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Rickards is wrong. There is no perpetual QE.

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  • Mon, Mar 21, 2011 - 08:29pm

    #11
    Troutbum

    Troutbum

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    Joined: Mar 17 2011

    Posts: 2

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    On QE II

The Fed buys its paper from Primary Dealers, I don’t believe they are allowed to directly buy from the Treasury. When the Fed buys a T Bond or Note, it credits the purchase amount into the Dealers account at the Fed. No “money” is actually created until or if the Dealer ( think Chase or Citi) actually taps the Reserve Account in order to generate new Loans. It is loan creation that creates “money” and if enough loans are created you could increase the velocity of money, thereby possibly engendering inflation. But couldn’t the velocity of money be negated by debt destruction or repayment in other parts of the economy? ( think Government vs Consumer). The Feds policy of ZIRP and QEII generally support asset prices (think equity prices being supported by low interest rates) and if the top 20% of households “Feel Better” they will spend $$. Whether or not this can overcome the loss of value in the real estate market is the essential struggle between inflation and deflation.

  • Sun, Mar 27, 2011 - 09:28am

    #12

    Thinkor

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    Joined: Sep 13 2009

    Posts: 14

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    Reply to Troutbum

[quote=Troutbum]

The Fed buys its paper from Primary Dealers, I don’t believe they are allowed to directly buy from the Treasury. When the Fed buys a T Bond or Note, it credits the purchase amount into the Dealers account at the Fed. No “money” is actually created until or if the Dealer ( think Chase or Citi) actually taps the Reserve Account in order to generate new Loans. It is loan creation that creates “money” and if enough loans are created you could increase the velocity of money, thereby possibly engendering inflation. But couldn’t the velocity of money be negated by debt destruction or repayment in other parts of the economy? ( think Government vs Consumer). The Feds policy of ZIRP and QEII generally support asset prices (think equity prices being supported by low interest rates) and if the top 20% of households “Feel Better” they will spend $$. Whether or not this can overcome the loss of value in the real estate market is the essential struggle between inflation and deflation.

[/quote]

I like to think of the MV=PQ relationship as M/PQ = 1/V = average cash balances required per dollar of transactions.  When people have cash balances above the desired level, they spend them (saving = spending on a loan to your bank or someone else) which has an inflationary effect. 

Debt destruction/repayment diminishes total credit, deflating the economy, motivating people to seek higher cash balances (lower velocity), so, yes, it does counteract the attempt by the Fed to inflate by creating more money – ye olde liquidity trap.

I think the reason ZIRP and QE2 will fail is that they depend on creating an illusion that good times are around on the corner, but they do nothing to correct the underlying structural problems in the economy, which will reassert themselves, as they seem to be doing.

 

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