More on Quantitative Easing Explained

Omid Malekan produced a great video called "Quantitative Easing Explained" which we posted here a little over a week ago. The video has really hit a nerve because it resonates with people’s sense of outrage. Kevin Depew, the Editor-in-Chief of Minyanville sat down with Malekan to discuss with him what the video is all about and why he thinks it’s received such attention. The video of their conversation is below.

For a more in-depth but equally populist take on QE, see these remarks by Michael Hudson in his interview with Eric Janszen.

I have written a lot on this topic. My best take is probably, "(Don’t Fear) The Reaper, The Fed Says ‘More Cowbell’. The line you should remember is this:

Every single time the U.S. is met with an economic downturn (is met by the figurative Grim Reaper), the policy response is always the same: monetary easing (more cowbell). And with interest rates as low as they can go, the Fed has turned to printing money and monetizing debt. This excess liquidity is an economic hazard washing up on the shores of South Korea, Brazil and India, causing policy makers there to consider barriers to reduce the floods from the incoming waves of U.S. money. The excess liquidity is pumping up commodity prices, raising the price of gasoline and food for average American citizens and reducing their purchasing power.

And let’s be clear, this money printing does not have direct effects on the real economy. This is not a helicopter drop either. In that case, the money would actually go to consumers instead of the banks who are primary dealers of U.S. government bonds. It is about interest rates and asset prices.

40 Comments
  1. Efi Pylarinou says

    The “QE explained” viral video does not really belong in the EXPLAIN category. it really belongs in the STAND-UP COMEDY genre. And this is actually the reason it is popular. There is a great need, even among professionals, for entertainment, humor, and sarcasm.

    1. Edward Harrison says

      Whether it belongs in ‘explain’ category is semantics. My point is that it resonates with people and it does contain enough of the basic narrative to get the main points across to the average person.

  2. Freddy12 says

    It’s unfortunate that this video has gone viral as it is 100% factually incorrect.

    1. Edward Harrison says

      It’s not credible to call something 100% factually incorrect. One might say, “it is riddled with errors” which I don’t believe is accurate. But, saying this video is 100% factually incorrect is simply a nonsensical statement.

      What is correct is that as QE2 is conceived the Federal Reserve creates electronic dollar credits to make an asset swap for Treasury bonds in circulation. While no new net financial assets are created, this is ‘printing money.’ So when the video says “print a ton of money,” that is correct. The question is why. Bernanke himself has said he is targeting asset prices, interest rates, and lending. However, to date only the asset price effect has shown enough oomph to feed through into the real economy. So again, the video’s main thrust that this is about lining the pockets of speculative investment is correct. I would say what I said above:

      “And let’s be clear, this money printing does not have direct effects on the real economy. This is not a helicopter drop either. In that case, the money would actually go to consumers instead of the banks who are primary dealers of U.S. government bonds. It is about interest rates and asset prices.”

      1. Freddy12 says

        By calling it “money printing” you are misleading your readers. Not only are they not actually printing money, but they are not adding to the actual money supply. Calling it money printing invokes fears of inflation and that is the whole purpose of the video – to create a sensationalist fear that the government is just printing up dollars and injecting them into the economy. Honestly, it’s sad that a person as smart as yourself is spreading this nonsense around.

        1. Edward Harrison says

          Rubbish, Freddy. The Fed is printing money. There are more reserves in the system . As Marshall Auerback has said, it depends on your definition of the money supply. His definition of money is oriented around credit and higher monetary aggregates. My definition is on the monetary base. And clearly the monetary base has expanded dramatically.

          The question has always been about how would or could that feed through into either inflation or into credit growth.

          Moreover, I have been quite cautious in dispelling notions of hyperinflation and so forth on this site. Either you have not been paying attention or you are choosing to take a biased and narrow view of the subject.

