QE is not money printing. It's worse?

[NotSure]

According to Ambrose Evan-Pritchard in the DT (apologies, paywalled article)

The West’s beancounters are guilty of a great white lie

By pushing the QE experiment too far, central banks have tainted the whole apparatus of emergency money

Western central banks are guilty of an enormous white lie. They led the public and the political class to believe that quantitative easing (QE) was tantamount to printing money, and that it could be reversed painlessly once the deflation threat had passed.

They were throwing sand in our eyes. The process is not remotely equivalent to printing bank notes. The central banks have conducted QE in such a way that there is a liability owed to commercial banks on the other side of every bond purchase. That liability is contracted at floating rates.

The US Federal Reserve, the Bank of England, and the European Central Bank, among others, have borrowed short to buy long. This is a variant of the maturity mismatch that blew up Northern Rock and Lehman Brothers after the short-term funding markets froze during the global financial crisis.......

https://www.telegraph.co.uk/business/2022/11/07/whoops-central-banks-may-soon-need-gigantic-bail-out/

I cannot vouch for the value of AEP's analysis (and he's usually pretty gloomy) but it would help explain why, for example, BoE seem very keen to QT (edit: and also seem loath to increase interest rates). I would be very interested (and grateful) if anyone here could critique or elaborate - the arguments are well above my economics pay grade.

(I recently came across a reddit forum called 'Explain it like I'm five' )

[odysseus2000]

Many of the issues surrounding QE arise because people believe that there are fundamental laws that have to be obeyed, but they are not.

If you find someone who lived through the Great Depression ask them how much fun it was. Then ask them how the lack of money in the economy reversed to a mass supply as arms making became government policy.

Governments do what they want & central banks adjust things to suit.

In 1945 the uk was bankrupt & short of everything. Within in 15 years we had the swinging 60’s.

All the arguments about debt, qe, qt etc are just convenient smoke screens that obscure the fact that the rich get richer & the masses get very slowly more prosperous.

Regards,

[GoSeigen]

According to Ambrose Evan-Pritchard in the DT (apologies, paywalled article)

The West’s beancounters are guilty of a great white lie

By pushing the QE experiment too far, central banks have tainted the whole apparatus of emergency money

Western central banks are guilty of an enormous white lie. They led the public and the political class to believe that quantitative easing (QE) was tantamount to printing money, and that it could be reversed painlessly once the deflation threat had passed.

They were throwing sand in our eyes. The process is not remotely equivalent to printing bank notes. The central banks have conducted QE in such a way that there is a liability owed to commercial banks on the other side of every bond purchase. That liability is contracted at floating rates.

The US Federal Reserve, the Bank of England, and the European Central Bank, among others, have borrowed short to buy long. This is a variant of the maturity mismatch that blew up Northern Rock and Lehman Brothers after the short-term funding markets froze during the global financial crisis.......

https://www.telegraph.co.uk/business/2022/11/07/whoops-central-banks-may-soon-need-gigantic-bail-out/

I cannot vouch for the value of AEP's analysis (and he's usually pretty gloomy) but it would help explain why, for example, BoE seem very keen to QT (edit: and also seem loath to increase interest rates). I would be very interested (and grateful) if anyone here could critique or elaborate - the arguments are well above my economics pay grade.

(I recently came across a reddit forum called 'Explain it like I'm five' )

It's hardly an "analysis" when he could have read this stuff here on TLF (and TMF) years ago.

I think the BoE's actions are the opposite of what the OP depicts. They have been very keen to raise rates, and have done practically no QT. I think the consequences will be clear in the next 12 months or so.

Money supply growth of any consequence is only a recent phenomenon BTW, i.e. since 2020. Before that money supply growth was very subdued and often negative.

GS

[NotSure]

It's hardly an "analysis" when he could have read this stuff here on TLF (and TMF) years ago.

I think the BoE's actions are the opposite of what the OP depicts. They have been very keen to raise rates, and have done practically no QT. I think the consequences will be clear in the next 12 months or so.

Money supply growth of any consequence is only a recent phenomenon BTW, i.e. since 2020. Before that money supply growth was very subdued and often negative.

GS

Thank you and apologies - I (the OP) should not have commeneted on the AEP article.

