# Quantitative Easing - Why is it damaging our society and what can be done to fix it?



## ColmFitzgerald (4 Feb 2015)

Quantitative Easing (QE)

– Why is it damaging our society and what can be done to fix it?

*What is Quantitative Easing?*

“_Quantitative Easing (QE) is a monetary policy used by some central banks to increase the supply of money. It usually involves both a direct increase in the money supply and a knock-on effect from the fractional reserve system. QE is usually implemented by a central bank first crediting its own account with money it creates out of nothing (“ex nihilo”). It then purchases financial assets, for example, government bonds, quasi-government debt, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as “open market operations”._”

In short, QE is printing money, and using the money to buy different types of bonds, typically government bonds.

*What is Quantitative Easing supposed to achieve?*

QE is supposed to provide an economic stimulus to increase economic growth, to increase employment and to increase inflation (to combat deflation).

Buying bonds causes bond prices to go up, which lowers bond yields, which should lower longer-term interest rates – making borrowing cheaper and so stimulating the economy.

As bonds are purchased by central banks, more money should flow into circulation. Banks are assumed to get more deposits from the new money created and are assumed to sell some of their bonds giving them more money and liquidity in place of these bonds. This extra money available to banks should help banks provide additional lending into the economy boosting economic growth.

*What has Quantitative Easing achieved in the US and the UK?*

The US and the UK have pursued QE policies in recent years. Their economies have recovered, albeit in an unequal way. Wage growth has been low, but corporate profits have been buoyant, aided by lower interest rates and wealth effects from rising asset prices. Despite money printing, inflation rates in the US and the UK are still low and QE does not seem to have increased inflationary expectations to any significant extent.

*Quantitative Easing in the EU*

The US and the UK economies have outperformed the EU which remains in recession. The EU has just launched a QE policy which is supposed to stimulate the European economy and to combat deflation in the EU. Some are concerned about the QE policy, particularly in Germany which has a history of hyperinflation which was caused by excessive money printing.


*How does Quantitative Easing work? What are the mechanics of it?*

Quantitative Easing works as follows

1)  The central bank print money, increasing the amount of money in the economy.

2)  They use it to buy certain types of bonds, forcing up the price of these bonds, lowering bond yields and making profits for those who own these bonds.

3)  Those who sold the bonds typically use the money to buy other types of bonds, for example corporate bonds, forcing up the prices of corporate bonds and making profits for those who own the corporate bonds.

4)  Those who sold the corporate bonds, typically buy other types of assets to replace their bonds, forcing up the prices of those assets and making profits for those who own them.

5)  A general shortage of corporate bonds is created. The excess demand for corporate bonds causes corporate bond yields to drop to low levels making corporate bonds less attractive to investors. This makes other investments relatively more attractive, e.g. equities.

6)  Money goes into buying equities, forcing up equity prices, making profits for those who own equities.

7)  Money also goes into buy property, similarly forcing up prices and making profits for those who own property.

8)  Lower corporate bond yields make it attractive to companies to issue more corporate bonds (making borrowing easier and cheaper for large companies), enabling them to raise cheap capital on the financial markets. This enables companies to use this money to buy back shares, further forcing up equity prices (and the value of the directors stock options) and making further profits for those who own equities.

All these profits make those who have assets (those relatively better off) much more relatively better off. The profits create a significant wealth effect which stimulates the economy.

Those with relatively smaller amounts of assets also gain. But they have fewer assets in the first place, so they gain proportionately less. Those who have no assets get nothing.

The poor are supposed to gain from ‘trickle-down effects’ because governments can borrow at lower interest rates. But, offsetting this, governments are likely to need more money for social expenditure to combat the rising inequality. The ‘trickle-down effects’ might be compared to ‘_crumbs from the rich man’s table_’. All-in-all QE should directly increase inequality in society.

*What effect will QE have on ordinary members of the public?*

Assets prices will rise.

-  If you have shares or other investments, these should have risen in value.

-  If you have property, it should have risen in value.

-  If you have a pension fund, the value of the assets in the fund should have risen.

The more assets that you have the more you will have gained. Those with the most gain the most. But relatively speaking, everybody becomes poorer than those who were richer than them in the first place. If you have no assets you will have gained nothing and have become relatively much poorer.

Pension funds are likely to see the expected cost of providing pensions in the future to have risen due to lower bond yields. Pension fund assets will have risen, but their liabilities may have risen by more than their assets reducing their funding levels and putting more pressure on pension schemes to close down.

If your employer becomes more profitable, some of this may trickle-down to you, but much less than your employer is getting.

If you are self-employed and your customers are the relatively rich, you will likely see business improve. If your customers are relatively poor, you will likely to see very little upturn in business.

*What effect is QE likely to have on lending and interest rates?*

QE is supposed to lower interest rates and give banks more liquidity so that they can lend more money to individuals and to businesses to stimulate the economy and create more employment.

However, banks will only lend to customers who they consider will be able to repay their loans. The extent to which they lend the additional money available to them, rather than purchasing other types of bonds, will depend on borrowers’ creditworthiness. The only customers likely to be sufficiently more creditworthy are the relatively better of, who have been made better off by QE. The increase in lending driven by QE will mostly just improve credit availability to the better off, with only ‘trickle-down effects’ for other borrowers.

Those on tracker mortgages will have seen their mortgage interest rates come down as the ECB cut interest rates, but will see no impact from QE. Interest rates on other mortgages and other personal loans are supposed to fall. But mortgage rates and personal loan rates are mostly being kept high to offset loses than banks are making on tracker mortgages. Lower tracker rates means less scope for banks to cut other interest rates.

*Effect on inflation*

The dangers of deflation are often put forward as one of the main reasons for QE.

However, QE is unlikely to significantly increase inflation. This is because better off individuals mostly spend their money on different types of goods and services than less well-off individuals, and since the CPI is mainly based on goods bought by the less well-off, and since the less well-off are really no better off (and relatively worse off) the CPI is unlikely to increase. This lack of increase in inflation may be used to argue for more QE, but in doing so is missing the point.

This is consistent with what has happened in the US and the UK. Despite enormous amounts of QE, inflation has been muted (albeit assets prices have ballooned and asset prices are not counted in CPI).


*Effect on economic growth*

As QE makes the better off even more better off, it is likely to lead to higher incomes for the better off, thereby increasing economic growth. The impact on the poor will be marginal. Those who gain employment will gain but stagnant wage growth limits any significant benefits. The benefits to the less well-off are mostly limited to trickle-down impacts.

However, the less well-off will suffer because the types of goods which the better off buy, which the less well-off also aim to buy, will rise in value, pushing them further beyond their horizons.

The end effect of QE is economic growth fuelled by big increases in incomes for the better off, offsetting stagnant incomes of the less well-off. The growth numbers might be called into question as they are discounted by CPI, which does not include the rising cost of assets. So in ‘real’ terms the growth figures may not be as real as they are made out to be.

