Help me understand QE2
Sorry for the long post, I have a lot of questions. Even if you only answer one question or clarify one point, it'd still help me tremendously.
This is basically what I know (skip this paragraph if you want to get to my actual questions): The whole idea of quantitative easing is to buy treasuries from the banks, thus giving the banks more money which allows them to give out more loans because of fractional reserve banking. The increased supply of loans lowers the cost of borrowing, aka the interest rate. This leads to more investment and spending, which increases GDP. But the increased supply of money causes inflation.
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How come bond yields have risen since QE2 was initiated then (Nov 3, 2010)? I thought they were supposed to go down?
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Why do critics of QE2 complain that it decreases the value of the dollar? Isn't that good for us since it increases exports and lowers imports, thus reducing our trade deficit?
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Why is monetizing the debt so frowned upon? Sure it leads to inflation, but don't the benefits of the resulting lower interest rates outweigh the negatives of inflation in our current economic climate?
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Did QE2 "work"? Unemployment dropped 1% and the stock market has gained a lot, but on the other hand there is higher inflation (although we avoided deflation) and commodities have surged. Whether the pros outweigh the cons, or how much of this is due to QE2, I don't know.
Right now if you put a gun to my head and asked me whether QE2 was the right thing to do, I would (unconfidently) say yes because at the time there was serious threat of deflation which would have been very bad considering the high unemployment rate and the negative effects of deflation on investment. At that point in time we needed the surge in investment.
I've basically been researching from scratch all of this within the past 3 days. I've taken macroeconomics so I know the basics (what the fed does, what an open market operation is), but I have never really taken the time to understand the current economy until now. Any insights, no matter how small, are greatly appreciated.
why have interest rates risen? the goal of QE2 was to get people away from ultra safe treasuries and into riskier options such as stocks. when this happens, and people sell treasuries, the price of treasuries decreases, causing the yield to rise. although theoretically QE2 was supposed to lower the interest rate by buying a shitload of treasuries, the flight to risk has caused the yield on treasuries to increase. critics ABROAD complain about the devaluation of the dollar. of course it is good for the US to increase exports and devalue the dollar, and most foreign countries are extremely against this(obviously). did QE2 work? maybe, maybe not. unemployment has dropped, but an enormous amount of that can be attributed to a decrease in the labor force, not people actually getting jobs.
This is probably a dumb question, but how do you know this?
Thanks for the input btw, I have a clearer idea now.
http://seekingalpha.com/article/257661-excess-reserves-at-commercial-ba… http://www.zerohedge.com/article/fed-excess-reserve-cumulative-deficien… (graph 3 of 4) http://blogs.wsj.com/economics/2010/07/22/bernanke-lowering-interest-ra…
Banks have sold their treasuries and then bought the treasuries back again at small spread, going full circle. That's why there hasn't been any inflation except commodity prices (due to devalued dollar). Banks buy from the Fed for less than they sold it too so they essentially got free money. They are not releasing the funds, but if they do look for inflation to sky rocket (multiplier effect). Free money help the banks stay liquid and avoid the huge write offs that are on their heels from the real estate loans
QE2, The Video: Bad Economics Made Easy (Originally Posted: 11/15/2010)
Hah, pretty good.
This is great! Silver Banana
lol +1
Sweet mother of lord, although a lot of things in their are biased and it doesn't present all the facts that shit was hilarious
ha...i like
Good stuff, but, while there is plenty to criticize about QE2 a lot of that is incorrect or misleading.
About The Goldman Sachs? lol
Such as? Would like to hear specifics as I'm not really sure how you can legitimately defend QE2 (or QE in general.)
The core CPI is used to measure inflation not the CPI but of course the video is too bias to state that. Bond buying is the most common method of injecting money into the economy, but the video is too bias to state that. Bernanke does have policy experience, but the video is too biased to state that. The money supply has been expanded and contracted in the past but the video is too bias to state that. It's a funny video but it's sad that is exactly what the average dumb American believes
Core CPI is a bogus number to begin with. Newsflash, people buy food and energy, and for many people those items are the bulk of their expenditures. Arbitrarily excluding these costs because they are so volatile, and then basing policy decisions off of the result doesn't make a whole lot of sense in my opinion. You're right that bond buying the most common method of injecting money into the economy, but thats not the point. Rates have been low for a while now, it wasn't a lack of loanable funds keeping people from borrowing, its lack of demand for borrowed funds. This country is deleveraging, as it should, but that doesn't help grow the country since everything here is based on borrowed money.
