Quote from: Undermood on May 17, 2015, 02:28:08 AM

Quote from: oblivi on May 16, 2015, 06:07:22 PM

If there are actually any QE supporters on this board could they please tell me how even if QE 'works', how would this ACTUALLY benefit,say, the Greek or Spanish economy in any way that actually funnels down to the real economy?

QE is:The central bank plans to buy 60 billion euros a month of assets - mostly sovereign bonds - until at least September next year. By then more than 1 trillion euros will have been created.With the promise that more could be bought, and for longer, if it has to. Greece, which remain under EU/IMF bailout programmes, will be eligible but subject to stricter conditions.

I think that many people are over-estimating the impact of this QE stuff. It will almost not do anything in reality.

After all, what is QE ? It is a kind of panic printing of a central bank, that cannot, any more, with its usual devices, arrive at printing enough money to sustain the inflation it is set to achieve. That inflation, on its turn, is necessary, to keep the blown-up financial sector that lives on it, alive and kicking.

It is a misunderstanding that in normal times, the central banks "set the limit of printed money". 97% of money is invented by private banks, when they write out a loan. Each time a private bank writes out a loan, it creates, out of nothing, the amount of money of the loan. That money is not taken anywhere else, say, from its saving customers. No, it is invented out of nothing.

However, private banks need to have some central bank money. First of all as a compulsory reserve, and second, in fact much more important, to balance accounts with other private banks. Because in as much as private banks invent money for their customers, between them, they settle their stuff in central bank money. So if your private bank X writes you a loan of 1 million, and hence invents 1 million out of nothing, and you carry that money to bank Y now with a bank order, then bank X has in fact to send central bank money to bank Y. In as much as what a bank looses to others, is compensated by what it gains from others, no central bank money is needed. But a certain reserve is necessary for difficult days.

A private bank can obtain as much central bank money as she wants. She just has to ask. Only, she has to pay an interest rate on it, set by the central bank. That's, in normal times, the ONLY limiting factor on money creation: the interest rate set by central banks. The central banks don't impose any limit on how much central bank money can be created: it is totally elastic with respect to demand from private banks. This is why a bank run has become impossible btw.

Each time you pay back a loan, you also DESTROY money.

The problem is that that interest rate has fallen essentially to zero, and private banks don't make enough new money. In fact, too many people pay back loans, and not enough people take up new loans. So there is not enough money creation by the private banks to cause inflation.

QE is the trick of last resort by the central bank: instead of having people take loans at private banks, the central bank now "monetizes" itself certain assets from non-bank institutions, which normally, only banks can do. The central bank now issues central bank money directly to non-bank institutes such as pension funds and the like, where these guys can sell assets for central bank money. The HOPE is that these guys will then spend that money on other assets, and as such, put that money in the economy just as loans do normally.
However, if these guys pay back loans with it, QE has in fact the funny effect of destroying money, and causing deflation.

In the end, the problem is that people don't, actually, need more money. There doesn't seem to be sufficient demand for money, even cheap money, so as to print enough of it to cause inflation. We come to a point where assets are preferred over money. QE tries to seduce asset possessors to give them a nice bonus to trade it for (inflating) money.

However, the problem is that if that money is essentially used to pay back other loans, QE will be invisible, or even cause deflation.
And as many (European) governments have a kind of "austerity" programme, it is very well possible that the money going into state bonds, bought with new QE money, will essentially serve to pay back other loans. And will eventually destroy money.

Look at Greece, for instance. If the central bank buys up, say, German bonds from a pension fund, who gets cash in its place, and if that pension fund buys Greek bonds with that money, and the Greek government pays back loans that are due with the money of those issued bonds, then nothing happened to the total amount of money, except that some loans at high interest rate were replaced by loans at lower interest rate, which will in fact be deflationary concerning the interest rate.