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Banks are lending ;they just have to follow new rules on lending; same as credit cards. Basically congress protects consumers by not allowing them to borrow as before crisis ;plain and simple.
I do not see how your post replied to mine. I answered your questions, and you are bringing back questions that my first reply addressed (regarding inflation and separation of the Fed and Treasury).
Recall that QE has nothing to do with the debt. QE is simply an extension of the Fed's typical open market operations. It is the same bond-buying function performed on a much larger scale. The purpose of QE is to execute the current low-interest rate policy - that's it.
Yes, the Fed creates money to buy the securities. No, it does not cause inflation - see my first reply for how inflation works.
If the Fed wants to contract the money supply (not likely in the next few years) it can do so by selling its bonds and/or raising the reserve requirement. The reserve requirement is a tool of untold power. The money is not "destroyed" literally, but effectively so.
Understand: the Fed and Treasury are entirely separate. They each have their jobs, monetary and fiscal policies respectively.
Thanks for clearing that up. The reason why I was asking if it could potentially cause inflation by increasing the velocity of money is because the majority of outlets I've read from make it seem as if QE is a separate function than buying securities.
I've also read that the Reserve borrows the money from its member banks. This suggests to me that commercial banks must be lending money to Reserve banks.
Is this true or does the Reserve have the actual capacity to create money out of nothing?
Another question is, why would the Fed continue this policy if it is not putting more money into the economy? It seems like if that was the intention, it is a policy failure.
Banks are lending ;they just have to follow new rules on lending; same as credit cards. Basically congress protects consumers by not allowing them to borrow as before crisis ;plain and simple.
Perhaps, but articles like this lead me to believe the lending rules are being relaxed and that housing is inflated.
I'll never forget my mother talking about how CHEAP candy was during the depression. She said she could get a ton of candy for a dime - but the dime was hard to come by. My point is, there was very serious DEflation during the depression. Prices dropped as people had no earnings. People who did have money held onto it, since it would be worth more tomorrow. The poor had nothing to spend, and those who did have money spent reluctantly, since money was increasing in value.
We have just come through the worst economy since the depression. We SHOULD have seen deflation, but we didn't, because the feds printed money. Deflation is great for those with savings, terrible for those with debt, and horrible for a recovery, since those who have money will try not to spend it. So the very clear reason why we haven't see significant inflation, despite all the money being pumped into the economy, is that the economy was so bad that we were having deflation, counterbalanced by the inflationary effect of pumping money into the economy.
The stock market has gone up - but the actual objective value of the market has remained the same. A certain percentage of the population has more money than they realistically know what to do with and/or need to pay for their living expenses. That money has found it's way into the stock market. An increase in money causing inflation in a sector of the economy that is currently inflated due to subjective valuation.
The inevitable crash is going to be absolutely epic.
The stock market has gone up - but the actual objective value of the market has remained the same. A certain percentage of the population has more money than they realistically know what to do with and/or need to pay for their living expenses. That money has found it's way into the stock market. An increase in money causing inflation in a sector of the economy that is currently inflated due to subjective valuation.
The inevitable crash is going to be absolutely epic.
What would be the catalyst?
Where else would people put their money? Real estate is also inflated.
Bonds are paying less than the rate of inflation. You would actually lose money by investing in bonds.
Gold and silver are priced high from a historical perspective.
So where would the money go?
If inflation were to occur, I assume gold and silver would be a great place to put money considering its intrinsic value; however, if inflation occurs gradually, one could argue that those high on gold already made their move, and gold is currently valued as if inflation would have occurred when the Fed started QE.
Maybe the Fed told the banks not to lend the money out, in order not to cause inflation, and are continuing QE, especially internationally, in order to get high yielding bonds to pay into the treasury.
I don't understand it.
I agree the market does seem to be inflated, especially if you consider the CAPE ratio, but I don't see any other alternatives where people can put their money.
Then again, if I did, I suppose I would be wealthy.
If someone could properly explain what QE is, I think it would benefit this forum substantially.
As I previously said, I thought the Federal Reserve's monetary policy revolved around establishing the discount rate, setting a requirement percentage for banks in so far as how much they hold in their reserves, and the sale and purchase of securities.
Additionally, I was led to believe the only way the government funds its programs is through the sale of securities and the collection of taxes.
I was not taught about Quantitative Easing, which from what I've read seems to a tool the federal reserve uses to create money out of nothing, and then purchase securities held by banks.
How can it create money out of nothing, and not cause inflation? There has been an increase in money supply, so at some point, doesn't the velocity of money have to rise or can the fed destroy money as easily as it creates it?
Does the Fed even create money or does it borrow money from its member banks? And if it does borrow money from its member banks, where do the member banks get their money from?
Do banks loan the federal reserve money? If so, how much interest is paid on the money loaned to the federal reserve by commercial banks?
The fed creates money out of nothing via a few strokes of a keyboard. With that money, it buys government bonds, mortgage backed securities, etc. Why does this not cause inflation? Well, all else being equal, it should. However, the world is a complicated place. We now live in a world in which credit = money. Pretty much all money is loaned into existence via the banking system. And the banking system is highly leveraged. And let's not forget the shadow banking system. In any event, everything works well during a period of expansion. The trouble starts during periods of economic contraction. The economy slows, loans go bad, bank balance sheets are compromised. Trillions of dollars go to money heaven. A deflationary spiral can result. If, during this same period, the fed expands it's balance sheet a bit, so what? It's nothing compared to the trillions that disappeared via bad loans. Hence, there's not much inflation, if any. And don't forget globalization. People in places like China work for $5 a day. That's where a lot of the junk we buy is made.
Where else would people put their money? Real estate is also inflated.
Bonds are paying less than the rate of inflation. You would actually lose money by investing in bonds.
Gold and silver are priced high from a historical perspective.
So where would the money go?
If inflation were to occur, I assume gold and silver would be a great place to put money considering its intrinsic value; however, if inflation occurs gradually, one could argue that those high on gold already made their move, and gold is currently valued as if inflation would have occurred when the Fed started QE.
Maybe the Fed told the banks not to lend the money out, in order not to cause inflation, and are continuing QE, especially internationally, in order to get high yielding bonds to pay into the treasury.
I don't understand it.
I agree the market does seem to be inflated, especially if you consider the CAPE ratio, but I don't see any other alternatives where people can put their money.
Then again, if I did, I suppose I would be wealthy.
I've got bonds paying as much as 7.5%, so where you get your info is flawed.
Answer to thread topic:
Inflation is created when demand exceeds supply. With 70% of the GDP being consumer spending, and consumers don't have money the demand has not outweighed supply. Until money is put back in the hands of consumers we will continue to experience low inflation, and building of what will eventually be a robust economy like we experienced under Clinton / Gingrich.
In fact, there's an entire website Alternate Inflation Charts that is dedicated to the question, using the pre-1990 calculations to determine what the actual inflation rate is. And the results are roughly double what the government says they are.
To be sure, the government has vested interest in under-reporting the inflation rate. For example, Social Security and government pensions are indexed for inflation. If they were honest about the inflation rate, they'd really go broke.
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