*Making the rich richer*

In summary, the main effect of QE is to make the relatively rich richer, both directly and indirectly. The rich gain immediately from rising asset prices fuelled by the bond purchases. They also gain from improved credit availability and from lower interest rates.

The gains for the poor are mostly negligible and indirect. The media, which is typically owned by the richer elements of society, usually makes a big deal about reductions in the costs of borrowing for governments. These are the governments who have significant debts due to bailing out banks in the financial crisis.

The complicated nature of QE means that most of the public seem to be unaware that the rich are getting much richer and there has been no real public protest about QE policies.

*Dangerous asset bubbles*

A further problem with QE is that it is creating a bubble in the bond markets and a bubble in the equities market. Asset prices have frequently risen sharply on bad economic news in recent years as this has been a signal that more QE might be on the way, so more asset purchasing. Assets prices risk being artificially stimulated to levels above their long term fair-values. These types of bubbles usually last as long as the money printing (QE) is happening, but they usually end badly for society. And the less well-off will usually pay the price for them.

*Philosophical background*

The philosophy behind QE is that of neo-liberalism and the philosophy of Ayn Rand. Rand’s philosophy considered the ‘little guys’ to be mostly irrelevant and relatively worthless compared to ‘type-A’ individuals. She considered that without ‘type-A’ individuals there would be no employers, no managers etc, so no jobs for the ‘little guys’. So the ‘little guys’ should be grateful for anything that they get. This philosophy is very attractive to the strong in society who are happy to brutally seek wealth and power or who are just willing to turn a blind eye – it gives them a moral defence to their actions. The philosophy has a seeming truth to it, but the seeming truth is used to entrap those who read it.

According to Rand’s philosophy, if lots of small guys get hurt (or relatively hurt) for the benefit of ‘type-A’ individuals, well then that’s not such a bad thing – it will make everybody better off (the seeming truth but really the lie that advocates much greater inequality).

References:

“The Fountainhead” and “Atlas Shrugged” by Ayn Rand

“Capitalism - the Unknown Ideal” by Ayn Rand, Alan Greenspan et al (1967)

Note: Alan Greenspan, former US Federal Reserve Chairman, advocated Rand’s philosophy and the philosophy is an influential force in current world political elites.

*How to fix it?*


Two immediate things can be done to fix the problems being created by QE:


1) Tax profits on the financial assets impacted by QE: on a mark-to-market basis (not on a realised basis), at say 25% of any capital appreciation since 2009 (since QE began).


2) Use the money to invest in education, to improve public services, health, to encourage real enterprise and to improve the social fabric of the state.

A braver option would be taxing 75% of the profits (these profits are effectively free money given to the rich) and redistribute the money across society in a more productive manner.

*Likely impact*

Those who own assets will have to sell some of their assets to pay the tax. This should lead to lower asset prices as they begin to sell – and should stop the current bubbles growing further.

Lower asset prices also mean greater capacity of the less well-off to buy and to be able to aspire to buy these assets (including property).

*Conclusion*

Quantitative Easing is white-collar financial corruption on a grand scale. It sells the integrity of our financial system for short term gain – and gives these gains to the better off. It needs to be stopped and the redistributive effects reversed.


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## Brendan Burgess (4 Feb 2015)

Hi Colm

That's a great piece and explains it very well.  I might come back on some of the more political issues, but a few questions 

Although, I don't know enough about the topic, I am very uneasy about Q.E.  I can't see how it gets reversed without doing huge damage. 

1) As someone invested in shares, I am delighted to see how the prices have gone up because there is so much money sloshing around the system after Q.E.   But I don't see why the companies I have invested in , say CRH, Ryanair, DCC, should be any more profitable as a result.  You say "corporate profits have been buoyant, aided by lower interest rates". But are interest rates in the Euro area not at rock bottom anyway?  Will CRH be able to refinance its debt at lower rates?


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## ColmFitzgerald (4 Feb 2015)

Thanks Brendan

QE has resulted in narrowing corporate bond spreads - that is, it has reduced the credit spreads / yield premiums over goverment bond yields paid by corporate entities that issue debt. With German bond yields at historic lows (they went below Japanese bond yields yesterday) and credit spreads at historical lows, companies mostly have never had it so good from the point of view of being able to borrow money (which is good for their share prices). That said this is mostly true for larger corporate entities, and less so for smaller ones without easy access to financial capital markets.

Furthermore, corporate entities are mostly using money raised on their corporate bond issuance to buyback their own shares - forcing up their share prices (even further). Take for example, Apple. Apple have a huge amount of cash on their balance sheet, and could be argued not the need any more, yet they are issuing debt.... for share buybacks!
http://seekingalpha.com/news/2263206-apple-plans-5b-debt-offering?source=bloomberg

I'm not necessarily calling for a reversal of QE - just to the redistributive elements of it. There is political buy-in, mostly in the absence of any other alternatives. However, I do not think that political figures understand the very significant redistributive effects of QE, the damage that these cause and the asset bubbles created. A policy of QE, along with redistributive policies could be quite popular amongst the electorate, as long as they realise that any tax effect on them would effectively make them better off compared to those who are better off than they are, and actually makes their dreams and aspirations more attainable.

The practicalities of any taxation would need a lot of work - but even if a proportion of the gains were taxed it would raise substantial funds.

Outright printing of money is probably better than printing money and giving it proportionally to the rich. QE might be regarded as regressive money printing, the worst kind! Money printing is generally not considered to be a good thing. Unfortunately we are at the party stage of the regressive money printing, so very few seem to be sober enough to see the problems being created.


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## dub_nerd (4 Feb 2015)

QE isn't money printing in the traditional sense of introducing new money permanently into the economy. The assets purchased by the Central Banks will eventually be sold again, and the proceeds used to extinguish the debt created when the money was brought into existence. QE was conceived as a way to grease the wheels of the economy without the old inflationary dangers of creating _fiat_ money -- any inflation resulting from QE is hoped to be the result of growth in the real economy, brought on by businesses' easier access to credit.

Unfortunately, as the OP points out, there's no strong evidence that it has worked. Those arguing for it say that things would have been much worse than they are now had QE not occurred, and use the contrast between the US and Europe as evidence. But it certainly looks like most of the new money has gone into creating asset bubbles instead of productive uses. You have the perverse fact that whenever the end of QE is mooted, instead of seeing it as a sign of the economy recovering the markets take fright and equities plunge. Meanwhile, negative news for the economy such as bad tax revenue or jobs figures are taken as a sign that QE will have to be continued, and the markets surge.

IMHO, anybody invested in equities right now should be cognisant of the role of QE in buoying up the markets since 2009, and should consider that all the air will come back out when QE ends ... _if it ever does_: the US Fed seems to have created something of a monster that it's going to have trouble killing off. Now we have the prospect of the same thing happening in Europe.

I don't see the point of taxing gains from assets, especially not on a mark-to-market basis ... as I said, I think investors will get fleeced when QE ends so taxing them on unrealised gains will just make things worse. Also, do you try to distinguish between assets which increased in value because of "fundamentals" versus ones that benefitted from the general exuberance? You could  be just compounding one nightmare of government interference with another. It would be better to have just dished out inflationary "helicopter money" (to use Bernanke's term) in the first place. On the other hand, seeing as QE _did_ happen ... we're in a bit of a bind as to what to do next.


