Continuing to work my way through the back catalog. Do you have articles discussing the decline in bank loans in 2020-2021? Would you attribute this purely to COVID?
I have just posted to your earlier post comparing to Jeff Snider.
As I said, have some questions, nagging questions if you will after reading this white paper comparing Lyn Alden and TMF :)
So, I was wondering if you can please help with the following:
1. QE. I agree with this "In Step 1, the government spent new money into the economy. The Treasury asked the Fed to credit household and business bank accounts with additional funds, which the Fed did along with printing reserves to sit on bank balance sheets. When CARES was being discussed and implementing, the “how will we pay for it” question was never on the table. The money was printed, but not through QE, it was just numbers on a balance sheet"
a. Question: Why is the FED doing QE (asset swap)? What is their incentive according to you as opposed to doing something else or nothing? Psych-ops?
b. I quote you "QE does not print assets in the same way that the government does with deficit spending."
and
"Finally, in Step 3, the Fed, independently and unrelatedly, conducts QE. The Fed replaces some of those Treasury securities with a different kind of security, reserves. Changing the composition of an asset-liability pair isn’t money printing, which is why we don’t consider QE money printing. We see QE as akin to money transforming."
Question: So, if the FED does QE, it buys bonds from banks (crediting them with inert reserves; banks lose the bonds and the associated income).
I've yet to see someone explain what happens when FED does QE and buys bonds FROM SOMEONE ELSE (Pension Fund, Corporate entity (Apple as example) MMF, Foreign institutions, etc) ? Are they buying from Banks only If FED buys from someone else, other than a Bank, is then the FED printing assets because they are crediting the seller with USD that is SPENDABLE and not a reserve? These entities would not sell treasuries to FED if they can't use the proceeds (if they are inert bank reserves used for settlement).
c. "Combining these steps, we get to Alden’s description of what happened in March 2020: The Fed effectively monetized the post-Covid fiscal stimulus, getting the QE money into the economy and ultimately producing inflation.
We disagree with that assessment. Step 2 (spending) comes before Step 1 (QE), making Step 1 (QE) not necessary for Step 2 (spending).
Our view of QE: Nothing more than a bond-reserve asset swap, disconnected from federal spending."
Question: Hmmmm, I've read the deficit myth and read some other MMT articles. So let's dig in. How would the Treasury spend if their FED bank account is empty? They need the dollars. Is Step 1 the only option according to you for the Treasury to get the FED to credit their account? If that is the only option, then the QE is unavailable for the Gov & the Treasury (to issue new bonds and get reserves).
d. "We like to rephrase QE as QRM, or Quantitative Reserve Management. QE as popularly viewed isn’t an ease. It doesn’t fund the government; it doesn’t print money; it doesn’t affect the real economy. If it did, the QE era wouldn’t have had worse nominal economic outcomes than the pre-QE period, during which the total size of the Fed’s balance sheet never exceeded $1tn.
As an empirical matter, the Fed never monetized the Covid debt, and QE was immaterial to the US Treasury’s ability to fund itself. The CARES Act was funded almost entirely with T-Bills. The Fed did a QE of entirely T-Notes and Bonds without linkage to the CARES Act US Treasury funding.."
Question: Are you saying it is this black and white? "If it did, the QE era wouldn’t have had worse nominal economic outcomes than the pre-QE period" - is it maybe because many beneficiaries of the QE were buying S&P and Nasdaq (index funds, etc) ?
You are saying two different things: "immaterial to the US Treasury's ability to fund itselve" and "doesn't fund the government". Well, even if it is immaterial, let's see how immaterial it is, psych-ops or not. They said they are ready to buy corp bonds in March/April 2020 and they did! They did little buying because of psych-ops I guess and low demand, but still...immaterial or not.
