QE Phooey

If there really were a costless way to finance government spending it would have been discovered by now. In the economic menu of life there are lunches of varying costs, but there are still no free ones. ‘Money creation’ is just another form of borrowing.”

– Adam Creighton on the magic pudding of QE.

 
Via Tom. Read the whole thing. It’s the best explanation of this new perpetual motion machine I’ve read.

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27 Responses to QE Phooey

  1. JC

    QE is not an attempt to fund the deficit. That’s what south American countries do and it invariably turns into hyperinflation. QE is an attempt to prevent deflation and or to counteract previous (tight) monetary mismanagement. QE works in western economies for the very reason that people rightly believe the central will NOT print money in perpetuity.

    If monetary policy were too loose then long 10 year bonds would not be yielding .6%.

  2. Bruce of Newcastle

    Financing of government spending working really well in Zimbabwe today.

    Zimbabwe Shutters Stock Exchange, Blocks All Mobile Money Payments As Currency Collapses (Again) (29 Jun)

    A national currency, the Zimbabwe dollar or Zimdollar, was reintroduced in 2019, replacing a basket of national currencies including the Japanese Yen, the US dollar and pound sterling. To force citizens to leave the previous system, the government banned the domestic use of foreign currencies. But – with the government mired in corruption scandals – it swiftly lost ground to the US dollar. This is the fifth time in Zimbabwe’s history that its national currency has collapsed.

    Meanwhile, inflation has risen above 750%.

    But maybe it will work here. You never can tell, seeing that socialism hasn’t been properly tried yet either, so they say.

  3. JC

    Bruce

    I don’t think there’s been one major western economy except Australia until ~2015, when that beta male (Rob Lowe) took over that’s actually tried to match the inflation mandate. They haven’t even attempted to and it’s a major policy failure.

    Let’s understand something. Government spending is being financed through taxes and government bond issuance (borrowing). It is NOT being financed through QE. The treasury issues the paper using the RBA as its agent and then the money is sent bank to the treasury. The RBA does QE through its books. It prints money and buys bonds, which are then held on its balance sheet.

  4. Another Ian

    “This is the fifth time in Zimbabwe’s history that its national currency has collapsed.”

    Never upwards either

  5. Peter Greagg

    Adam suggests borrowing might be less damaging than taxing, economically speaking.

    Apart from the inter generational iniquity issue of borrowing for today’s spending and kicking down the road the debt for our children to pay off, it all depends (as with most things). If today’s taxation is more economically inefficient than that in the future, then perhaps there may be an argument to delay taxing to fund current spending. IMO, this isn’t much of an argument from a practical perspective as who knows whether future governments would actually make the tax system more efficient in the future.

    Given the very low current interest rates, there is a strong argument that the Commonwealth should seek to refinance all it’s debt and going for longer durations (more than 10 years). A point Terry McCrann has been pushing in the Oz.

    Given that the full economic cost of raising $1 today causes $1.50 damage, the Government needs to get a return of at least $1.50 for each $1 raised of tax. If the return is less than that, we are all made poorer by that. This is such a simple point that I am continually amazed that economists usually just don’t get it.

  6. Bruce of Newcastle

    It prints money and buys bonds, which are then held on its balance sheet.

    Which funds government JC.
    So government in the form of the RB is funding government in the form of Treasury.
    Soon some government somewhere will pass legislation to cancel their central bank debt and the held bonds and reset their CB balance sheet to zero. Thus magically wiping out the government liability. The snake will have then swallowed its tail.

  7. NoFixedAddress

    We need a Very Fast Train line from Melbourne to Cairns, a Bass Straight Tunnel between Tasmania and Victoria, a new and updated NBN v2030 and more Universities.

    Then we’ll boom.

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  9. Iampeter

    Never forget that governments have no money – it is always ours.

    Yea but could someone please remind Trump and his supporters? K, thx.

    Big and bold!

  10. John Smith101

    Soon some government somewhere will pass legislation to cancel their central bank debt and the held bonds and reset their CB balance sheet to zero. Thus magically wiping out the government liability.

    It’s already happened, Bruce. The US Government has basically neutered the Fed (and all other Reserve Banks globally) some months ago (early Covid-19), and we are just days away (maybe a week or two) from a global currency reset (GCR) and revaluation of currencies (RV) , based on a gold (& silver/platinum) standard. Government liability will be “wiped out” and debts forgiven. Debt forgiveness, in part, will lead to recovery stimulus.

    This is already happening: student and other debt is gradually been forgiven in the US; Morrison last week (I think it was) stated that debt owed to private education institutions will be forgiven.

    For about three months now I have been attempting to draw to Cat’s attention the NESARA Act (National Economic Security and Recovery Act; also, GESERA (Global Economic Security and Recovery Act).

    I am constantly amazed that as a leading economics blog site it seems like no one here (the blog principals especially) has the faintest idea of what has just happened regarding NESARA/GESARA during Coviod-19, and what is about to happen. Every damn leader in the world is signed up to this yet Catallaxy is locked down in tired old paradigms and left-right dichotomies, and has afaik never said a word about NESARA and what is probably the most significant economic transition in human history that is about to occur. Broaden your thinking. (Last paragraph not aimed at you Bruce :). You are one of the clearer thinkers here.)

    And I haven’t even got to Postmaster General Russel Jay Gould, soon to be a household name.

