The 85 billion a month QE in perspective

[Spungo]

Seriously, what are they buying for 40 billion a month?

Votes?

 

[sm625]

You do realize that buying bonds gets you your money back when the bonds mature right? Dams and aircraft carriers don't. Care to try again?

Smoke what? Are you seriously making the claim that a frickin piece of paper produces more than a $26 billion hydroelectric dam? A dam which produces well over $1 million per hour of electricity? Hahahhahaha take me away now the zombies have invaded.

The point the OP is making is completely valid. $85 billion a month, spent on almost anything real, could produce more return on investment than funding this out of control rogue government. You know how much money gets wasted just on chasing down pot users and imprisoning them? 85% of the BATF, DEA, etc is all about pot. It's like that with every sector the government interferes in. Over a trillions of dollars of our annual budget is utterly wasted on crap like the war on pot, and instead of cutting it out of the budget, the Fed just funds it all with a tax of $85 billion a month on the purchasing power of everyone. And even with all this wranglign over the budget none of this is getting addressed.

 

[Kntx]

Seriously, what are they buying for 40 billion a month?

...Treasuries and MBS

 

[Texashiker]

...Treasuries and MBS

That is a massive amount of treasuries and MBS.

Look at the opening post, then go look at the three gorges dam, or a super aircraft carrier.

Exactly what is that money buying every month?

The fed is buying mortgage backed securities. Ok, and? Are we looking at the fed buying mortgages that will go belly up in a couple of years? Are the mortgages left over from the 2008 housing collapse the banks can not get rid of? Is the fed buying homes to keep housing prices high? And how many mortgages will 85 billion a month buy?

 

[Kntx]

That is a massive amount of treasuries and MBS.

Look at the opening post, then go look at the three gorges dam, or a super aircraft carrier.

Exactly what is that money buying every month?

The fed is buying mortgage backed securities. Ok, and? Are we looking at the fed buying mortgages that will go belly up in a couple of years? Are the mortgages left over from the 2008 housing collapse the banks can not get rid of? Is the fed buying homes to keep housing prices high? And how many mortgages will 85 billion a month buy?

That's a lot of questions but the point you're trying to make is unclear. I do not know anything about the assets underlying the particular securities the Fed is purchasing. The distressed securities from the housing collapse were purchased by the government under the TARP not by the Fed.

The goal of QE is to keep rates low. Low rates support housing prices. More generally by buying up a lot of the low risk assets QE encourages market investment in riskier assets and ventures. Economic growth and employment should follow.

 

[Attic]

Good discussion. The Fed actions are THE most important thing going on in the USA today. Some think the Fed has saved the country, hard to argue with that on absolute terms. i.e.) without the fed intervention the monetary system likely would have collapsed.

Main question many folks have is, has the Fed just delayed the collapse.

What led to the global financial crisis has not really been averted, it's just that the fed is a kickstand on this thing, the kickstand being the previous trillions of printed money and the ongoing 85billion a month of printed money that is going to buy up debt assets that allow government and financial institutions to remain solvent. There is a reason the QE version have had to increase and that we are now at 85 billion a month that can't be tapered (lowered). It should be clear to anyone in the discussion that if interest rates on Treasuries were not manipulated by fed actions that our debt burden becomes much more immediately unsustainable. Most don't believe it, but the fed's profits from it's book are handed to the US Treasury. We have a private institution that is allowed to print money, and 98% of what it earns on that printed money by law has to be given to the US Treasury. Anyone see a moral hazard there? The treasury (gubment) may just be ok with a balooning fed balance sheet, even if if that ballooning balance sheet drastically hurts most citizens . i.e.) record low cost of living increases to those on fixed incomes, SS and other, at a time when food/energy/healthcare/housing prices are all going up at a high rates, items that are all subsidized through government spending. Government spending that is kept intact and at "sustainable" levels only through Fed intervention.

Yes, the money the Fed prints goes to allow government operations to continue. That money is spent via the government. The key is to understand that the printed money is needed to keep the status quo. A large part of the status quo is horribly inefficient government spending operations. The question is if the status quo is sustainable or not. With a ballooning fed balance sheet (printed money) we know the status quo ends at some point. We also know the fed can't stop QE. With the fed continuing to print money to pump into the economy the question is if that is the right solution and the other issues are who does it really benefit? My answer to the last question is that the benefit goes to to those who have always benefited from the status quo, and the folks who are hurt by it are the same ones always hurt by the status quo.