Why do most MMT proponents perpetuate the myth that the Treasury can command the fed to simply create reserves for it to spend? First of all, that's not legal. Perhaps it would make sense for it to happen that way but as a practical matter it most certainly does not. (I notice you did not include an asset on the fed's balance sheet when you showed it creating a reserve liability.) In the real world, the treasury must by law, sell bonds or bills first and can only do so to the authorized dealers. However, this isn't a significant issue because if the Fed wants to monetize a portion of government debt it can simply buy treasuries on the secondary market. Fed sells bonds to a bank/dealer in exchange for bank reserves. 1 second later, the dealer flips the bonds to the fed for a tiny spread in exchange for newly created reserves. The bank balance sheet is now unchanged. It has simply used it's balance sheet for 5 seconds to act as a middle man between the treasury and the fed because legally, the fed can't simply buy bonds directly from the treasury so they go through this kabuki process to make it technically legit. The fed now has a treasury bond asset offset by a newly created reserve and the TGA has a reserve balance offset by it's bond issuance liability. The commercial banks' assets and liabilities are unchanged. NOW the government can spend, and when it does, the recipients deposit the checks at their banks who then cash them at the Treasury in exchange for those TGA reserves. The net effect is that the fed has bought government bonds in exchange for reserves. Those were then spent by the government and wind up as new money (deposits) in the banking system. This is important to understand because there is a lot of confusion about whether QE is money printing or not with both sides claiming the issue is black or white. However, the truth is, both views are partially right and partially wrong. QE can print money (in the sense of creating actual deposits in commercial banks) through the middle man approach I just described. It can also simply constitute an asset swap on the asset side of commercial bank balance sheets with zero impact on real money (ie bank deposit) creation. So if a bank buys a treasury for the express purpose of flipping it to the Fed then this is clearly debt monetization by the Fed with bank deposits created the second the government spends those newly minted reserves. Similarly, if a commercial bank buys the treasuries to hold as an asset, again, a bank deposit would be created the second the government spent the reserves it received from the commercial bank in exchange for the bond. However, if later on, after that deposit has already been created, the Fed comes along and offers to buy treasuries from the commercial bank and the bank voluntarily decides to do sell, then such fed purchases do NOT create new deposits. Those were already created when the commercial bank bought the bonds in the first place. So when you hear absolutists claim that QE is always just an asset swap with zero impact, that's not necessarily true. The same stands for those who claim that all federal deficits are monetized and therefore cause inflation. That's also not always true. Monetization only happens when bonds are bought by commercial banks or when the Fed buys them at issuance using a commercial bank as a middle man or if they buy them from the private sector in the secondary market. That too creates new bank deposits when the fed pays for those bonds and the sellers have funds wired into their bank accounts by the Fed. Ritik's chart showing M2 and M2 less reserves explains this well. He has focused on the fact that much of the M2 expansion was due to an increase in reserves. He is correct. But if you look closely, you'll see that between 2020 and 2022 bank deposits rose by nearly 2 TRILLION! Some of those QE reserves wound up monetizing newly minted treasuries. So while Ritik's claim that QE can never impact the real economy is false, he is correct that in the 2010's at least the vast majority of the QE wound up as commercial bank asset swaps with no impact on your or my ability to spend real money. But there is an important difference between saying something "can't happen" and something "didn't happen".
this is correct , richard werner invented QE , and he distinguishes between two types of QE ,
one must study his view to know what is realy happening , QE could be both an asset swap and indirect retail money creation at the same time , it is dual sided
Terrific post as usual! Could you please elaborate a bit more on why the yield curve inversion is distorted? How is that distortion calculated? It seems that only you (TMF) and Michael Howell have caught up with this.
Continuing to work my way through the back catalog. Do you have articles discussing the decline in bank loans in 2020-2021? Would you attribute this purely to COVID?
Thank you Ritik and George.
I have just posted to your earlier post comparing to Jeff Snider.
As I said, have some questions, nagging questions if you will after reading this white paper comparing Lyn Alden and TMF :)
So, I was wondering if you can please help with the following:
1. QE. I agree with this "In Step 1, the government spent new money into the economy. The Treasury asked the Fed to credit household and business bank accounts with additional funds, which the Fed did along with printing reserves to sit on bank balance sheets. When CARES was being discussed and implementing, the “how will we pay for it” question was never on the table. The money was printed, but not through QE, it was just numbers on a balance sheet"
a. Question: Why is the FED doing QE (asset swap)? What is their incentive according to you as opposed to doing something else or nothing? Psych-ops?
b. I quote you "QE does not print assets in the same way that the government does with deficit spending."
and
"Finally, in Step 3, the Fed, independently and unrelatedly, conducts QE. The Fed replaces some of those Treasury securities with a different kind of security, reserves. Changing the composition of an asset-liability pair isn’t money printing, which is why we don’t consider QE money printing. We see QE as akin to money transforming."
Question: So, if the FED does QE, it buys bonds from banks (crediting them with inert reserves; banks lose the bonds and the associated income).
I've yet to see someone explain what happens when FED does QE and buys bonds FROM SOMEONE ELSE (Pension Fund, Corporate entity (Apple as example) MMF, Foreign institutions, etc) ? Are they buying from Banks only If FED buys from someone else, other than a Bank, is then the FED printing assets because they are crediting the seller with USD that is SPENDABLE and not a reserve? These entities would not sell treasuries to FED if they can't use the proceeds (if they are inert bank reserves used for settlement).
c. "Combining these steps, we get to Alden’s description of what happened in March 2020: The Fed effectively monetized the post-Covid fiscal stimulus, getting the QE money into the economy and ultimately producing inflation.
We disagree with that assessment. Step 2 (spending) comes before Step 1 (QE), making Step 1 (QE) not necessary for Step 2 (spending).
Our view of QE: Nothing more than a bond-reserve asset swap, disconnected from federal spending."
