Why Unwinding QE Won’t Matter
Ashwin Parameswaran nails it once again. If you want to understand how the modern financial/monetary system actually works, run don’t walk to read this post.
His key insight:
Just as the East India Company could access cash on the back of their government bond holdings in the 18th century, any pension fund, insurer or bank can do the same today.
Let me translate that into my words:
If the CB unwinds QE by trading bonds for “money,” “sopping up” “cash” (those are all “so-called” quotes) from the private sector, the private bond-holders can just use those bonds as collateral to get (new) cash loans. Commercial and shadow banks will create (“counterfeit”) the new money under (explicit or implicit) license from the central bank, and deposit the money into the bondholders’ accounts.
Result: roughly the same amount of “cash” in the system.
In other words:
…the private sector can monetize the deficit as effectively as the central bank can.
Hence:
…the reversal of QE, if and when it happens, will have no impact on economy-wide access to cash/purchasing power.
Update, 08:30 PST: This also serves to explain why QE may not have had as much effect as one might hope. The Fed gave bondholders cash in return for their bonds, so bondholders ended up with more cash but less collaterizable/monetizable/convertible-to-cash bonds. A wash?
Discuss. (But not until you’ve read Ashwin’s whole piece [at least once].)
Cross-posted at Angry Bear.
This is spot on. QE unwindwill not be any kind of disaster, only long rates might tick up a touch.
With that said QE is also not doing much of anything but keeping long rates down a touch. Banks are not reserve constrained only capital constrained.
Mcwop
QE is nothing more than an operational asset swap, that pushes longs rates down. Moreover it’s is a deflationary policy removing interest income from the economy reducing net private savings. How much it removes is tough to tell. Could be $20-30 billion a year at a $40 billion a month purchase rate.
Also QE is NOT money printing. It will not cause hyperinflation.
Also a great post on the fact that QE is not money printing:
http://ftalphaville.ft.com/2012/09/28/1183811/hsbc-dont-say-printing/
This is pure MMT. Great stuff!
The last blow of {not so} fresh air inside the bubble before it burst. Even with this fake cash shopping spree the cash-to-mutual funds ration is at the lows. This means there is no other fool who is willing to pay for for the assets