If you listen to Ben Bernanke it becomes clear he's quite aligned with propping up wall street and the government because they can't figure things out on their own. Problem is these institutions have now been trained on easy money, so they are further away from finding solutions that before the easy money was introduced.

 

[Texashiker]

The goal of QE is to keep rates low.

The fed already does that by setting the prime rate.

Main question many folks have is, has the Fed just delayed the collapse.

I think that is the point where we are at.

When we are spending enough money to build 3 three gorges dams every month, something is wrong.

 

[Attic]

The fed already does that by setting the prime rate.




I think that is the point where we are at.

When we are spending enough money to build 3 three gorges dams every month, something is wrong.

They also do this through POMO. Permanent open market operations. This is critical and it is what really effectievely lowers treasury rates. The fed is in there, through POMO, buying billions of treasuries every day. It would appear most Americans have no clue that the buying operation, POMO, is done entirely with money conjured up out of thin air. Bond prices and yields are like a seesaw. If the Fed is buying up, bidding up, treasuries, then yeilds drop. As we are discussing lower yields are the goal, but setting the prime rate is not enough oomph (control) these days.

To your second point. I agree. Though i'd note that the money can't go to building dams or aircraft carriers directly, further it's already going to prop up the economy. If congress wants an additional trillion dollar stimulus (i expect we get this) they could borrow that money, and the Fed could effectively print that money to hand over and then return interest to the government on the debt as well. Almost seems to good to be true, but that's what occurs. There is enough trepidation about monetizing the debt that we haven't simply gone full retard on spending printed money, but I expect that's the next step on this ride. But with existing printing, 85bil a month, there is not any leftover money for dams, and there is not really a choice, that money has to go to fund current government operations. The Fed printing is needed to keep the government solvent. It's congress issue for not building dams, but if they wanted to the fed could print more, that being said, the existing printing of 85 billion a month is already needed elsewhere to plug holes in the economy.

I'd highlight the point that if the Fed is going to print more to build dams, that this would implicity raise the cost of building the dam. Easy money from a buyer of debt who has infinite dollars will implicitly drive up the price of stuff. This already occurs across the economy as a result of the Fed actions. Folks get tripped up on inflation on absolute terms away from 0%, the key to understanding inflation related to fed actions is to figure out what inflation would be without Fed printing (obviously unknown) but we know without a shadow of a doubt that Fed printing is inflationary (even if in the hypothetical situation where measured inflation is negative, Fed printing is inflationary in effect).


Obama can thank QE in part for his 2nd term, that is something most folks can agree on. Whoever has to take on the tail end of this monster will get the unpleasant reaction of trying to unwind the thing. Though all that money was spent making the economy look better than it is, there is still a cost to be extracted from it, likely to land in 2016 onward.

 

[Texashiker]

To your second point. That money can't go to building dams or aircraft carriers directly, further it's already going to prop up the economy. There is not any leftover money, and there is not really a choice. The Fed printing is needed to keep the government solvent. It's congress issue for not building dams, but if they wanted to the fed could print more, that being said, the existing printing of 85 billion a month is already needed elsewhere to plug holes in the economy.

Its not about building dams, or aircraft carriers, this is about perspective.

When the news says the fed is buying $85 billion a month, most people have no idea how much money that is.

The term $85 billion did not click in my head until a couple of weeks ago. I was on wikipedia reading about aircraft carriers. When I saw the price tag of the Gerald Ford, I thought to myself, "holy crap, we are buying around 5 - 6 of these a month through QE?"

If even part of these mortgage backed securities goes belly up we are looking at a massive loss.

We bailed out wall street several times, now we are giving them free money every month?

The prime is set at zero, or around zero. So that is free money to the banks.

And the fed has been buying $85 billion for the year of bonds / securities?

What could possibly go wrong?

 

[OverVolt]

If one month of QE spending were put into infrastructure projects this recession would end.

Bingo

And we desperately need infrastructure for the new era. We need to renew our bridges, and I think rail is a good way to go as gas becomes shorter in supply. Freight by Mississippi, etc. The green energy projects just aren't going to work out and if they do it won't be anytime soon so we better build realistically, IMO.

 

[Attic]

Its not about building dams, or aircraft carriers, this is about perspective.

When the news says the fed is buying $85 billion a month, most people have no idea how much money that is.

The term $85 billion did not click in my head until a couple of weeks ago. I was on wikipedia reading about aircraft carriers. When I saw the price tag of the Gerald Ford, I thought to myself, "holy crap, we are buying around 5 - 6 of these a month through QE?"