Haha great vid.
Lol, "he has a nice beard."
Ha, "the Ben BernANK."
hahaha! great post. I love the series of No's when asking about what prices are decreasing.
this was just on CNBC...wow haha
Well done!
not only was this on CNBC, this just appeared in my classroom. what has the world come to.
Blowing Bubbles with QE2 (Originally Posted: 10/25/2010)
Funny that Midas mentioned the 1997 Asian crisis in his post today, because I think we’ll be seeing it happen again quite soon.
I was discussing gold with Frieds (ask him about his Playboy story by the way) last week and, thinking on the consequences of a Fed clusterfuck, noticed something that has taken second fiddle to gold and the currency wars.
The growing Asian bubble. Yeah, breaking news indeed, but seriously, all the time that commodities and the currency wars has taken center stage; the fact that the Indonesian and Sri Lankan stock indices has outperformed GLD has slipped under the radar.
After taking a hit in 2008, the former Asian Tigers have bounced back with most of them hitting their all time highs. Housing, land, and equity values have risen and all this prosperity can be traced back to large inflows of outside capital, low dollar rates, and the flight to safety in the emerging markets.
All too similar to the 1997 crisis, and with QE2 fast approaching the World Bank, fearing that another massive rush of capital would severely imbalance the region, has issued a report that the East Asian nations should brace themselves and to take as much precautions as possible or risk facing a repeat.
Shit is starting to hit the fan.
Wonder who won’t get screwed with QE2?
So is QE2 a good thing or not? DJI would probably come down a bit if it doesn't happen. The last rally was based on QE2. How would it impact SL?
short damn treasuries !!!!!!!!!!!!
How would it affect Sri lanka Squirtz?
http://www.priu.gov.lk/
Takes a graph to shoot down a graph.
http://www.investorplace.com/wp-content/uploads/2010/10/markman12.jpg
[quote=bluechimp]Takes a graph to shoot down a graph.
http://www.investorplace.com/wp-content/uploads/2010/10/markman12.jpg[/…]
That graph doesn't really mean anything. If you start it after '97 or in 2000 Asia would be way ahead. Or in 2009 and the US would be in a bull market...
A lot of the money flowing into the so called Asian Tigers is coming from China, and their tightening has led to a flow of capital seeking higher returns outside. I don't know what would happen given QE2, but at least this time round the governments are better prepared with both the Asian Financial Crisis and Credit Crisis fresh in their memories, and are already acting to cool down the economies.
I could’ve been clearer on this sorry, one effect of QE2, which I think is likely to happen, is that even more short term outside capital would flood in hoping for higher returns (carry trades, etc) further raising the current all-time valuations of their markets.
Sounds good at first, but high inflation, currency, and commodity prices would be a death knell to actual exporting nations (which most of them are), especially those whose populations are in the lower middle income levels (SL, Thai, Indo, etc).
When the bulls start seeing uncertainty and pull out, the bubble could pop.
This could actually work here squirtz, but then again they'd most likely cut rates, then your fucked.
QE2 (Originally Posted: 11/04/2010)
I am not understanding the most recent move in the yield curve. During QE1, all yields plumetted. However, when the Fed announced the purchase of 600 billion dollars in treasuries - I thought that would bring down yields by effectively introducing a large buyer. Instead Yields went up. Is that because traders speculated that inflation long term would be a more powerful effect then buying today?
Fed will purchase 7-10 year bonds, whose yields are down. 30 year yields jumped in a knee jerk reaction since they weren't part the plan. All the yields are down today. Expect 10year yield around 2.10% by year end
QE2, the dollar and equity markets (Originally Posted: 11/05/2010)
Why are US equity markets following the dollar? Why is the weak dollar providing strength for equities and vice versa?
Also, why are emerging markets and some developed countries concerned about capital inflows (into equity mkts?) on the back of the US QE2? How does it directly affect them?
Lastly, in laymans terms, how are some countries effectively importing US monetary policies? Is it only countries with pegged exchange rates?