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## ColmFitzgerald (4 Feb 2015)

It's unlikely the QE will be reversed. I dont think there is a precedent either.

Giving an economy heroin to 'grease the wheels' certainly will get an economy going in the short term, but ultimately it only leads to a heroin addiction.

Best option, after taking heroin for a period of 5 years, is to try to put the patient on methadone  - and methadone in this case is QE with marginal taxation of asset price gains. Without stating the obvious, this taxation would then need to be used in a progressive and productive manner, otherwise the whole process could become regressive. Easier said than done.


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## Brendan Burgess (4 Feb 2015)

Hi Colm 

I got called away in the middle of my first post. 

I understand the impact of QE on increasing the demand for and price of shares. 

But has there not also been genuine economic growth in the UK and the USA, whereas there has been none in the Eurozone, apart from Ireland?


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## dub_nerd (4 Feb 2015)

ColmFitzgerald said:


> Best option, after taking heroin for a period of 5 years, is to try to put the patient on metadone (spelling?? I'm not an expert on drugs!) - and metadone in this case is QE with marginal taxation of asset price gains.



I still don't see how you can tax unrealised gains. Taxation isn't implemented uniformly anyway, so you would have huge money flows between countries. Or, investors would simply bail out, asset prices would tank, and there wouldn't be any unrealised gains to tax.

Would the right approach not be to announce a definite end to QE and stick to your guns regardless of the reaction? The results would probably not be pretty, but where's the madness going to end otherwise? -- it surely can't be healthy that the "real" economy is becoming a sideshow.



Brendan Burgess said:


> But has there not also been genuine economic growth in the UK and the USA, whereas there has been none in the Eurozone, apart from Ireland?



Anaemic growth, perhaps, for trillions of dollars of expenditure which by rights must be reversed some time.


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## Brendan Burgess (4 Feb 2015)

The Central Bank of Ireland  will be doing its share of Q.E.  So the CBI will issue create electronic money and use it to buy Irish government bonds. 

The Irish government will pay the interest on these bonds to the CBI instead of to the pension funds which previously owned them. 

The CBI will thus be even more profitable and the government will be able to put those profits into the Exchequer. 

Is that not good for all taxpayers?  Of course, it might be better for the rich as they pay the bulk of the taxes anyway.

Brendan


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## dub_nerd (4 Feb 2015)

Brendan Burgess said:


> The Central Bank of Ireland  will be doing its share of Q.E.  So the CBI will issue create electronic money and use it to buy Irish government bonds.
> 
> The Irish government will pay the interest on these bonds to the CBI instead of to the pension funds which previously owned them.
> 
> ...


There's no net gain from the CBI receiving interest paid by the government. But meanwhile the bond prices have gone up and the previous holders who have made money from them -- the banks and pension funds -- will put the money they have received into riskier assets like equities (and not, as was supposed to happen, into lending into the real economy -- they consider that a riskier bet, for good reason).


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## ColmFitzgerald (4 Feb 2015)

EU QE is more risky than US QE 
http://www.cnbc.com/id/102376195
The US bought bonds at much higher yields (and much lower prices) than will be the case for the EU. The EU will be buying bonds at NEGATIVE yields (so will lose money buy holding some of them) and at very high prices. This means they could LOSE money on QE (if bond prices fall). Would the governments have to bail them out then? (QE = financial corruption).


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## ColmFitzgerald (4 Feb 2015)

Given the sharp increases in asset prices and the significantly higher money supply, US and UK growth could be considered "money illusion" rather than real growth. If rich individuals get lots of profits from money printing and they spend it, economic growth goes up. But ultimately, everyone is relatively less well-off as they own a smaller proportion of the overall pie. So the 'growth' is not as 'real' as it is made out to be!


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## Brendan Burgess (4 Feb 2015)

dub_nerd said:


> There's no net gain from the CBI receiving interest paid by the government.



I don't understand why? At the moment the government is paying the interest to pension funds, so it's leaving the Exchequer "umbrella". If the CBI buys the bonds, they will be getting the interest. But they are within the umbrella.


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## Brendan Burgess (5 Feb 2015)

dub_nerd said:


> QE isn't money printing in the traditional sense of introducing new money permanently into the economy. The assets purchased by the Central Banks will eventually be sold again, and the proceeds used to extinguish the debt created when the money was brought into existence. QE was conceived as a way to grease the wheels of the economy without the old inflationary dangers of creating _fiat_ money -- any inflation resulting from QE is hoped to be the result of growth in the real economy, brought on by businesses' easier access to credit.




This is a very interesting point. 

In the old days,  the Central Banks actually printed notes. Presumably this is of no significance any more? 

So if the ECB wants to increase the money supply, why don't they simply decrease the reserve requirements?  Or would that be in conflict with all the recent increases in solvency ratios? 

Which brings me to another point.  If the commercial banks sell their bonds for cash, so that they lend that cash to businesses, does it not make the lending less prudent?   For example, the Irish mortgage banks will argue that they could lend a lot more money if there were any demand for it? 

Brendan


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## ClubMan (5 Feb 2015)

dub_nerd said:


> I still don't see how you can tax unrealised gains.


Why not? (I'm not advocating it - just asking!).
Don't we already have that in the form of, say, pension levy (on the gross fund - not just gains) and - more to the point - the 8 yearly taxation of unrealised gains/deemed disposals on unit linked funds?


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## Duke of Marmalade (5 Feb 2015)

Very interesting OP.  I broadly accept Colm's description of QE and its transmission effects.  It was Bernanke who quipped that QE works in practice but not in theory, so against that background I am certainly not going to attempt to provide a theoretical justification.

Where I would take issue with Colm is in the tone of his socio political criticism of QE.  We must be careful here to avoid begrudgery politics, which in its extreme would prefer the poor not to improve their lot if that involves improving the rich even to a greater extent.  We must also be careful in using terms like the rich are relatively better off than the poor are.  A rich man who sees his assets grow by 25% has in one sense seen a much greater improvement than the unemployed man who has found a job, but in human relative terms the latter is probably the much more appreciative of the improvement.

An objective of QE is to bring back inflation.  As someone who lived through double digit inflation I am still trying to get my head around that but by Colm's analysis any inflation is likely to come from the rich man's spending.  So luxury goods will increase in value whilst food prices won't, this seems a very virtuous, or to use Colm's expression, "progressive" form of inflation to me and I don't see why Colm sees wickedness in such a development.  Colm talks about assets being priced beyond the poor man.  Does he mean that the poor man will find gilts, corporate bonds and equities even more beyond his reach?

Colm uses the term re-distributitive a lot.  It is suggestive of a transfer of wealth from one section of the population to another.  That is not what is happening.  In a paper on the Distributive Effects of QE by the BoE back in 2012, it observed that the only losers from the policy were households with deposit wealth who saw their interest  rates fall, but as the paper points out they lost much more on this score from the more conventional monetary instrument of reducing Bank rate to near zero.