          1. Marshall Auerback says

            But the expansion of the monetary base is a function of the growth of
            credit, which is ultimately a FISCAL phenomenon, not a monetary one. It’s
            endogenous.
            When we talk about endogenous money we are referring to the outcomes that
            are arrived at after market participants respond to their own market
            prospects and central bank policy settings and make decisions about the liquid
            assets they will hold (deposits) and new liquid assets they will seek (loans).
            A leading contributor to the endogeneous money literature is my friend
            from the University of Ottawa, Professor Marc Lavoie. In his 1984 article (‘
            The endogeneous flow of credit and the Post Keynesian theory of money’,
            Journal of Economic Issues, 18, 771-797) Lavoie wrote the following (page 774):
            When entrepreneurs determine the effective demand, they must plan the level
            of production, prices, distributed dividends, and the average wage rate.
            Any production in a modern or in an “entrepreneur” economy is of a monetary
            nature and must involve some monetary outlays. When production is at a
            stationary level, it can be assumed that firms have at their disposal
            sufficient cash to finance their outlays. This working capital, in the aggregate,
            constitutes credits that have never been repaid. When firms want to increase
            their outlays, however, they clearly have to obtain extended credit lines
            or else additional loans from the banks. These flows of credit then
            reappear as deposits on the liability side of the balance sheets of banks when
            firms use these loans to remunerate their factors of production.
            The essential idea is that the “money supply” in an “entrepreneurial
            economy” is demand-determined – as the demand for credit expands so does the
            money supply. As credit is repaid the money supply shrinks. These flows are
            going on all the time and the stock measure we choose to call the money
            supply, say M3 is just an arbitrary reflection of the credit circuit.
            So the supply of money is determined endogenously by the level of GDP,
            which means it is a dynamic (rather than a static) concept.

            In a message dated 11/22/2010 2:13:03 P.M. Mountain Standard Time,
            writes:

            Edward Harrison wrote, in response to Freddy12 (unregistered):

            Rubbish, Freddy. The Fed is printing money. There are more reserves in the
            system . As Marshall Auerback has said, it depends on your definition of
            the money supply. His definition of money is oriented around credit and
            higher monetary aggregates. My definition is on the monetary base. And clearly
            the monetary base has expanded dramatically.

            The question has always been about how would or could that feed through
            into either inflation or into credit growth.

            Moreover, I have been quite cautious in dispelling notions of
            hyperinflation and so forth on this site. Either you have not been paying attention or
            you are choosing to take a biased and narrow view of the subject.

            Link to comment: http://disq.us/sr1w2

          2. Edward Harrison says

            Yes, the fed is conducting fiscal policy (or at least attempting to d so) and inserting itself politically into an arena where it should not be. If the Obama Administration and Congress cannot get the economy re-started with fiscal policy, there is zero reason for the Fed to try by trying to blow bubbles and flood the economy with liquidity.

            The result will be a ‘witch hunt’ against the fed. The day of reckoning is coming.

          3. Marshall Auerback says

            Agreed. Although the Fed made its own bed through its complete dereliction of duty in terms of regulating the subprime mortgage market. So I have little sympathy for Mr Bernanke. He helped make the bed he is now being forced to lie in.

        2. Edward Harrison says

          Freddy, I suggest you read the post “Hyperinflation in the USA”

          https://pro.creditwritedowns.com/2010/05/mmt-hyperinflation-in-the-usa.html

          1. Freddy12 says

            Wow. This is amazing. You know more about the Fed and the monetary system than Ben Bernanke himself. The reason I say that is because just a few weeks ago he made comments that directly contradict what you say:

            “What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed. Now the question is what happens the economy starts to grow quickly and it’s time to pull back the monetary policy accommodation. There are several tools that we have”

            So, who do we believe? Some blogger? Or the Fed Chief? I’ll go with the Fed Chief thank you very much.

            You should really be more careful about your postings. Sarah Palin also called it “money printing”. It’s a political move and you’re using a popular video to attract viewers and attention. In the meantime you’re diminishing your own reputation.

          2. Edward Harrison says

            If you want to throw your lot in with the Fed and their fine conduct of monetary policy, fine. To each his own. Clearly you have your view. I guarantee you if you asked people who read this site who had more credibility, it would not be Ben Bernanke or the Fed.