Question: Hmmmm, I've read the deficit myth and read some other MMT articles. So let's dig in. How would the Treasury spend if their FED bank account is empty? They need the dollars. Is Step 1 the only option according to you for the Treasury to get the FED to credit their account? If that is the only option, then the QE is unavailable for the Gov & the Treasury (to issue new bonds and get reserves).
d. "We like to rephrase QE as QRM, or Quantitative Reserve Management. QE as popularly viewed isn’t an ease. It doesn’t fund the government; it doesn’t print money; it doesn’t affect the real economy. If it did, the QE era wouldn’t have had worse nominal economic outcomes than the pre-QE period, during which the total size of the Fed’s balance sheet never exceeded $1tn.
As an empirical matter, the Fed never monetized the Covid debt, and QE was immaterial to the US Treasury’s ability to fund itself. The CARES Act was funded almost entirely with T-Bills. The Fed did a QE of entirely T-Notes and Bonds without linkage to the CARES Act US Treasury funding.."
Question: Are you saying it is this black and white? "If it did, the QE era wouldn’t have had worse nominal economic outcomes than the pre-QE period" - is it maybe because many beneficiaries of the QE were buying S&P and Nasdaq (index funds, etc) ?
You are saying two different things: "immaterial to the US Treasury's ability to fund itselve" and "doesn't fund the government". Well, even if it is immaterial, let's see how immaterial it is, psych-ops or not. They said they are ready to buy corp bonds in March/April 2020 and they did! They did little buying because of psych-ops I guess and low demand, but still...immaterial or not.
Much appreciated.
Thank you.
Why do most MMT proponents perpetuate the myth that the Treasury can command the fed to simply create reserves for it to spend? First of all, that's not legal. Perhaps it would make sense for it to happen that way but as a practical matter it most certainly does not. (I notice you did not include an asset on the fed's balance sheet when you showed it creating a reserve liability.) In the real world, the treasury must by law, sell bonds or bills first and can only do so to the authorized dealers. However, this isn't a significant issue because if the Fed wants to monetize a portion of government debt it can simply buy treasuries on the secondary market. Fed sells bonds to a bank/dealer in exchange for bank reserves. 1 second later, the dealer flips the bonds to the fed for a tiny spread in exchange for newly created reserves. The bank balance sheet is now unchanged. It has simply used it's balance sheet for 5 seconds to act as a middle man between the treasury and the fed because legally, the fed can't simply buy bonds directly from the treasury so they go through this kabuki process to make it technically legit. The fed now has a treasury bond asset offset by a newly created reserve and the TGA has a reserve balance offset by it's bond issuance liability. The commercial banks' assets and liabilities are unchanged. NOW the government can spend, and when it does, the recipients deposit the checks at their banks who then cash them at the Treasury in exchange for those TGA reserves. The net effect is that the fed has bought government bonds in exchange for reserves. Those were then spent by the government and wind up as new money (deposits) in the banking system. This is important to understand because there is a lot of confusion about whether QE is money printing or not with both sides claiming the issue is black or white. However, the truth is, both views are partially right and partially wrong. QE can print money (in the sense of creating actual deposits in commercial banks) through the middle man approach I just described. It can also simply constitute an asset swap on the asset side of commercial bank balance sheets with zero impact on real money (ie bank deposit) creation. So if a bank buys a treasury for the express purpose of flipping it to the Fed then this is clearly debt monetization by the Fed with bank deposits created the second the government spends those newly minted reserves. Similarly, if a commercial bank buys the treasuries to hold as an asset, again, a bank deposit would be created the second the government spent the reserves it received from the commercial bank in exchange for the bond. However, if later on, after that deposit has already been created, the Fed comes along and offers to buy treasuries from the commercial bank and the bank voluntarily decides to do sell, then such fed purchases do NOT create new deposits. Those were already created when the commercial bank bought the bonds in the first place. So when you hear absolutists claim that QE is always just an asset swap with zero impact, that's not necessarily true. The same stands for those who claim that all federal deficits are monetized and therefore cause inflation. That's also not always true. Monetization only happens when bonds are bought by commercial banks or when the Fed buys them at issuance using a commercial bank as a middle man or if they buy them from the private sector in the secondary market. That too creates new bank deposits when the fed pays for those bonds and the sellers have funds wired into their bank accounts by the Fed. Ritik's chart showing M2 and M2 less reserves explains this well. He has focused on the fact that much of the M2 expansion was due to an increase in reserves. He is correct. But if you look closely, you'll see that between 2020 and 2022 bank deposits rose by nearly 2 TRILLION! Some of those QE reserves wound up monetizing newly minted treasuries. So while Ritik's claim that QE can never impact the real economy is false, he is correct that in the 2010's at least the vast majority of the QE wound up as commercial bank asset swaps with no impact on your or my ability to spend real money. But there is an important difference between saying something "can't happen" and something "didn't happen".
this is correct , richard werner invented QE , and he distinguishes between two types of QE ,
one must study his view to know what is realy happening , QE could be both an asset swap and indirect retail money creation at the same time , it is dual sided
Terrific post as usual! Could you please elaborate a bit more on why the yield curve inversion is distorted? How is that distortion calculated? It seems that only you (TMF) and Michael Howell have caught up with this.
Hopefully today's video hits on this question