It is true that there has been a significant wealth effect which affects directly only a minority of households.  But this is on paper.  It is not a *transfer* of wealth from one section of society to another.  The BoE estimated that the QE program of £325bn increased the paper wealth of the population by £600bn.  But this does not mean that there was a wealth transfer of £325bn or for that matter £600bn.  The BoE had got gilts in return for this monetary injection.  Undoubtedly somewhat overpriced, but by how much?  5% let's say.  £15bn to make people feel £600bn better off is nearly worth it in its own right and the knock-on impact (trickle down smacks of Reagan/Thatcher) on the economy should not be so lightly dismissed. Colm's suggestion that this £600bn should be subject to a £450bn tax redistribution to the poor highlights the error of his premise that the £600bn was a redistribution from the poor to the rich in the first place.


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## DerKaiser (5 Feb 2015)

This is a very intricate subject. 'Works in practice but not in theory' seems like a good description.

I can't accept that everyone is a winner though. There has to be losers.

My theoretical interpretation of QE is that it was actually a tax on the rich (via lower return on savings and higher inflation) to encourage them to spend money. The poor should not be affected - when you ain't got nothing, you got nothing to lose!

The short term reality is that the wealthy appear better off on paper in nominal terms and the poor are no worse off. This can't be true though. What could the explanation be?

1) The asset bubble appears to make the wealthy better off, but they are not as their investment income is unchanged.

So if all the money simply flows into inflated asset prices, nothing has really changed for anyone, rich or poor.

2) Without QE we would have had deflation, so in real terms asset values are unchanged.

It may appear that QE has had no inflationary impacts, but if some of the additional money flows into the economy and prices remain unchanged, then maybe QE has reduced deflation we would otherwise have had. So no QE, Deflation and stable asset prices can be compared to QE, no deflation and increased asset prices. These amount to the same thing in real terms, and nobody gains in reality. 

So if 1) and 2) are true, it suggests the main benefits of QE are around the incorrect perception by people that they are better off in real terms. A deflationary environment is a unique opportunity to give the impression something has been created out of nothing.


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## 44brendan (5 Feb 2015)

As I understand it QE is the equivalent of a blood transfusion to a sick patient. There is insufficient blood/money to feed all of the veins in the body which it needs to operate at full efficiency. By inputting this transfusion the body is restored to health and subsequently over time the additional blood can be released back without any ill effects. Liquidity is the money that feeds the economy and all businesses. Without this liquidity (generated through the banking system) we have a stagnant economy. The difficulty with QE is that unlike the heart which will fairly distribute the blood to where it is needed we will be reliant on the banking sector to pump the additional funds towards businesses that will grow both sales and ultimately employment. This is where I have my reservations. Surely QE should be accompanied by some form of oversight of funds usage.
I previously did some project work for the World Bank where funds were advanced to banks in underdeveloped countries. These funds were advanced on a conditional basis that they were lent on to the SME sector. A project team was sent to the banks to monitor usage of the funds and ensure that they were going into the right sectors and due diligence was properly applied in advancing the new loans. Surely this should also be applied to the QE funds. If not there is a significant danger of them (in Ireland anyway) being used to feed a housing bubble. Despite all of the changes that have been promised, we still have a significant deficit of good business sector assessors/underwriters in the banking sector.


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## Duke of Marmalade (5 Feb 2015)

_Derkaiser_ I'm with you all the way. 

It all seems a bit of a confidence trick - but let's not dismiss it for that, economics is often about confidence.  If the problem is one of deflation then it is because the well off in society are not spending enough - the less well off are presumably spending every last cent they have to begin with - no need to stimulate their demand.

If a feel good wealth effect leads to that increased spending then the deflation problem might be addressed.  

Colm's argument that this is a massive transfer from the less well off to the more well off just doesn't stack up.  As to taxing unrealised gains that should be only a timing thing, a one off tax take to be given back in future.  It would be a serious delusion to think that this could be used to boost fiscal expenditure.  That hostage to fortune would quickly come back to bite as the one-off passes and has to be repaid.


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## ClubMan (5 Feb 2015)

Duke of Marmalade said:


> As to taxing unrealised gains that should be only a timing thing, a one off tax take to be given back in future.  It would be a serious delusion to think that this could be used to boost fiscal expenditure.


As I've already said we already have this - e.g. the 8 year taxation of paper gains on unit linked funds.
I don't know to what extent but I presume that this does boost the state's coffers allowing it to be spent elsewhere?

A question to the original poster - if QE is so bad then what is your preferred alternative?


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## Duke of Marmalade (6 Feb 2015)

> So if the ECB wants to increase the money supply, why don't they simply decrease the reserve requirements? Or would that be in conflict with all the recent increases in solvency ratios?


_Boss_ you are going to have to throw out that old economics book  My understanding is that the money supply doesn't really work that way any more especially after QE.  Currently the M1 Multiplier in the US is actually around .75 i.e. actually *less* money created by the banks than they have in CB reserves; it used to be about 3.0.  The requirement to hold CB reserves is no practical impediment any more to banks creating money.  The focus these days is all on asset quality and having sufficient capital to meet the risks.  In other words the focus has gone off liquidity ratios and on to solvency ratios.

Getting back to OP, I don't think creating a wealth effect was the primary purpose of QE, though of course, for all sorts of reasons, if it worked it would naturally create a wealth effect which does not mean that one section of society would be exclusively the beneficiaries.

As to Mario's QE it is unlikely to have anything like the same wealth effect arising  from supply and demand for financial assets, after all it is difficult to see bond yields getting much lower and the European stock indexes have already benefitted from the bounce.  No, Mario's QE is good "old fashioned" QE; make the place awash with money and hope some seeps into the real economy.


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## Duke of Marmalade (9 Feb 2015)

Below is my more considered response to OP.  I have concentrated on the areas where I differ, though that does not mean that I agree with everything else.


ColmFitzgerald said:


> 2)  They use it to buy certain types of bonds, forcing up the price of these bonds, lowering bond yields and making profits for those who own these bonds..


As _Derkaiser_ points out buying a bond does not increase overall profit as the proceeds will be invested at the reduced yields. This is a timing thing and not a transfer of wealth.





> 6)  Money goes into buying equities, forcing up equity prices, making profits for those who own equities.


Transactions in equities themselves are merely the transfer of money between the holders, it does not make the holders as a class profits.  The extent to which prices go up on paper is merely that class of persons agreeing amongst themselves that they value equities higher because of the low yields.  Again as _Derkaiser_ says, no extra wealth is created or re-distributed _per se_.  Of course, if equities were being purchased directly by the authorities that would amount to a morally unjustifiable transfer or wealth from the less well-off to the more well-off.



> All these profits make those who have assets (those relatively better off) much more relatively better off.


On paper - there is no re-distributitive transfer of wealth taking place.





> The profits create a significant wealth effect which stimulates the economy.