Thanks
On the emerging markets
As more money gets pumped into our US economy, it drives down the cost of borrowing, lending, and decreases the returns from "safe" investments i.e US treasuries. The 10yr is yielding 2.5%ish. This is paltry as compared to Australia,Indonesia, Brazil, Korea etc etc. With the increase in money flows, this will turn away capital inflows to the US, an divert them to other countries. This "hot money" therefore inflates asset values in these emerging economies. Thus, they have to raise benchmark interest rates to combat inflation(Australia earlier this week). This increase in the rate starts a vicious cycle of more capital inflows due to even higher yields. This in turn causes more inflation, and increases the value of the local currency relative to the US dollar. This in turn crumpled exports for these emerging economies, which rely on their undervalued currencies to support their exports, which is the basis of their economy. The only country that wins is the US, because we decrease our current account deficit by exporting more, our companies good become cheaper oversees, etc etc. That is why their is a "currency war" and restrictions on capital inflows
what cheese said, essentially the fed is waging war on the rest of the world and looking to create a global depression that will make our recessionary .0000000001% annual growth look like the internet boom of the 90's.
Appreciate the detailed response. But why does the weak dollar support our equity market as well? Seems when dollar is down, mkt is up and vice versa, in the US.
Or is this all the same, just related to investors looking for higher yielding, riskier assets?
The equity markets and the dollar have no direct correlation.
The basis for that argument just depends on what your school of thought is on asset prices..EMH, random walk, brownian motion, irrational exuberance, unfounded skepticism, luck, momentum or irrational investors
Who really knows what's supporting our equity markets. We have record outflows of $ from mutual funds, low trading volume, and a load of other factors thy truly defy this market were in. But of course, the market is forward looking. Anything you hear will just be an opinion, as is what in saying. Everything is subject to scrutiny, as I welcome any contrary dispositions.
Now the bond market is a whole different animal that is being distorted like crazy.
I would say it's not exactly the view of a weak dollar that is rallying the market. Investor's are buying into the idea of QE2 with more stimulus from the Fed which is propping the equity market up. As we see that today, the market is flat or down a little as of mid-day even though we got strong NFP numbers. That is because investors are now worried that the Fed might reconsider QE, and there were talks of QE3 couple of days ago which has all disappeared today, thus the lackluster market today.
Help with QE2 question: which maturities, and why? (Originally Posted: 11/17/2010)
Finance gurus,
Which treasuries did the fed buy up for qe1 & qe2? 10yr? 30yr?
And why did they choose those maturities?
Thanks
dunno about qe1 but qe2 was short term debts up to 10 year they didn't buy as much of the 20 year that is why a short tlt trade really paid off look at yield curve if you owned 20/30 yr you really got your ass handed to you i think they are going to have to buy more 10 years though bc it is linked to mortage rates no one buying houses + higher % rates = slower housing recover
Exactly what I was looking for. Thanks.
ok wait let me explain
In a statement after the F.O.M.C. announcement, the New York Federal Reserve, which handles the bond purchases, said the purchases will include bonds ranging for less than 2 year to 30 years, with “an average duration of between 5 and 6 years.”
i heard some where it was mostly going to be quick maturing bonds but they will BUY the 30/20 yr but not as much so the correct answer is all years but NOT AS MUCH long term debt
cnbc said ------ With the Fed buying almost everything in the middle of the yield curve, the Street is full of talk about a steepening yield curve, which would benefit banks. ***disclamer im not very good at fixed income ****
see mostly short imo 5/10 is short compared to 20/30 but obvsiously it isn't the 6mo /2/5 yr so maybe shouldn't say short term i guess author is right with middle term the reason is bc they want investors to go some where else maybe buy corporate debt to encourage businesses to spend ...for some reason they do not want to spend record cash etc etc. 30 yr is a god damn 4.2% 10 year 2.8% ~200 bases points more for long term , every 1 knows there will be inflation only a matter of time look at yield curve
it looks like the formula y = 3x + .2 ...
steep as ****
that is why i think fed going to buy mostly 10 yr
You might find the following paper helpful: http://www.ny.frb.org/research/staff_reports/sr441.pdf
It's a paper that looks at the effects of QE1. At the end of the paper they have a bunch of charts. They break down treasury purchases by maturity and MBS purchases by coupon.
Also, blastoise, I don't think they're planning on buying 30 year.
