home? It was being felt by '74, but it really didn't "pound the stuffin'" out of the masses until about '79 and early '80's. This is no different today. Yeah, we're all playing the "where's the inflation" game. The bulk of it might not get here until 2016 or even later. By then it will be too late to tar and feather old Al and Ben, but not too late for the politicians of the day to retroactively cast blame their way.
Last edited by POhdNcrzy; 11-18-2010 at 12:39 AM..
Go ahead and steal money if you want people, because you're really not stealing anything. Our money is more or less just imaginary money. The whole scam only works because everyone is foolish enough to just agree that "a dollar" is "a dollar".
So go ahead and send me your worthless imaginary money. News flash: a dollar IS a dollar.
You have little clue of what is going on. The Fed gives money to its approved traders and they bid for bonds from all broker/dealers with the size to handle the transactions. Goldman works as one of the market maker in these bids because bonds are not traded on an open market like stocks are.
When it makes the purchases the Fed gets ownership of actual bonds, promises to pay by the Treasury. The money creation is that the Fed pays on something akin to a large charge card, they just boost the balance of cash available to the member banks they are dealing with so the member banks can withdraw the cash when needed. The fact is though the member banks always keep some balance with the Fed so what the net effect works out to be is the Fed is just going with less float at the close of business each day.
The only thing to watch out for is the very unlikely case of a major catastrophe hitting the banking system and having every bank pull its funds out. In this case the Fed could effectively be bankrupt. Highly unlikely scenario, but nothing is impossible. The more practical and likely thing to worry about is what happens when the Fed decides its time to unwind. They do the opposite transaction, they bid to sell their treasury holdings and the broker dealers return cash in the form of a reduction in their outstanding balance. Problem is the Fed is buying at low yields so its very likely there will be a loss when its all netted out. The question remains unanswered who will absorb those losses. The assumption is the federal government will cover the losses, but no one knows for sure. The banks could fund the losses over time, but since no one knows right now what the losses might be no one is going to speak for them. Only other option is the Fed doesn't sell some of the bonds and just keeps them to maturity thereby effectively experiencing minimal to no book value loss.
Pay attention to the wrapping up process, not the process right now. This hoopla over created money is a lot of hype and little real substance. The Fed will admit to one thing, they want to put a bid under a lot of treasury paper in hopes it will filter down into other bond markets to the benefit of the economy. The second thing they won't admit to, but seems clear is a happy benefit to them is a weakening of the dollar. A weaker dollar should in theory help out their mandate to improve the employment situation in the country. Its not a direct cause effect so they can't speak to it officially, but only an idiot wouldn't believe its clearly on their minds.
The money creation is that the Fed pays on something akin to a large charge card, they just boost the balance of cash available to the member banks they are dealing with so the member banks can withdraw the cash when needed.
Okay, as I suspected, the Fed just waves it's wand and "poof"s into existence a bunch of money and gives it to the "member banks", to do with as they wish, including fancy cars and alotta Ho's. What a fraud and scam!
Or NO, that's not what you meant??
Quote:
Originally Posted by Willy702
When it makes the purchases the Fed gets ownership of actual bonds, promises to pay by the Treasury.
Okay, yes I get it. Some portion of the "poofed" money is used to actually buy Treasury bonds for the Fed, just to sort of lend a veneer of credibility and "cover" to the whole fraudulent scam.
Is that your explanation then, Willy? That's pretty well in line with my own understanding of quantitative easing.
There seem to be two main schools of thought on QE:
1. QE is money printing by the Fed, increases the money supply(M3), causes inflation, and dilutes the value of currency already in the system (M1). Adherents to this argument reason inductively. They note that M3 is increasing. They gather evidence of inflation. Basically, they've pieced together what is going on from the preponderance of economic evidence. Their weakness lies in failing to explain satisfactorily exactly how QE equates to "money printing", i.e. What is the transmission mechanism?
2. QE is just more monetary policy. The Fed gives money to member banks to buy Treasury bonds with at the going market rates. The member banks use the money to buy the Treasuries. The purpose of all this is to steepen the yield curve and to lower interest rates across the entire curve, especially the front end. Doing so will achieve positive results for the national economy. This is nothing untoward, and it's certainly not "money printing" or inflationary.