This last being a good thing of course.  This is the main point of QE; whether through the wealth effect or through more money sloshing around the more well off or indeed those of an entrepreneurial spirit will start spending and investing.  Colm calls this "trickle down" but it is the whole rationale of monetary easing.  Deflation is because of reduced spending and investing - clearly any attempt to reverse this phenomenon must be targeted at the better off.  



> However, QE is unlikely to significantly increase inflation. This is because better off individuals mostly spend their money on different types of goods and services than less well-off individuals, and since the CPI is mainly based on goods bought by the less well-off, and since the less well-off are really no better off (and relatively worse off) the CPI is unlikely to increase.


Agreed, but the implication is that this is bad.  Would Colm prefer that inflation came in the prices of goods bought by the less well off?



> As QE makes the better off even more better off, it is likely to lead to higher incomes for the better off, thereby increasing economic growth.


This is a _non sequitur_.  The increase in wealth is on paper, no case has been put forward that *incomes* of the well off increase disproportionately, indeed because interest rates have fallen the well-off are less income rich than hither-to-fore. 





> Those who gain employment will gain ...


Not to be dismissed.


> However, the less well-off will suffer because the types of goods which the better off buy, which the less well-off also aim to buy, will rise in value, pushing them further beyond their horizons.


Repeating earlier point, would Colm prefer that the inflation came in the prices of food rather than of Mercs?



> The end effect of QE is economic growth fuelled by *big increases in incomes* for the better off


_Non sequitur_.





> The growth numbers might be called into question as they are discounted by CPI, which does not include the rising cost of assets. So in ‘real’ terms the growth figures may not be as real as they are made out to be.


Profoundly disagree.  The only asset which is relevant for the deflator is property and this is allowed for in CPI through rents.



> The complicated nature of QE means that most of the public seem to be unaware that the rich are getting much richer and there has been no real public protest about QE policies.


Maybe the public are more astute than Colm gives them credit for. They know that QE is not taking money out of their pockets in the way that water charges are.



> A further problem with QE is that it is creating a bubble in the bond markets and a bubble in the equities market. Asset prices have frequently risen sharply on bad economic news in recent years as this has been a signal that more QE might be on the way, so more asset purchasing. Assets prices risk being artificially stimulated to levels above their long term fair-values. These types of bubbles usually last as long as the money printing (QE) is happening, but they usually end badly for society. And the less well-off will usually pay the price for them.


 Now this really is contradictory.  So the well off benefit disproportionately from the bubble and the less well off lose disproportionately from the bust.  That just doesn't stack up.  If Colm argued that  the less well off were relatively unaffected by either phenomenon it would at least be consistent.



> A braver option would be taxing 75% of the profits (these profits are effectively free money given to the rich) and redistribute the money across society in a more productive manner.


I have argued that the increase in wealth is on paper, these are *not* "profits".  Colm predicts that the bubble will burst.  Would this tax on unrealised gains then be returned?  If not, Colm is in fact recommending a massive confiscation from the well off, which of course can be argued in its own right but cannot be justified as a reversal of some earlier re-distribution in the opposite direction wrought by QE. 





> Quantitative Easing is white-collar financial corruption on a grand scale. It sells the integrity of our financial system for short term gain – and gives these gains to the better off. It needs to be stopped and the redistributive effects reversed.


This concluding oratorical flourish is simply OTT.


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## ColmFitzgerald (11 Feb 2015)

blogs.wsj.com/economics/2014/12/26/how-to-save-like-the-rich-and-the-upper-middle-class-hint-its-not-with-your-house/


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## Brendan Burgess (11 Feb 2015)

Hi Colm

While the article is interesting, I don't see its relevance to the QE discussion, apart from 
_
The research helps explain part of why the recent recession, which hinged on a housing bust, was so much more difficult for the middle class than a typical recession. It also helps explains why the recovery has been so disappointing to many. Housing has regained its ground only slowly while corporate profitability has boomed. In other words, we’ve seen slow growth in the major middle class asset, but substantial growth in the assets held by the wealthiest._

Brendan


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## Jim2007 (11 Feb 2015)

ColmFitzgerald said:


> blogs.wsj.com/economics/2014/12/26/how-to-save-like-the-rich-and-the-upper-middle-class-hint-its-not-with-your-house/









This is the thing that Irish people are determined not to learn - investing in property will not put you in the top flight when it comes to wealth....


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## ColmFitzgerald (11 Feb 2015)

The graph in the link shows the distribution of wealth

QE, given that it increases asset prices, makes the wealthy much more wealthy. The graph puts into context the size of the gains for the middle class from QE compared to the gains that arise for the top 1% and top 10%.

The middle class are getting crumbs and consider themselves better off - but really are relatively much worse off. Plus they are probably closed to the idea of giving back some crumbs to reverse the situation somewhat.

The lower classes are being screwed - and too busy being kept on the hook to see it.

If people can't see this, then fair play to those who came up with QE, they are smart people! They've engineered it so that the middle class are actually supporting them.


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## ColmFitzgerald (11 Feb 2015)

This graph shows the distribution of wealth and puts into perspective the disproportional effect that QE will have on society. 

"_My own opinion is that when the whole ship of state is on the right course it is a better thing for each separate individual than when private interests are satisfied but the whole state as a whole is going downhill_" - Pericles


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## Duke of Marmalade (11 Feb 2015)

The inequality in our (all) society and M. Pickety's thesis that it is only going to get worse is a very interesting topic in its own right.  So too is the pathetic smugness of the middle classes with their Semi-Ds whilst the real elite are laughing all the way to their Swiss banks. However I suggest we stick to the specific effects of QE and it would be good if Colm addressed some of my particular comments, notably:

1. Does he really believe that QE is white collar corruption on a grand scale? This later amplification suggests that he does indeed believe that this is a satanic conspiracy by "smart people". 





> If people can't see this, then fair play to those who came up with QE, they are smart people! They've engineered it so that the middle class are actually supporting them.



2.  Does he still think that a 75%  confiscation of the, largely paper, gains since QE was introduced, is justified, especially as he believes that this bubble will burst.

3.  Indeed  when the bubble does burst won't this massive wealth distortion disappear?  Who will look the fools then?  Still the pathetic middle classes?

4.  Again on that bubble burst and the 75% confiscation would Colm reverse it?

5  Can he explain why the effect of the bursting of this bubble in the paper wealth of the elite will disproportionately disadvantage the rest of us? (_bio note_ - no, unfortunately I do not have a Swiss bank account and my Title is purely an honorary one.  I guess I am one of the duped middle classes).

6.  The UK has been doing this QE thing for some time now.  The Labour Party in particular do not seem to be making an election issue of this "massive white collar corruption" and they have plenty of lefty academics advising them.  Does Colm believe that they too and their advisors have been duped?

7.  A new point.  Colm asserts that the cost of social cohesion in the light of this wealth distortion will offset any societal gains.  But he later asserts that very few of us have a clue that this massive corruption is taking place, so where will the pressure for social cohesion measures come from?