They chose to focus around the 4-10 year maturities because they were hoping to influence private lending with maturities around 4-10 years (think cars, students loans, etc...).
If you don't understand the basic arguments for QE, your paper (I'm assuming it's a paper) will be very hard to write. Read the first 10 or so pages of that paper I linked to and you should have a much better idea of what the Fed is trying to achieve with further LSAPs.
I read somewhere they will only be buying 6% on 10 year securities (and zero on 30). Rest would be mid-range part of the curve.
QE2 - Successful Trades (Originally Posted: 11/30/2010)
Doing some independent research on QE2, partly in attempts to understand it better for purposes of a class project. Looking for examples of trades originally based on the Fed's actions that ended up in the money (or conversely, trades that had strong economic reasoning behind them, but didn't work out). I know a lot of the predicted effects of the bond purchases were already priced into the market, so I'm wondering how much people were able to take advantage of the volatility closer to the actual implementation. For instance, I know going long on equities for the period Sep-Nov worked out,in part because QE2 was supposed to nail bond yields therefore spurring demand for equities, but I was wondering if anyone has anything more closely related to the day-to-day movements during the purchasing period.
Additionally, if anyone can explain to me how securities dealers selling treasuries to the Fed on behalf of their clients is supposed to ease credit markets (or if there is another intended effect of this aspect of the implementation of QE), I would be grateful.
Thanks for any discussion that results from this.
[I know some people have mentioned some trade ideas in other threads, thought it would be interesting to see them in one place. Also, the search function is not working for me right now.]
funny but biased video clip
Funny video, I laughed
Question on QE2 (Originally Posted: 12/09/2010)
I am not sure which forum this question belongs to -
Here is an article by Robert Barro on QE2.
http://www.economist.com/blogs/freeexchange/2010/11/qe2
My question is about the second bullet point (Expansionary open-market operations....)/
There is a statement - "However, this operation is equivalent to the Treasury shortening the maturity of its outstanding debt."
Can someone explain to me how do Fed's open market operations result in "Treasury shortening the maturity of its outstanding debt" ?
(I understand the open market ops and why they are done ... but this shortening the maturity of debt thing is new to me.)
.
QE2 wont RESULT in the treasury shortening the maturity of their debt, it is equivalent to the treasury shortening the maturity of their outstanding debt.
many of the QE2 critics feel as though the treasury should be the ones dealing in terms of long term rates rather than the fed trying to mess with them through QE2
Fed aims for 5-7 year notes, increasing the % weight on that range
my understanding is, you can think of excess reserves as the equivalent of treasuries, since banks get paid an interest rate of 0.25% on excess reserves they store with the fed. so having money parked in excess reserves is like having money parked in very short term treasuries, because the low interest rate is on par with short term treasuries. since QE is exchanging longer-term treasuries for excess reserves, you are basically swapping out the longer term treasury for a much shorter term treasury, thus shortening the maturity of the outstanding debt.
this link also might help: http://pragcap.com/mechanics-qe-transaction
junior2012,
Thank you. That answers my Q. The link is good too.
Fahmie25, NikhilN25 - Thank you.
V
QE2 -> Lower Unemployment rate? Explain Please (Originally Posted: 04/04/2011)
How does QE2 lower the unemployment rate? I though it would have done the opposite. Here's my logic: If the fed buys bonds -> there is more money in circulation -> money is worth less -> prices go up -> people buy less -> businesses make less -> higher unemployment. My logic is flawed somewhere since the unemployment rate dropped nearly a percent in the past 8 months.
The fed buying bonds pushes real rates (note: NOT nominal rates) down which makes financing business projects cheaper which reduces unemployment.
Your line of reasoning isn't "right" because in theory wages should go up with inflation as well so purchasing power remains the same. This idea can (and probably should) be argued.
Also the recent decrease in unemployment doesn't make your logic correct or incorrect. It's just one result; economics isn't physics or chemistry and you need a bit more than one result to validate or invalidate a theory.
This. When loans are cheaper in real terms businesses will seek funds to drive growth (growth=more employees).
Unemployment isnt the measure of people out of work, its the measure of people out of work who are actively seeking work. The government is cheap and they just use the number of people who get unemployment checks divided by the assumed size of the labor force. So with the larger numbers of people loosing benefits the number has to go down even if employment is not actually up in any real sesne.
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