His basic point is that QE is not money printing as it left CB with (huge) liabilities and that these are variable rate liabilities. Now rates are rising it is devaluing their QE assets and also costing them more. Hence CB technical insolvency beckons. Maybe that's not an issue, but where will the next batch of "emergency money" come from without QT (but of course QT makes the issues worse).

....ING says the Fed has incurred a paper loss of $1 trillion (£880bn) this year on its $8.7 trillion balance sheet of US Treasuries and mortgage debt. Its holdings are trading at an average 7pc discount to par value. This is going to be hard to explain to Congress.

The Fed has also racked up an annual interest bill of $170bn that must be paid to counterparties, either on the excess reserves of commercial banks or on its reverse-repo facility. The terminology is obscure. The cost is real and will eclipse the interest income from the Fed’s bond portfolio by a wide margin as US interest rates near 5pc......

[odysseus2000]

notsure

His basic point is that QE is not money printing as it left CB with (huge) liabilities and that these are variable rate liabilities. Now rates are rising it is devaluing their QE assets and also costing them more. Hence CB technical insolvency beckons. Maybe that's not an issue, but where will the next batch of "emergency money" come from without QT (but of course QT makes the issues worse)

If they need money it will be printed.

Regards,

[Alaric]

According to Ambrose Evan-Pritchard in the DT (apologies, paywalled article)

The central banks have conducted QE in such a way that there is a liability owed to commercial banks on the other side of every bond purchase. That liability is contracted at floating rates.

The US Federal Reserve, the Bank of England, and the European Central Bank, among others, have borrowed short to buy long. This is a variant of the maturity mismatch that blew up Northern Rock and Lehman Brothers after the short-term funding markets froze during the global financial crisis.......

That does at least partly explain why the Government's interest payments on Government debt have rocketed in recent months.

https://www.dailymail.co.uk/news/articl ... ugust.html

[scrumpyjack]

The BOE explanation of QE gives no indication that they are borrowing money to fund their gilt purchases or that they/the state have any liability to anyone in respect of the gilt purchases, nor that there was an interest cost involved. Indeed I understood that the interest paid by HMG to the BOE, on the gilts held by the BOE, was then handed back to the Treasury so in effect no interest was paid.

https://www.bankofengland.co.uk/monetar ... %20economy.

[AsleepInYorkshire]

The BOE explanation of QE gives no indication that they are borrowing money to fund their gilt purchases or that they/the state have any liability to anyone in respect of the gilt purchases, nor that there was an interest cost involved. Indeed I understood that the interest paid by HMG to the BOE, on the gilts held by the BOE, was then handed back to the Treasury so in effect no interest was paid.

https://www.bankofengland.co.uk/monetar ... %20economy.

Phew - that was my [limited] knowledge of QE. The BoE was buying assets to pump money into an illiquid market.

Where's dealtn when you need him? I'm sure he can explain this in a way that at least I can understand.

AiY(D)
Preying no one is setting an exam on this subject for me later this week

[GoSeigen]

It's hardly an "analysis" when he could have read this stuff here on TLF (and TMF) years ago.

I think the BoE's actions are the opposite of what the OP depicts. They have been very keen to raise rates, and have done practically no QT. I think the consequences will be clear in the next 12 months or so.

Money supply growth of any consequence is only a recent phenomenon BTW, i.e. since 2020. Before that money supply growth was very subdued and often negative.

GS

Thank you and apologies - I (the OP) should not have commeneted on the AEP article.

His basic point is that QE is not money printing as it left CB with (huge) liabilities and that these are variable rate liabilities. Now rates are rising it is devaluing their QE assets and also costing them more. Hence CB technical insolvency beckons. Maybe that's not an issue, but where will the next batch of "emergency money" come from without QT (but of course QT makes the issues worse).

The real thrust of his point is that the new monetary liabilities resulting from QE are interest bearing whereas banknotes are not. I think anyone with even a basic understanding of QE knew that all along. And it's not really much of a point, because most monetary liabilities have been interest bearing even before QE: the main difference prior is that the money was generally issued by commercial banks in exchange for private-sector loans like mortgages, whereas QE is the Central Bank exchanging the money for government loans aka gilts.