8.  A minor point but I am curious to know what type of inflation Colm would approve of.

[broken link removed]for a balanced view on the distributive effects of QE.


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## Duke of Marmalade (11 Feb 2015)

Colm has actually put up a very strong case that it is the elite who are being conned, certainly if you believe that this is an asset bubble going to burst.

Here's how the alternative narrative goes.  QE=government buys back its own bonds at inflated prices.  Hey, what's the big deal, they have reduced the returns on the money to nuffin anyway so the elite only think they have made profits.  Then they will start bidding up the prices of their silly equities and they will convince themselves that they really are much better off.  Then the rub, they will start spending their illusory increased wealth on the rest of us.  And then the bubble bursts.  This is socialist corruption on a grand scale


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## ColmFitzgerald (11 Feb 2015)

1) I don't believe in conspiracy theories. I believe in the human condition. All of my comments so far are based on an assumption that people are NOT rational but that they are human. I should probably start a new thread on this as it is not something easily explained here and I'm going to try to stick to your questions. 
QE is not a satanic conspiracy of smart people, of course not. The strong mostly do as they have the power to do. There is a notable absence of noble leadership these days so the strong and wealthy will mostly get stronger and wealthier. My point was QE is clever if it enables this and there is little if any backlash from others.
Some of the strong and wealthy will naturally agree with Ayn Rand and feel justified in being better off from QE, or more precisely their egos will feel justified.
2) Confiscation? Money was printed which directly resulted in asset price inflation. My point is taxing this. Realistically the taxation would concentrate on certain assets and exempt others (like a person's home). Have you assets and do you feel it's unfair that you might be taxed?
Yes bubbles arise when natural relationships between economic variables are pushed way out of line with historical or natural norms, e.g. house prices in south Dublin when to 16 times average earnings in the last bubble (norm is closer to 5) and given that houses are mostly bought from income such a high multiple of earnings was unlikely to be sustainable in the long-run and would probably revert at some stage. 
If QE is followed by general printing of money or more and more QE, the bubble could last a long time. Are you suggesting that asset gains not be taxed? Surely taxation would inhibit any bubbles and be better in the long-run for the economy?
3) I think you are ignoring my point in 1) the strong and wealthy mostly have power so they will protect themselves in any crash, the average guy will pay the price probably - just like in the last crash.
4) I think your viewpoint thinks that a QE tax would be robbing you - I don't think that is a fair point, the money printing gave the gains in the first place.
5) The same way as what happened in the last crash. The bondholders got bailed out. Wall Street got bailed out. Etc. Taxes went up. Health and Education spending was cut.
6) I don't think many people get QE, yet alone how it works and what are the implications.
7) From those with a social conscience.
8) Approve of inflation?? I don't understand the question.

Re the balanced view. Do you think the world is benign or otherwise? Are those in power trying to help you or help them?  
Do you think BOE communication is direct and honest - or are the tools of Public Relations being used?

Where do you see the BOE paper differing from the initial post?


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## Duke of Marmalade (11 Feb 2015)

Colm,  I will not at this stage riposte point for point.  But on the last I will comment now.  Yes indeed the BoE analysis did back up your description of the wealth transmission mechanism almost verbatim - I accepted it myself.  But they did not conclude that this was white collar fraud on a massive scale.  It is that interpretation which I simply can't buy and neither do the socialists in the UK.


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## Duke of Marmalade (12 Feb 2015)

And my point for point response





ColmFitzgerald said:


> 1) I don't believe in conspiracy theories. I believe in the human condition. All of my comments so far are based on an assumption that people are NOT rational but that they are human. I should probably start a new thread on this as it is not something easily explained here and I'm going to try to stick to your questions.
> QE is not a satanic conspiracy of smart people, of course not. The strong mostly do as they have the power to do. There is a notable absence of noble leadership these days so the strong and wealthy will mostly get stronger and wealthier. My point was QE is clever if it enables this and there is little if any backlash from others.
> Some of the strong and wealthy will naturally agree with Ayn Rand and feel justified in being better off from QE, or more precisely their egos will feel justified.


I read your tone as implying that QE was a clever conspiracy by a tiny elite against the rest of us.  Apologies if I have misinterpreted you.





> 2) Confiscation? Money was printed which directly resulted in asset price inflation. My point is taxing this. Realistically the taxation would concentrate on certain assets and exempt others (like a person's home). Have you assets and do you feel it's unfair that you might be taxed?
> Yes bubbles arise when natural relationships between economic variables are pushed way out of line with historical or natural norms, e.g. house prices in south Dublin when to 16 times average earnings in the last bubble (norm is closer to 5) and given that houses are mostly bought from income such a high multiple of earnings was unlikely to be sustainable in the long-run and would probably revert at some stage.
> If QE is followed by general printing of money or more and more QE, the bubble could last a long time. Are you suggesting that asset gains not be taxed? Surely taxation would inhibit any bubbles and be better in the long-run for the economy?


75% taxation on gains in financial assets is confiscation in anybody's book - especially if the gains are largely on paper and a mere adjustment of the yield level.  Rezoning gains by contrast are direct and windfall wealth transfers from the community to the lucky landowner/speculator and should justifiably be taxed at very high levels.  Not so QE induced pricing level adjustments.





> 3) I think you are ignoring my point in 1) the strong and wealthy mostly have power so they will protect themselves in any crash, the average guy will pay the price probably - just like in the last crash.


Let's take that crash.  One can argue that the big losers were those who lost their jobs and that the people who lost on the markets or on their property suffered only paper losses.  But you have to be consistent - when this phenomenon is reversed it should be judged by the same criteria.





> 4) I think your viewpoint thinks that a QE tax would be robbing you - I don't think that is a fair point, the money printing gave the gains in the first place.


 No! No! No!  Read _Derkaiser_ again.  The initiating transaction is the Government exchanging its bond liabilities for less expensive money liabilities (because of reductions in interest rates).  If QE is successful the resulting inflation increases still further the real transfer *TO* the Exchequer.  Your insistence that this is a massive wealth transfer helps explain your revulsion of QE.  If I believed that, I too would by shouting "corruption on a massive scale"





> 5) The same way as what happened in the last crash. The bondholders got bailed out. Wall Street got bailed out. Etc. Taxes went up. Health and Education spending was cut.


This is a plausible argument.  There does seem to be a Bernanke PUT at play.  On the other hand what was done was done to save our economic system.  True some have more at stake in that system but by and large in modern Western democracies we all have an interest in preserving the system.





> 6) I don't think many people get QE, yet alone how it works and what are the implications.


To me the reaction of the British Labour Party to QE is the dog that didn't bark.  If even a part of your "massive corruption" theory was true it would surely have gained some political momentum.  We should be careful that we two do not convince ourselves that we are part of a tiny intellectual elite who understand QE. The British Labour Party will have plenty of learned advisors looking for any chink.





> 7) From those with a social conscience.


 Yes indeed and when we consider the Venn Diagram intersection of that small set with the even smaller set who understand QE we are not going to have a very influential group.





> 8) Approve of inflation?? I don't understand the question.