            In your comments, you consistently gloss over the arguments I have made. I have defined ‘money’ and the arguments I have made are certainly more nuanced than the one’s you have just made. Specifically, I referenced the hyperinflation post where I said:

            What about the ideology? Well, the MMT’ers say that the Austrians ideologues and the gold fetishists have a deflationary bias when inflation doesn’t change the real productive capacity of a nation. Clearly, the hyperinflation talk is a gimmick with which to discourage deficit spending. You should see this debate as about a specific policy prescription driven by ideology. The other side of this ideological divide was taken up by Dean Baker in the Guardian’s “Cliches won’t fix the financial crisis“

            Nevertheless, inflation does alter business decision-making via accounting’s tie to nominal numbers and the money illusion. Moreover, inflation reduces relative wealth by transferring income from those who receive the money first like banks versus those who receive their money later, your typical widow living on fixed income bonds and annuities. Finally, inflation encourages the accumulation of debt by benefitting borrowers over savers. I see inflation as a problem to be avoided.

            Ideologically then, I see inflation as the increase in the money supply.

            Economics. an increase in the VOLUME of money, which eventually leads to a persistent, substantial rise in the general level of prices and results in the loss of value of currency.
            -What is Inflation?, Credit Writedowns, June 2008

            And where inflating the money supply does not eventually lead to consumer price increases, it does lead to asset price increases which foster a stronger boom-bust tendency.

            So, people like me look at large government deficits in a fiat currency system as an invitation to print money and inflate the money supply. If you take this way of thinking to a logical extreme, you end up with what Marc Faber is talking about: hyper-inflation.

            But, this is ideology – not economics. The claims of hyperinflation awaiting the US or the UK seem hyperbole at best, misinformation and deception at worst. Hyper-inflation has very specific pre-conditions in foreign currency obligations and a loss of tax revenue and productive resources. ‘Printing money’ alone doesn’t get you there. So, it simply isn’t credible to claim that Hyperinflation in the US or the UK is in the offing now or anytime in the immediate future.

            Read more: https://pro.creditwritedowns.com/2010/05/mmt-hyperinflation-in-the-usa.html#ixzz1639dduWs

        3. Marshall Auerback says

          I wouldn’t impute nefarious motives to Ed, whom I think has always tried to
          be balanced about this, but I do think it’s inappropriate to use the term
          “money printing”, as it is abused.
          All transactions between the Government sector (Treasury and Central Bank)
          and the non-government sector involve the creation and destruction of net
          financial assets denominated in the currency of issue. Typically, when the
          Government buys something from the Non-government sector they just credit a
          bank account somewhere – that is, numbers denoting the size of the
          transaction appear electronically in the banking system.
          It is inappropriate to call this process – “printing money”. Commentators
          who use this nomenclature GENERALLY do so because they know it sounds bad!
          I don’t think that’s the case with Ed, but it is true that the orthodox
          (neo-liberal) economics approach uses the “printing money” term as
          equivalent to “inflationary expansion”. If they understood how the modern monetary
          system actually worked they would never be so misleadingly crass.

          In a message dated 11/22/2010 2:02:59 P.M. Mountain Standard Time,
          writes:

          Freddy12 (unregistered) wrote, in response to Edward Harrison:

          By calling it “money printing” you are misleading your readers. Not only
          are they not actually printing money, but they are not adding to the actual
          money supply. Calling it money printing invokes fears of inflation and
          that is the whole purpose of the video – to create a sensationalist fear that
          the government is just printing up dollars and injecting them into the
          economy. Honestly, it’s sad that a person as smart as yourself is spreading
          this nonsense around.

          Link to comment: http://disq.us/sr0jz

          1. Edward Harrison says

            Well said, Marshall. I am perfectly aware of MMT’s explanation of the monetary system as you well know. I choose to use the terminology I do because it is the terminology that resonates and because it also is accurate when talking about excess reserve creation during QE2.

            I have to reiterate that dovish talk that acts as if it condones the Fed’s reckless policy will have zero resonance to people who see the economy in the doldrums while the well-to-do are living high on the hog. NOT talking about the Fed’s actions in outraged terms only invites the populists in with their neo-liberal agenda.

            I can see where this is headed now. Austerity, a neutered Fed, a trade war or worse. We are living in dangerous times so it is important to have the right frame on these issues.