....ING says the Fed has incurred a paper loss of $1 trillion (£880bn) this year on its $8.7 trillion balance sheet of US Treasuries and mortgage debt. Its holdings are trading at an average 7pc discount to par value. This is going to be hard to explain to Congress.

The Fed has also racked up an annual interest bill of $170bn that must be paid to counterparties, either on the excess reserves of commercial banks or on its reverse-repo facility. The terminology is obscure. The cost is real and will eclipse the interest income from the Fed’s bond portfolio by a wide margin as US interest rates near 5pc......

The loss is put on their balance sheet as a deferred asset IIRC. The asset accumulates with time as maturity date approaches and the bond prices approach par. So in theory at least the losses are temporary (and underwritten by the US treasury IIANM).

The interest is more of a problem but may also be temporary on this occasion as I hinted in my last post.

I'll say it again, the only really novel aspect to all this is the identity of the bank involved, i.e. the Central Bank as distinct from commercial banks who issued money in the past. To a great extent everything is working correctly as intended and to the benefit of the economy (another great depression was avoided).

EAP tends to get overly excited, especially when things are about to get better. Fools would do well to treat him as a contrarian indicator.

GS

[NotSure]

post deleted due to spouting garbage

[NotSure]

Thanks GS, I think it is becoming clearer in my head, and as suspected AEP is rather "over egging the omelette". So AEP has shades of gloom? That's good to know. So far I have only encountered "very gloomy".


I believe the BoE mainly holds gilts, but not the case everywhere - commercial debt, and in some cases even equities are held by some CBs.

[GoSeigen]

The BOE explanation of QE gives no indication that they are borrowing money to fund their gilt purchases or that they/the state have any liability to anyone in respect of the gilt purchases, nor that there was an interest cost involved. Indeed I understood that the interest paid by HMG to the BOE, on the gilts held by the BOE, was then handed back to the Treasury so in effect no interest was paid.

https://www.bankofengland.co.uk/monetar ... %20economy.

That's a very poorly written, simplistic explanation of QE, so no wonder it doesn't spell out the liability aspect of QE. If you refer the the balance sheet of the APF it will be clear.

The interest you refer to is the interest earned on the APF assets (gilts). The interest AEP is referring to is the interest due on the APF monetary liabilities (reserve balances) which is floating of course.


GS

[GoSeigen]

I believe the BoE mainly holds gilts, but not the case everywhere - commercial debt, and in some cases even equities are held by some CBs.

True, but probably not material amounts, except maybe in Japan?

GS

[NotSure]

The BOE explanation of QE gives no indication that they are borrowing money to fund their gilt purchases or that they/the state have any liability to anyone in respect of the gilt purchases, nor that there was an interest cost involved. Indeed I understood that the interest paid by HMG to the BOE, on the gilts held by the BOE, was then handed back to the Treasury so in effect no interest was paid.

https://www.bankofengland.co.uk/monetar ... %20economy.

That's a very poorly written, simplistic explanation of QE, so no wonder it doesn't spell out the liability aspect of QE. If you refer the the balance sheet of the APF it will be clear.

The interest you refer to is the interest earned on the APF assets (gilts). The interest AEP is referring to is the interest due on the APF monetary liabilities (reserve balances) which is floating of course.


GS

This seems a more rounded article than AEPs (and is not paywalled). Seems to say that much of what AEP predicts may indeed come to pass, but even if it does, as GS has explained, only a very few will actually notice and fewer still will mind.

https://www.brookings.edu/blog/up-front/2022/06/01/what-if-the-federal-reserve-books-losses-because-of-its-quantitative-easing/

Edited to quote first para:

In the course of making monetary policy and issuing currency, the Federal Reserve accumulates a portfolio of Treasury and agency securities, which earn interest. Its liabilities consist primarily of currency outstanding, which of course pays no interest, deposits of the U.S. Treasury, which also pay no interest, and reserve deposits of banks and repo borrowing from money market funds and other lenders, both of which do pay interest. Normally, the interest the Fed earns on its securities greatly exceeds the interest it pays to banks and money funds, and the Fed meets its expenses from the surplus and remits the rest to the Treasury.....

[OhNoNotimAgain]

In 1945 the uk was bankrupt & short of everything. Within in 15 years we had the swinging 60’s.