  You observed that any inflation wrought by QE will only serve to put the goods that the well off buy further beyond the reach of the less well off.  I was asking did you prefer that it was the price of food which underpinned any pick up in inflation.


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## darag (12 Feb 2015)

Duke of Marmalade said:


> ...This is a timing thing and not a transfer of wealth.Transactions in equities themselves are merely the transfer of money between the holders, it does not make the holders as a class profits.  The extent to which prices go up on paper is merely that class of persons agreeing amongst themselves that they value equities higher because of the low yields.  Again as _Derkaiser_ says, no extra wealth is created or re-distributed _per se_.  ...


If you hadn't repeated variants of this claim many times, I would have assumed a misunderstanding on my part. To claim that there has been no transfer of wealth makes no sense.

I, as an owner of equities, am wealthier as a result of rising equity prices. Similarly government bond holders are wealthier as a result of falling bond yields.

This isn't just 'on paper' - I can sell my bonds or equities any time I want and use the extra profit to buy TVs, fillet steaks, pints of beer or Armani underwear.  The losers are those who were not owners or such assets before the price increases but want/need to buy now.

If the increases in prices in certain assets are caused by government or central bank behavior, then it's fair to say that the behavior has resulted in a transfer of wealth.

If the government could cause property prices to double for example, would you really try to argue that this wouldnt constitute a transfer of wealth to property owners from non-owners (either through higher rent or cost of 'getting on the ladder')?

I personally am wealthier as a result of QE (equities represent a significant portion of my savings) - while those with little or no net worth coming into QE, starting to save e.g. for a pension are poorer.  Ignoring the Picketty flavoured hyperbole, colmfitzgerald's summary of QE seems spot on.


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## Duke of Marmalade (13 Feb 2015)

darag said:


> Ignoring the Picketty flavoured hyperbole, colmfitzgerald's summary of QE seems spot on.


We are in violent agreement.  I have on several occasions said that Colm's summary of how QE works is spot on, directly in line with the BoE's description.  Where I have taken issue is on the "_Picketty flavoured hyperbole_".  Colm asserts that this is white collar fraud on a massive scale, that a tiny but smart elite have not only duped the poorer in society but the middle classes (I will count you as MC rather than Elite, but stand to be ejected) as well.  His assertion that the little guy (which seems to mean the vast majority of us) are always on the losing side does not stack up.

I fully accept the BoE and Colm's analysis that there has been a "wealth effect" and you seem to exemplify that perfectly. The extent to which this is largely "on paper" does not detract from its effect in making you feel better and switching you from Dunnes Stores to Armani in your choice of under garments.  If Colm's proposal that 75% of your unrealised gains should be confiscated would you shrug your shoulders and say "oh heck, I'm still the remaining 25% ahead of "the losers" who didn't have any equities."?  You would be badly mistaken to take that view.

Let me address the purchase of government bonds by the government, as my argument that there is no wealth *transfer* is a mathematical truism in that case.  Let's say the government pays way over the odds and buys a 10 year bond off you at 2% yield.  You (or somebody else) then keeps that money earning .5% from the same government.  That is in fact a transfer *from* you to the government of 15%.  If in addition the QE ploy works and inflation ticks up by 1% p.a. then you have been pilfered in real terms by 25%.  It could be argued that there has been a transfer of your future wealth to the present albeit subject to that 25% real leakage.  One could even argue that this is an attempt to dupe you into buying those fillet steaks from your future wealth - however, I try to avoid spinning any moral tales into these transmissions.

The math is not quite so obvious when it comes to equities.  But to the extent that the increased share prices are a reflection of lower yields then it is precisely as for the bonds, an advance of your future wealth to today.  To the extent that it reflects improved prospects for the economy, then despite what Colm says, that is good news all round.  When you sell an equity it is most likely to someone of your same class, it is not dipping into the poor box as Colm suggests.

Perhaps these matters are best exemplified by the price of houses.  If house prices go up no wealth has been created and no wealth has been transferred.  Nonetheless, people feel "wealthier" and though they never have any intention of cashing in their newly acquired equity they will be more inclined to buy those fillet steaks.

The recession was largely due to the "haves" retrenching on foot of the massive collapse in asset prices wrought by the financial crisis.  The way to reverse this is to coax the same people back into spending and investing.  QE tries to achieve this.  If QE involved the government buying up the equities, houses and even mercs of the "haves" there would rightly be an outcry, but as described above the initiating transactions are merely rebalancing of the State's own liabilities between long term and monetary. (I remind you that there hasn't been a peep out of the socialists in the UK, and that is not because they don't understand it, I have more respect for socialist analysis than that.)

The fact is that all monetary policy is directed at managing the spending and investing habits of the "haves".  To manage the economy through the "have nots" is to use fiscal transfers, which certainly has been tried and was a favourite of Keynes but as the mountain of sovereign debt testifies has been (ab)used beyond its sustainable limits.


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## darag (15 Feb 2015)

Duke of Marmalade said:


> Let me address the purchase of government bonds by the government, as my argument that there is no wealth *transfer* is a mathematical truism in that case.  Let's say the government pays way over the odds and buys a 10 year bond off you at 2% yield.  You (or somebody else) then keeps that money earning .5% from the same government.  That is in fact a transfer *from* you to the government of 15%.  If in addition the QE ploy works and inflation ticks up by 1% p.a. then you have been pilfered in real terms by 25%.  It could be argued that there has been a transfer of your future wealth to the present albeit subject to that 25% real leakage.  One could even argue that this is an attempt to dupe you into buying those fillet steaks from your future wealth - however, I try to avoid spinning any moral tales into these transmissions.
> 
> The math is not quite so obvious when it comes to equities.


Well it's not obvious at all to me in the case of bonds either!  Why would anyone voluntarily sell bonds yielding 2% in order to buy bonds (or the equivalent - say put the money into government backed term deposit accounts) which paid 0.5%?  How would the government be paying "way over the odds" buying back bonds paying the former yields given the best yielding equivalent product yields a quarter of that rate?  Surely they'd be paying way under the odds.  The only thing I can take from this is that if I agree (why?) to a 75% cut in income from my bond holdings, I lose and the counter-party (the government) wins but that would happen with or without any QE  wealth affects.

And surely inflation is a red herring in your calculations?  It indiscriminately takes value from all asset classes, not just the ones which have been inflated by QE.  It does the same to someone who has only held cash, commodities, property, art or anything else.  So I don't see it's role in recovering the gains achieved by equity and bond holders.


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## Duke of Marmalade (15 Feb 2015)

darag said:


> Well it's not obvious at all to me in the case of bonds either!  Why would anyone voluntarily sell bonds yielding 2% in order to buy bonds (or the equivalent - say put the money into government backed term deposit accounts) which paid 0.5%?


Why indeed?  But it happens, that is the essence of QE.  So who is being ripped off?