  3. Edward Harrison says

    I should also point out that Ben Bernanke is saying what I have said all along: QE is an asset swap. No new net financial assets are created by QE. The ‘money printing’ leads to the accumulation of excess reserves because there is not enough demand for new loans by creditworthy borrowers.

    See here:
    https://pro.creditwritedowns.com/2010/11/on-printing-money-and-debasing-the-currency.html

    You can use whatever terminology you like to get to this conclusion. I prefer ‘money printing’ for creating dollar credits and the creation of excess reserves.

    1. Freddy12 says

      My whole point is that you have to be careful what terminology you’re using. Personally, it sounds like you’re comfortable using “money printing” because Marshall has referred to it as such. That’s an unfortunate use of terminology for Marshall because he, of all people, should know that this is a term used by neoliberals to invoke inflation fears. It is a gold standard term and has no place in today’s modern monetary systems. When you both use such a term you’re simply feeding the beast. You might call it semantics or whatever, but I think it’s very important that you not invoke such misconceptions.

      Money printing is simply not an accurate portrayal of what is occurring. Not only are they not printing money, but they are not adding to the money supply so there is no reason to believe QE will be inflationary. This is simply a different form of traditional open market operations. When the Fed cuts rates on overnight reserves do you call that “money printing”? No. Of course not. This is not really any different. Theyre just buying a different maturity issue.

      This is very important in my opinion and I am upset to see two very smart people using terminology that invokes an inherent inflationary response.

      1. Marshall Auerback says

        Don’t put words in my mouth, Freddy12! I specifically DO NOT use the phrase
        ‘money printing’. In fact, I’ve just written the following:

        I wouldn’t impute nefarious motives to Ed, whom I think has always tried
        to be balanced about this, but I do think it’s inappropriate to use the term
        “money printing”, as it is abused.
        All transactions between the Government sector (Treasury and Central Bank)
        and the non-government sector involve the creation and destruction of net
        financial assets denominated in the currency of issue. Typically, when the
        Government buys something from the Non-government sector they just credit a
        bank account somewhere – that is, numbers denoting the size of the
        transaction appear electronically in the banking system.
        It is inappropriate to call this process – “printing money”. Commentators
        who use this nomenclature GENERALLY do so because they know it sounds bad!
        I don’t think that’s the case with Ed, but it is true that the orthodox
        (neo-liberal) economics approach uses the “printing money” term as
        equivalent to “inflationary expansion”. If they understood how the modern monetary
        system actually worked they would never be so misleadingly crass.

        In a message dated 11/22/2010 3:06:45 P.M. Mountain Standard Time,
        writes:

        Freddy12 (unregistered) wrote, in response to Edward Harrison:

        My whole point is that you have to be careful what terminology you’re
        using. Personally, it sounds like you’re comfortable using “money printing”
        because Marshall has referred to it as such. That’s an unfortunate use of
        terminology for Marshall because he, of all people, should know that this is
        a term used by neoliberals to invoke inflation fears. It is a gold
        standard term and has no place in today’s modern monetary systems. When you both
        use such a term you’re simply feeding the beast. You might call it
        semantics or whatever, but I think it’s very important that you not invoke such
        misconceptions.

        Money printing is simply not an accurate portrayal of what is occurring.
        Not only are they not printing money, but they are not adding to the money
        supply so there is no reason to believe QE will be inflationary. This is
        simply a different form of traditional open market operations. When the Fed
        cuts rates on overnight reserves do you call that “money printing”? No.
        Of course not. This is not really any different. Theyre just buying a
        different maturity issue.

        This is very important in my opinion and I am upset to see two very smart
        people using terminology that invokes an inherent inflationary response.

        Link to comment: http://disq.us/sr97y

        1. Freddy12 says

          My apologies Marshall. I thought Edward was using your use of the term as a defense. I reviewed your article and noticed you quoted HIM in it.

          1. Marshall Auerback says

            “Money printing” is not my preferred terminology. For the same reason, I seldom use the term “money”, preferring the term “financial assets”.