Regards,

Not forgetting being bailed out by the Marshall Plan. And then deflating the debt by inflation.

[dealtn]

Where's dealtn when you need him? I'm sure he can explain this in a way that at least I can understand.

This might already have been explained but, hopefully simply, the BoE buys an asset, Gilts from the market. To pay for this it exchanges (newly created) money, which it gives to the seller of the Gilt.

In essence the Central Bank (more accurately one of its subsiduries) now owns an asset and has created a liability. The asset can be thought of as having a profit/loss - just like many of us on here that buy shares, if the price goes up we have "made a profit" if it goes down we have "made a loss". Although some investors and in particular some boards this doesn't always appear to apply!

One of the allegations is the Central Bank has "lost" a lot of money. The counter is that many of these assets will be held until maturity so the "loss" will actually only be holding an investment for a known return, and any loss is just an "opportunity cost" and not a trading/investment loss. The second counter is more "so what". in essence the QE wasn't meant to be considered against any (potential) loss, but to "rescue" the economy from weak growth and deflation. Indeed its unwinding, and associated losses, are the signs of the policy's success (and a price worth paying compared to the alternative costs of its failure).

Considering the liability side (which few do, or understand) essentially that (newly created) money works its way round the financial system, but essentially everyday "money" sits in commercial banks (as we use it to pay for stuff and the sellers of that stuff either buy stuff themselves or "bank" it). That deposit at the commercial bank in turn, at the end of each day gets deposited at the Central Bank "overnight". That deposit is an asset of the Commercial Bank, and therefore a liability of the Central Bank. In simple language the Central Bank pays the Commercial Bank interest on that overnight deposit as a "cost".

So again (as a measure of the policies success in creating growth in the economy etc.) as daily variable interest rates rise the fixed interest rate return of the Central Banks Gilt asset doesn't go up, but the variable floating rate element paid on its deposit liability does, and therefore the daily running cost of QE becomes more expensive.

One side of the argument will be QE was stupid and is now costing (us) more. The response from some will be "Good. The policy worked!".

[NotSure]

.....Considering the liability side (which few do, or understand) essentially that (newly created) money works its way round the financial system, but essentially everyday "money" sits in commercial banks (as we use it to pay for stuff and the sellers of that stuff either buy stuff themselves or "bank" it). That deposit at the commercial bank in turn, at the end of each day gets deposited at the Central Bank "overnight". That deposit is an asset of the Commercial Bank, and therefore a liability of the Central Bank. In simple language the Central Bank pays the Commercial Bank interest on that overnight deposit as a "cost"......

Thanks dealtn for taking the time to explain.

If you scroll up a bit, you'll find a post from "deleted for spouting garbage". Turns out it wasn't total garbage as it ran along the lines of the quoted bit of your post above. But I was winging it and then got stage fright

[SavageReturns]

According to Ambrose Evan-Pritchard in the DT (apologies, paywalled article)

The West’s beancounters are guilty of a great white lie

By pushing the QE experiment too far, central banks have tainted the whole apparatus of emergency money

Western central banks are guilty of an enormous white lie. They led the public and the political class to believe that quantitative easing (QE) was tantamount to printing money, and that it could be reversed painlessly once the deflation threat had passed.

They were throwing sand in our eyes. The process is not remotely equivalent to printing bank notes. The central banks have conducted QE in such a way that there is a liability owed to commercial banks on the other side of every bond purchase. That liability is contracted at floating rates.

The US Federal Reserve, the Bank of England, and the European Central Bank, among others, have borrowed short to buy long. This is a variant of the maturity mismatch that blew up Northern Rock and Lehman Brothers after the short-term funding markets froze during the global financial crisis.......

I cannot vouch for the value of AEP's analysis (and he's usually pretty gloomy) but it would help explain why, for example, BoE seem very keen to QT (edit: and also seem loath to increase interest rates). I would be very interested (and grateful) if anyone here could critique or elaborate - the arguments are well above my economics pay grade.

(I recently came across a reddit forum called 'Explain it like I'm five' )

Yet QE has actually been what the BoE have been doing since September 28th. And UK and the big EU equity markets reacted accordingly....

[SavageReturns]

Where's dealtn when you need him? I'm sure he can explain this in a way that at least I can understand.