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## Duke of Marmalade (16 Feb 2015)

_Darag_ people do not voluntarily give up 10 year 2% yielding bonds with the intention of holding 0.5% money for 10 years. The money becomes "hot" in their pockets.  They look around for better yielding assets or hopefully invest in the real economy or better still start buying those fillet steaks.  My point is that the government has replaced 2% liabilities with 0.5% liabilities, a net transfer _*from*_ the recipients of QE.
The government prints money, buys bonds off people with a view to lowering the value of that money (inflation). What is there to not understand about that?


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## darag (16 Feb 2015)

Why would people sell their bonds to a central bank for less money than the market is offering?
If market yields are currently 0.5%, the CB has to offer to buy at 0.5% or less.

Maybe it's the use of yields rather than prices that's confusing the discussion.  I can state the question equivalently as follows: if the market price for a particular bond is 100k and if I wanted to sell why would I sell to the CB for 98k and not one of the private buyers willing to pay 100k?  This bizarre/implausible trade seems to be the basis of your argument. 

This has nothing to do with motivation or money being "hot". I've already decided to sell.


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## Duke of Marmalade (16 Feb 2015)

_darag_ I'm afraid that we are getting to the stage where the medium is not conducive to constructive communication.  You are completely misunderstanding me and I presume from your relatively well off financial position that you are not stupid, unless daddy gave you it.

Briefly as a last try.  10 year bonds trading at 3%, say valued at 95K.  Money earning 0.5%.  This was more or less the market as it would have been if QE was not applied.  Government buys bonds at a 2% yield, say 102K.  This is Colm's argument - an apparent straight 7K subsidy to the elite.  My counter argument is that it is the elite who have been conned, for whilst they think they have made a 7K profit, over time they will lose *as a group* 15K.  If you do not understand that I presume that it is because I am not explaining it well.


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## darag (16 Feb 2015)

Duke of Marmalade said:


> _darag_ I'm afraid that we are getting to the stage where the medium is not conducive to constructive communication.


I actually think it is constructive (ignoring the personal gibe in your last post), but I can accept that it's not pleasant to have your arguments challenged.  Your original statement on how bond holders lose money through QE was clearly enough stated:


> Let's say the government pays way over the odds and buys a 10 year bond off you at 2% yield. You (or somebody else) then keeps that money earning .5% from the same government.


This was the very basis of your argument that the government immediately gains from the purchase of bonds and I asked why would anyone swap a 2% yield for a 0.5% yield?  I simply don't accept that the intersection of bond investors and financial illiterates is large enough to support this "mechanism".



> Briefly as a last try.  10 year bonds trading at 3%, say valued at 95K.  Money earning 0.5%.  This was more or less the market as it would have been if QE was not applied.  Government buys bonds at a 2% yield, say 102K.  This is Colm's argument - an apparent straight 7K subsidy to the elite.  My counter argument is that it is the elite who have been conned, for whilst they think they have made a 7K profit, over time they will lose *as a group* 15K.  If you do not understand that I presume that it is because I am not explaining it well.


This situation simply cannot exist.  If things were set up as you describe above, then I just keep buying bonds for 95K and selling them to the government/CB for 102k, over and over.  Markets do not allow arbitrage situations like this to exist (for long).

I don't believe I am being stupid; I've genuinely tried to read your arguments carefully because I'm always keen to avoid confirmation-bias in my own beliefs and views.  But I've come to the conclusion that I don't think you understand market mechanics very well.  I work in  financial markets and so these sort of situations you describe immediately strike me as implausible, to put it mildly.


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## Duke of Marmalade (17 Feb 2015)

_darag_ Scream  I had no idea my communication skills were that bad.  I should stick to Letting off Steam.

I am not at all suggesting that there are two price levels operating, one in the open market and the other set by the taxpayer. Each QE transaction will take place at the then "market price".  But I agree with Colm that the existence of such a massive buyer raises the price level not only for the bonds she is chasing but as a knock on into other financial assets, thus creating a wealth effect.  Where I take issue with Colm is that I do not see this as a corrupt transfer of resources from those who are relatively light in financial assets.

Now I perfectly accept that you are much more knowledgeable on the workings of the financial markets than I.  Are you saying that even a buyer as big as the taxpayer cannot move the price level - in the words of Mrs T you can't buck the markets?  If that is your argument then even this plausible basis for Colm's assertion falls away.


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## WolfeTone (27 Feb 2021)

The initial QE in the US was push $80bn a month for 10-12 months or so? This was going get everything back on an even keel. To a large extent it worked, or at least gave that impression by papering over the cracks in the foundations of the US economy.
Six years on, where are we? QE program No.4? No.5?
And now the amounts are in the region of $350bn a month! Obviously Covid19 did not help, but then again, neither does trying to protect and sustain asset prices.
The ominous thing about this round of 'stimulus', the $1.90trn, is that it comes at a time when asset prices have actually been rising despite economies sinking. 
None of it makes any sense most of the time, but now it is just off the charts insofar as any rationale can be applied.
And that is just the US, the Eurozone is a complete basket case.


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## jpd (27 Feb 2021)

Anyone with assets is delighted - the money had to go somewhere - stock markets up, property prices up, bond prices up


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## Purple (1 Mar 2021)

jpd said:


> Anyone with assets is delighted - the money had to go somewhere - stock markets up, property prices up, bond prices up


And the gap between those who have assets and those who are starting off in life is bigger than ever.
Something has to give.


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## Merowig (15 Mar 2021)

jpd said:


> Anyone with assets is delighted - the money had to go somewhere - stock markets up, property prices up, bond prices up


Also some were able to buy assets with cheap credit. 
Some companies also can and do buy their own shares back ( backed by very cheap finance ) - which increases the share price for everyone who holds. 
The ECB can't really increase interest rates without causing issues within many countries in Europe - but at some point (more in the distant future) it might become necessary.


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## joe sod (16 Mar 2021)

But stock markets didn't all go up, most of the money went into very concentrated areas of the markets,  technology and us stocks. Look at the ftse,  Europe. Financials,  industrials,  many.valued at alot less than they were a decade ago. For example the banking executives of a decade ago have been replaced by the collison brother except the collisons are more wealthy but maybe they will be knocked off by the Chinese hot guys in a decade time.  Look.at Sean dunne and Sean quinn billionaires in 2007 now in survival mode


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## jpd (16 Mar 2021)

The two Sean's are examples of how success goes to some people's head and they feel that they are infallible. Both made disastrous investment decisions which failed and brought down the whole enterprise. 

Not the first, and certainly, not the last.

Very few business successes remain modest and keep their feet on the ground - realising that there is always a bit of luck in their success and that it is not 100% down to their undoubted expertise


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## joe sod (16 Mar 2021)

But the point is that the super wealthy of years gone by are no longer the super wealthy of today,  the industrialists and bankers of yesterday have been replaced by the tech billionaires of today , it's not a homogeneous unchanging group of people,  many billionaires have also lost their wealth again even if through their own actions.


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## jpd (16 Mar 2021)

I suspect that it is not the billionaires that lost their wealth rather their grandchildren lost their inherited wealth


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## Purple (16 Mar 2021)

Interesting insight into Labour as a share of Income from McKinsey .


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