  4. Edward Harrison says

    Marshall Auerback never called QE money printing; he condoned my definition. So I would leave him out of this. I said very clearly in the Hyperinflation post what the ‘money printing’ ideology is all about so I am clear on this. But Michael Hudson’s view of the matter is very much in line with where I am:https://pro.creditwritedowns.com/2010/11/krugman-china-and-the-role-of-finance.htmlThe Fed has this wrong. They are ruining any shred of credibility they have on a monetary policy that does not work except via asset markets. It’s the ultimate financialization ponzi response to a financialized debt-ridden American economy. And again, I see a breath-taking expansion of the monetary base in exactly the same vein any anti-inflationary pro-hard money person would. It is an attempt to debase the currency and drive up asset price INFLATION. It is a tax on ordinary people who do not benefit from this asset price INFLATION in a world where real wages are stagnant or declining. It fosters a surreptitious transfer of wealth to the monied classes. 100% this is money printing and it must be stopped.

    1. Freddy12 says

      Your defense of Hudson shows that you don’t understand how a modern monetary system works. Hudson thinks the banks might lend out their reserves. That’s nonsense.

      You should do a bit more research. Bernanke is not trying to devalue the dollar. Again, he has directly said this in recent days:

      “The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States,”

      He is only trying to alter interest rates which he incorrectly believes will lead to more borrowing and a sustained wealth effect. His goal is to create a strong dollar through economic recovery. There’s nothing inflationary here at all. There is no transfer of money to the wealthy. There is only a supposed change in interest rates that he appears to be failing at since rates are rising….This is 100% not money printing of any kind.

      1. Edward Harrison says

        I guess that’s why Randall Wray writes on my site and frequently quote from him. I am perfectly aware that demand for credit drives the increase in reserves and not vice versa.

        Look, this is my site. If you want to mouth off with ad hominem attacks like: “Your defense of Hudson shows that you don’t understand how a modern monetary system works. Hudson thinks the banks might lend out their reserves. That’s nonsense.” I will simply ban you in future.

      2. Susijumala says

        Ever since QE1 started the emerging market indecies have doubled by now, some even went over that. In Western stock markets the gain has been +30%, roughly. “The inflation” is flooding into the emerging markets and now even into commodities (my guess is that stock markets are considered overvalued already.) The reason inflation has not risen in the US is the very simple: the banks are not loaning money and/or private sector in the US is not borrowing. Banks are not banks, they are traders and investing money overseas because of better profit.

        I’m only wondering what happens now when China increased the reserve requirements. It cuts down loaning i.e. inflation, but keeps foreign money reluctant to enter without interest rate rises. So much of the QE2 and its silent purpose of devalue dollar against Chinese yuan.

      3. Edward Harrison says

        I find it curious that you quote from Bernanke as someone who understands in one instance and then as someone who doesn’t almost minutes later. Bernanke doesn’t understand modern money. That is clear. I agree with you about how aims as I wrote here:https://pro.creditwritedowns.com/2010/11/on-printing-money-and-debasing-the-currency.htmlThe thing is if money worked as he believes it does QE would also have the effect of depreciating the dollar.

  5. Edward Harrison says

    We can talk about asset swaps and no net financial assets until the cows come home. My point from Randy’s post is the same:

    https://pro.creditwritedowns.com/2010/11/qe2-is-equivalent-to-issuing-treasury-bills.html

    when people see the expansion of the Fed’s balance sheet combined with the still high un- and underemployment, they go ballistic.

    It’s the Fed equivalent of Obama’s half-hearted fiscal stimulus. If you are going to do something non-traditional, it had better work. Better to fail conventionally than unconventionally is hard-wired into human interactions. When Steve Waldman talks about the ‘morality’ of economics, that’s what he means:

    http://www.interfluidity.com/v2/983.html

    You simply cannot create $2 trillion in excess reserves and then say you are going to do more in an environment where it is patently obvious to everyone that this has not benefited ordinary citizens but bankers are making record amounts of money. The more I see these arguments defending the Fed, the more hopeless I see this entire economic environment. The backlash against the Fed is coming – and it is precisely BECAUSE they are creating trillions in electronic dollar credits.

  6. Edward Harrison says

    Marshall: “The essential idea is that the “money supply” in an “entrepreneurial
    economy” is demand-determined – as the demand for credit expands so does the
    money supply. As credit is repaid the money supply shrinks.”

