>   
>   (email exchange)
>   
>   On Wed, Nov 10, 2010 at 10:29 PM, Mark wrote:
>   
>   One more thing I dont get. You say there isn’t more money
>   in the system, but there is more “cash”. For instance, If
>   I have $10 in t-bonds before QE and you have $10 in cash
>   and the government comes and buys my bond from me then we
>   both have $20 in cash combined.
>   

Right, because as an investor, yields are such where you now favor cash over t bonds.

>   
>   If we both want to buy a pair of socks the next day we will
>   bid up the price of those socks because now there is more
>   cash in the system, right? Before I couldn’t buy the socks
>   because I owned a bond. Is that wrong?
>   

Not wrong, but probably not realistic.

If you wanted socks you could have sold your t bonds the day before, just at a slightly higher yield/lower price.

QE is predominately about yields adjusting to levels where investors in aggregate make investment decisions decide to hold cash rather than longer term securities.

To your point, the question is whether lower rates in general cause what were investors to become consumers.

There isn’t much evidence of this happening anywhere, including Japan, so the next question is why not.

My guess is the interest income channel- lower rates mean less income for the economy in general because the govt sector is a net payer of interest. And QE directly reduces govt interest payments as the Fed earns the interest on the securities it buys, rather than the private sector.

So rates are lower, which might encourage consumption, and might encourage borrowing to consume, but income over all is lower as well.

And, of course, without real asset prices rising lenders are less inclined to lend as they don’t have rising collateral values to bail them out. A 70,000 mtg on a 100,000 condo or house can easily turn into a loss if the borrower defaults, for example, just from fees, commissions, closing costs, depreciation due to neglect.