This might already have been explained but, hopefully simply, the BoE buys an asset, Gilts from the market. To pay for this it exchanges (newly created) money, which it gives to the seller of the Gilt.

In essence the Central Bank (more accurately one of its subsiduries) now owns an asset and has created a liability. The asset can be thought of as having a profit/loss - just like many of us on here that buy shares, if the price goes up we have "made a profit" if it goes down we have "made a loss". Although some investors and in particular some boards this doesn't always appear to apply!

One of the allegations is the Central Bank has "lost" a lot of money. The counter is that many of these assets will be held until maturity so the "loss" will actually only be holding an investment for a known return, and any loss is just an "opportunity cost" and not a trading/investment loss. The second counter is more "so what". in essence the QE wasn't meant to be considered against any (potential) loss, but to "rescue" the economy from weak growth and deflation. Indeed its unwinding, and associated losses, are the signs of the policy's success (and a price worth paying compared to the alternative costs of its failure).

Considering the liability side (which few do, or understand) essentially that (newly created) money works its way round the financial system, but essentially everyday "money" sits in commercial banks (as we use it to pay for stuff and the sellers of that stuff either buy stuff themselves or "bank" it). That deposit at the commercial bank in turn, at the end of each day gets deposited at the Central Bank "overnight". That deposit is an asset of the Commercial Bank, and therefore a liability of the Central Bank. In simple language the Central Bank pays the Commercial Bank interest on that overnight deposit as a "cost".

So again (as a measure of the policies success in creating growth in the economy etc.) as daily variable interest rates rise the fixed interest rate return of the Central Banks Gilt asset doesn't go up, but the variable floating rate element paid on its deposit liability does, and therefore the daily running cost of QE becomes more expensive.

One side of the argument will be QE was stupid and is now costing (us) more. The response from some will be "Good. The policy worked!".

QE becomes more expensive for who? The central bank? They manufacture money, surely it is completely irrelevant to them.

[dealtn]

Where's dealtn when you need him? I'm sure he can explain this in a way that at least I can understand.

This might already have been explained but, hopefully simply, the BoE buys an asset, Gilts from the market. To pay for this it exchanges (newly created) money, which it gives to the seller of the Gilt.

In essence the Central Bank (more accurately one of its subsiduries) now owns an asset and has created a liability. The asset can be thought of as having a profit/loss - just like many of us on here that buy shares, if the price goes up we have "made a profit" if it goes down we have "made a loss". Although some investors and in particular some boards this doesn't always appear to apply!

One of the allegations is the Central Bank has "lost" a lot of money. The counter is that many of these assets will be held until maturity so the "loss" will actually only be holding an investment for a known return, and any loss is just an "opportunity cost" and not a trading/investment loss. The second counter is more "so what". in essence the QE wasn't meant to be considered against any (potential) loss, but to "rescue" the economy from weak growth and deflation. Indeed its unwinding, and associated losses, are the signs of the policy's success (and a price worth paying compared to the alternative costs of its failure).

Considering the liability side (which few do, or understand) essentially that (newly created) money works its way round the financial system, but essentially everyday "money" sits in commercial banks (as we use it to pay for stuff and the sellers of that stuff either buy stuff themselves or "bank" it). That deposit at the commercial bank in turn, at the end of each day gets deposited at the Central Bank "overnight". That deposit is an asset of the Commercial Bank, and therefore a liability of the Central Bank. In simple language the Central Bank pays the Commercial Bank interest on that overnight deposit as a "cost".

So again (as a measure of the policies success in creating growth in the economy etc.) as daily variable interest rates rise the fixed interest rate return of the Central Banks Gilt asset doesn't go up, but the variable floating rate element paid on its deposit liability does, and therefore the daily running cost of QE becomes more expensive.

One side of the argument will be QE was stupid and is now costing (us) more. The response from some will be "Good. The policy worked!".

QE becomes more expensive for who? The central bank? They manufacture money, surely it is completely irrelevant to them.

They pay interest on their liabilities, so the higher the overnight rates the more expensive it is for them. That liability, and its running cost, exists. I wouldn't describe that as completely irrelevant. Are we close to the point where that increase in cost is unaffordable and unlikely to be met on an ongoing basis though? No.