    Of course, this depends on your definition of “money supply.” Nevertheless, you and I are largely in agreement on the mechanics. Your quote here is the essential one. This is what Ben Bernanke fails to realize.

    Now, as for the video, which resonates with people – by the way, the right thing to do is to put it in context for people:

    What Dr. Galbraith is alluding to is the fact that Dr. Bernanke really thinks fiscal policy is more effective than quantitative easing to the degree you want to add stimulus. The breath-taking comment by Paul Krugman a few weeks ago about the Fed needing $8-10 trillion of QE to boost the real economy goes to this. I think you would need even more. But, of course, Bernanke has no input into fiscal policy and right now fiscal policy is a dead issue in Washington. Interest rates are already zero percent. So, Bernanke has decided to fall back on the only thing he has left and print money. Here’s the clue that he still believes fiscal policy is more effective.

    Read more: https://pro.creditwritedowns.com/2010/11/does-ben-bernanke-believe-the-stuff-he-writes.html#ixzz163ctgseH

    And Hudson is right that QE is the manifestation of a financialized US economy. It’s a place of monetary policy uber alles – even if it is actually fiscal or quasi-fiscal policy. QE is an abomination. It will not increase purchasing power for ordinary citizens and it does not create jobs. Why is Bernanke engaging in this fiction? No one believes him.

  7. Jon says

    I have to admit that I was kind of pissed at Edward posting this Paul Ryan-esque nonsense, but the argument it spurred made the whole thing worth it!

    Thank you Freddy, Edward and Marshall!! Debates in the comment section of any blog are rarely informed, courteous (mostly), and enlightening. I’m gonna cut and paste this to read again when i haven’t had two beers.

    1. Edward Harrison says

      Thanks, Jon. That’s the response I would like. Frankly I’m also getting pissed off, but for a different reason – and I spelled it out in my next post on economic code words. People are retreating to ideological corners ever more. I feel today that we are closer to another systemic crisis than at any point since 2008 for the very reason we need these kinds of debates. Everyone is fixing up for a fight and nothing is going to get solved.

  8. jimh009 says

    > Everyone is fixing up for a fight and nothing is going to get solved.Isn’t that sort of the hallmark of periods where the economic pie is shrinking, not expanding? People fight harder and more shrilly during periods where the economic pie shrinks. And views tend to become hardened, more polarized and more detached from reality.

    Also, one question. I see the term “MMT” all over this blog anymore. Care to enlighten me on what that acronym means! The acronym list for MMT is simply to long!

    http://acronyms.thefreedictionary.com/MMT

    1. Edward Harrison says

      That is hallmark of those periods. I agree 100%, Jim – and of course, that’s why I am still concerned about this crisis.

      The term MMT is short for Modern Monetary Theory, which isn’t much of a theory. It’s really a description of how the fiat monetary system works. A lot of people are still anchored to a gold standard mentality (40 years later). Part of the objection to the phrase “money printing” comes from this – it is anchored in the gold standard. MMT explains what is different about fiat currency in terms of monetary or fiscal constraints.

  9. fresnodan says

    I think your (Edward Harrison) initial idea was the best – just call “money” or “asset creation” cowbell – than instead of this semantics debate we can rationally discuss how effective more cowbell is. What evidence is there that cowbell is reducing unemployment and raising median incomes? And dare I say it – maybe the problem was too much cowbell – weren’t overpriced assets due to too much cowbell the main reason our orchestra collapsed???

    My own perspective is that despite what I hear about all this easy cowbell, I don’t hear it – the bank offers cowbell to me at the same rate as several years ago – if I was to borrow a cowbell I wouldn’t be saving any money.
    Now there are those who keep saying that more and more cowbell will not raise the volume to a painful level, but my cost of health insurance, gas, cows, and cow feed keeps going up. Its like the Fed measures volume by everything except sound producing devices like radio, TV, I-pods, etcetera…

    1. Edward Harrison says

      Good idea, Dan. I will go with that!

  10. DR says

    fixin up for a fight is right. Buy more gold, food, and ammo.

Comments are closed.

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