    In brief (not all will necessarily apply):
    NESARA/GESARA
    National Economic Security and Reformation Act.
    Provides major benefits to Americans in the world
    Forgives credit card, mortgage, and other bank debt due to illegal banking and government activities
    Abolishes income tax
    Abolishes IRS; creates flat rate non-essential “new items only” sales tax revenue for government.
    Increases benefits to senior citizens
    Returns constitutional law.
    Establishes new Presidential and Congressional elections within 120 days after NESARA’s announcement. [2nd republic?]
    Monitors elections and prevents illegal election activities of special interest groups.
    Creates new US currency, “rainbow currency” backed by gold, silver and platinum precious metals.
    Returns constitutional law to all courts and legal matters.
    Initiates new US Treasury bank system in alignment with constitutional law
    Eliminates the Federal Reserve System!!!
    Restores financial privacy.
    Retains all judges and attorneys in constitutional law.
    Ceases all aggressive US government military actions worldwide.
    Establishes peace throughout the world
    Initiates first phase of worldwide prosperity distribution of vast wealth which has been accumulating for many decades
    Releases enormous sums of money for humanitarian purposes.
    Enables the release of new technologies such as alternative energy devices.

    Please research before snarking.

  11. JC

    Bruce

    It does NOT fund government. It’s important this isn’t mixed up. Now the RBA may make a profit from its operations possibly like the fed and it’s passed onto the government.

  12. Entropy

    Asset holders love QE. Those that don’t have assets not so much.

  13. Thanks, but I’ll stick with my gold.

  14. John Smith 101:
    I just read through your list of panacea:

    Ceases all aggressive US government military actions worldwide.
    Establishes peace throughout the world
    Initiates first phase of worldwide prosperity distribution of vast wealth which has been accumulating for many decades
    Releases enormous sums of money for humanitarian purposes.
    Enables the release of new technologies such as alternative energy devices.

    You bloody idiot.
    You can be the first to kneel in the room with the drain hole in the floor, the rather unpleasant odour, and confess your sins…

  15. John Smith101
    #3499799, posted on June 30, 2020 at 2:42 pm

    Mate, maaaate, put the glue bottle down.

  16. So we’re back to smuggling and bribing customs agents.

  17. John A

    a Bass Straight Tunnel between Tasmania and Victoria

    Well, maybe, but no crooked government could ever build anything straight!

  18. Squirrel

    So a government with a sovereign currency can churn out as much money as it likes as long as it doesn’t produce a level of inflation which is regarded as naughty – no worries, Straya’s been practising and perfecting the art of ignoring real inflation for decades.

    It mightn’t be couched in these terms, but the next federal election will be about a “green new deal” funded (supposedly) by MMT.

  19. Arthur Wellesley

    Talking about ‘government’ money, I just received an automated polling call about ‘political and other matters’. The first 2 or 3 questions were the usual ‘who would you vote for tomorrow’ stuff, but all the rest were about the ABC, did I trust it? should it have more/less funding etc etc? So no guesses who was behind it and what they were hoping to hear.

    The interesting thing in this context was that the funding was referred to as coming from the ‘government’. I bet they are too scared to express it as coming from taxes or the taxpayer, as it might actually make people think about it!

  20. JC

    Straya’s been practising and perfecting the art of ignoring real inflation for decades.

    What’s the real inflation then, Squirrel.

    And no, a government cannot print as much as it wants without creating hyperinflation. Look, don’t argue against on this one, argue against the market which doesn’t agree. Long-term bond rates would be through the roof otherwise.

  21. Oh great we’ve got a American fiurth Reicher/La Rouchite who wants “debt jubilees” from “da globalists”.

  22. JC

    The intent is not always indicative of the result.

    How do you QE without inflating the debt away?

    My impression is that FP or MP always flows through to the other transmission channels of MP and FP respectively.

  23. John Smith101

    Winston, observations are not endorsements. Personally, I think it sucks. However . . .

  24. John Smith 101:

    Winston, observations are not endorsements. Personally, I think it sucks. However . . .

    My apologies then – I thought you were endorsing them.
    (I’m acing this Cranky Old Fart persona.)

  25. Diogenes

    JohnSmith101 ,
    do you have a US title number for NESARA to counter this wiki article

    National Economic Security and Recovery Act (NESARA) was a set of proposed economic reforms for the United States suggested during the 1990s by Harvey Francis Barnard. Barnard claimed that the proposals, which included replacing the income tax with a national sales tax, abolishing compound interest on secured loans, and returning to a bimetallic currency, would result in 0% inflation and a more stable economy. The proposals were never introduced before Congress.

  26. John Smith101

    My apologies then – I thought you were endorsing them.
    (I’m acing this Cranky Old Fart persona.)

    No worries Winston. With the way 2020 is going we are all turning into COFs!!!

  27. John Smith101

    JohnSmith101 ,
    do you have a US title number for NESARA to counter this wiki article

    Hi Diogenes. No, not immediately at hand anyway but I’ll have a look later today if I get time.

    I’ve only been researching NESARA/GESARA over the past few months – since Covid (along with everything else) and I notice that it has been getting a lot of mentions on Twitter and elsewhere. I still in no way grasp its significance (or not) or how it relates to our current Australian economic imbroglio (That is GESARA, the global version). I do, however, think that it is something Cats need to be informed about, given that there is a lot of talk about this subject on the back-channels, including those sites and feeds that support Trump 2020. It also helps explain, rightly or wrongly, where the money to pay for the various Government payments may be, in part, coming from.

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