Quantitative Easing for Dummies
Posted by WARREN MOSLER on December 17th, 2008
FACTBOX: What is quantitative easing?
Tue Dec 16, 2008 3:30pm EST
NEW YORK (Reuters) – The Federal Reserve on Tuesday cut its target for overnight interest rates to zero to 0.25 percent, bringing it closer to unconventional action to lift the economy out of a year-long recession.
“The message is they’re instituting quantitative easing on a fairly large scale,” said Doug Roberts, chief investment strategist at Channel Capital Research.com.
Under quantitative easing, central banks flood the banking system with masses of money to promote lending.
Central banks exchange non or low interest bearing assets- reserve balances- for longer term higher yielding securities.
Since lending is in no case ‘reserve constrained’, the ‘extra’ reserves do nothing for lending.
The purchase of the longer dated securities results in lower longer term rates than otherwise. The lower borrowing rates may or may not alter aggregate demand.
The lower rates for savers definitely lowers aggregate demand.
They usually do this when lowering official interest rates no longer is effective because they already are at or near zero.
True!
The central banks add cash by buying up large quantities of securities — government debt, mortgages, commercial loans, even stocks — from banks’ balance sheets,
Yes.
giving them plenty of new money to lend.
No, they already and always have infinite ‘money to lend’.
Available funds are not a constraint for the banking system.
The constraints are regulated asset quality and capital requirements that are expressed in the rates bank charge.
Not the total quantity of funds available.
It is a tool used by Japan earlier this decade to combat deflation and stimulate the economy.
Didn’t work then either. It was fiscal policy that kept them afloat, though not a large enough deficit to sustain output at full employment levels.
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December 5th, 2010 at 10:57 am
Mr Mosler, getting over the idea the government can spend without restraint will be a hard pill to swallow. One can easily envision inflation with higher taxes and the inefficiency the government is famous for. If uncle Sam has money, surely the health care industry will come with hat in hand. So will many welfare recipients, wanting more, of course.
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WARREN MOSLER Reply:
December 6th, 2010 at 7:39 am
could be, but facts are facts, and it’s a simple operational fact that fed govt spending is not revenue constrained.
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July 12th, 2011 at 10:30 am
Mr. Mosler:
Thanks for this — I am just working through MMT bit by bit?
I know you posted this in 2008, but three questions:
By “savers”, are you referring mainly to those on fixed incomes?
Would not savers’ lower consumption, in a context of lower interest rates, more than be offset by higher general household consumption?
Are you assuming that monetary policy (with interest rates at such low levels even in 2008) is now pretty much powerless to further stimulate demand?
Thanks for your helpful post, speeches and books!
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WARREN MOSLER Reply:
July 12th, 2011 at 7:50 pm
savers in that context means those earning interest- savers vs borrowers
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John O'Connell Reply:
September 19th, 2011 at 5:25 pm
@WARREN MOSLER,
“savers in that context means those earning interest- savers vs borrowers”
I think it means those who spend their interest income.
In stereotypes, those whose only means of support is earnings on their net financial assets, accumulated in previous periods. I.e., retired people.
Many working people are both savers and borrowers. Many savers do not spend their interest earnings, they let them compound and live off their wages. Their current consumption is not reduced by lower interest rates. In fact, given the prospect of diminished returns on savings, they may be more likely to spend their current earnings than to add them to savings, where their buying power will wither away over time.
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