QE School of Thought #2 has some real problems:
1. What's in it for the member banks? Why would they do all that work running around buying Treasuries for the Fed? Just to be nice? Hah! That doesn't sound like TGS we all know and love, or anyone else on WS for that matter.
2. Any economist can gather data and witness M3 going parabolic as a result of the Fed's policies. I guess QE School of Thought #2 just decides to intentionally ignore or overlook that fact.
Willy, maybe you would like to try again and take a stab at some of this. No one else seems to be up to the task.
Fascinating thing about QE, even the experts interviewed on Bloomberg can't seem to explain in a few simple phrases exactly what QE is. They all just sort of dance around the edges of a coherent explanation.
BTW, one piece of "nonsense" in this video is the impression it creates that QE is an illegal or underhanded arrangement between "The Goldman Sachs" and the Fed. Quite the contrary, the Fed is legally prohibited from buying directly from the Treasury, that's why it needs to buy from "The Goldman Sachs".
who gives a damn about the why's... the bottom line is that Goldman Sachs is making a ton of profit at the cost of the American people and that is the point of the video. If Goldman wasn't making any money (doing the Lord's work as they were quoted as saying once ) then why would they even bid? They have a spread on this auction and make money... and why should a private company make money while the currency is being devalued? How is this SCAM and FRAUD perpetrated by the Fed even helping the average American?
There are plenty of people out there that can and do explain the underlying logic behind quantitative easing, I'd answer, but you asked willy.
Quote:
Originally Posted by POhdNcrzy
Fascinating thing about QE, even the experts interviewed on Bloomberg can't seem to explain in a few simple phrases exactly what QE is. They all just sort of dance around the edges of a coherent explanation.
There is a simple reason for this, its not a simple concept, there is no easy way to explain it to someone that doesn't understand how our money system works. The vast majority of people still think as if we are on some sort of gold standard, then there are others that find out its not true and think its some big conspiracy because they lack an understanding of macroeconomics.
Quote:
Originally Posted by POhdNcrzy No one else seems to be up to the task.
There are plenty of people out there that can and do explain the underlying logic behind quantitative easing, I'd answer, but you asked willy.
Quote:
Originally Posted by POhdNcrzy Fascinating thing about QE, even the experts interviewed on Bloomberg can't seem to explain in a few simple phrases exactly what QE is. They all just sort of dance around the edges of a coherent explanation.
There is a simple reason for this, its not a simple concept, there is no easy way to explain it to someone that doesn't understand how our money system works. The vast majority of people still think as if we are on some sort of gold standard, then there are others that find out its not true and think its some big conspiracy because they lack an understanding of macroeconomics.
What is there to understand. Smart ones know exactly what it is. Printing money. Monopoly money.
Simple supply and demand economics. QE by kenysians think it will spur the economy more by increasing the money supply. Hence decrease the purchasing power of all that save. This saves the savers but destroy the consumer.
Because we over consume we are forced to take a pay cut hence businesses can operate more competitively. Easy no? You dont need a 1600 sat to understand what they are doing.
Simple it is pay cuts for all. Those that are at the top can take all inflated dollars and play with it since they can borrow at near 0%.
We understand, we will be forced into hyperinflation because we are not on a gold standard.
Fractional reserve banking and fiat money is fraud in it's truest form. But they cannot give people pay cuts honestly, so they will rob everyone and give it to the ones that can borrow at 0%. We also know FED will NEVER get rid of their balance sheet so it will never contract the money supply so why even bother throwing that out there.
QE by kenysians think it will spur the economy more by increasing the money supply.
Again, get the facts straight, QE is a monetarist idea, not a Keynesian idea.
Also, when you have real inflation, wages go up as well. Only in fantasy land do wages stay constant, yet everything else goes up.
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) then why would they even bid? They have a spread on this auction and make money... and why should a private company make money while the currency is being devalued? How is this SCAM and FRAUD perpetrated by the Fed even helping the average American? 