If even part of these mortgage backed securities goes belly up we are looking at a massive loss.

We bailed out wall street several times, now we are giving them free money every month?

The prime is set at zero, or around zero. So that is free money to the banks.

And the fed has been buying $85 billion for the year of bonds / securities?

What could possibly go wrong?

Gotcha.

 

[Kntx]

The fed already does that by setting the prime rate.

Correct, that is one of the tools they have but it is not the right tool for all jobs.

 

[BoberFett]

The goal of QE is to keep rates low. Low rates support housing prices. More generally by buying up a lot of the low risk assets QE encourages market investment in riskier assets and ventures. Economic growth and employment should follow.

I certainly can't see any flaws in a plan that involves propping up home prices and encourages riskier investment...

 

[shady28]

Bingo

And we desperately need infrastructure for the new era. We need to renew our bridges, and I think rail is a good way to go as gas becomes shorter in supply. Freight by Mississippi, etc. The green energy projects just aren't going to work out and if they do it won't be anytime soon so we better build realistically, IMO.

The problem with this and all of the logic here is a misunderstanding of what the Fed is, and how money gets 'printed' in the new world.

The fed does not just print money and engage in building things. It expects a financial instrument in return - ie, debt.

Basically they purchase high risk debt (MBS) and US treasuries, these instruments represent debt from previously spent money. The idea is that these instruments are replaced by cash, so that cash can then be lent out again.

example : A bank holds $1 billion in MBS, mortgage securities. The bank has 10 billion in deposits, 9 billion in investments including the 1B in MBS, and 1 billion in cash. The 1B in cash is their 10% reserve amt, so they cannot make loans. The Fed buys their $1B MBS', now the bank has 2B in cash, and can make up to 1B in loans.


If you have a problem with this, then you have a problem with how the US gov't spends its money. After all, by the time the Fed gets the debt instruments the money that instrument represents has already been spent. They are just replacing the debt instrument with cash that can then be spent again, but the Fed isn't the one spending it.

The Fed also expects to be able to sell those instruments in the future.

 

[Kntx]

I certainly can't see any flaws in a plan that involves propping up home prices and encourages riskier investment...

Sarcasm sure. The USA is built on the entrepreneurial energy of risk takers who chose to start a business, create an invention, pursue an idea, etc. Don't bet against America.

 

[Texashiker]

The problem with this and all of the logic here is a misunderstanding of what the Fed is, and how money gets 'printed' in the new world.

The fed does not just print money and engage in building things. It expects a financial instrument in return - ie, debt.

Basically they purchase high risk debt (MBS) and US treasuries, these instruments represent debt from previously spent money. The idea is that these instruments are replaced by cash, so that cash can then be lent out again.

Thread is not about the federal reserve or its purpose.

Thread is about how much money the fed is dumping into the market every month. Which is a massive, massive beyond measure amount of money.

A single month of QE could supply 30% of chinas power needs in 9 years.

I do not know chinas power needs as compared to the united states.

There is nothing which we can use to scale the feds QE over the course of a year. Two months of QE could double our fleet of aircraft carriers that the military has spent decades building.

If two months of QE spending equals decades of navy spending, what would a year of QE equal?

 

[Attic]

The problem with this and all of the logic here is a misunderstanding of what the Fed is, and how money gets 'printed' in the new world.

The fed does not just print money and engage in building things. It expects a financial instrument in return - ie, debt.

Basically they purchase high risk debt (MBS) and US treasuries, these instruments represent debt from previously spent money. The idea is that these instruments are replaced by cash, so that cash can then be lent out again.

example : A bank holds $1 billion in MBS, mortgage securities. The bank has 10 billion in deposits, 9 billion in investments including the 1B in MBS, and 1 billion in cash. The 1B in cash is their 10% reserve amt, so they cannot make loans. The Fed buys their $1B MBS', now the bank has 2B in cash, and can make up to 1B in loans.


If you have a problem with this, then you have a problem with how the US gov't spends its money. After all, by the time the Fed gets the debt instruments the money that instrument represents has already been spent. They are just replacing the debt instrument with cash that can then be spent again, but the Fed isn't the one spending it.

The Fed also expects to be able to sell those instruments in the future.

Reality is somewhat different.

Most importantly the disconnect is between the idea you state above about QE and the reality of what's occurring. Loans are not going up.

Granted as you state it, the intention of the policy it sounds good, though it never had a chance of going through if people knew we'd be nearly 3 trillion rather than the initial trillion or so. The biggest fears of QE1 are now locked in at QE infinity, it can't be exited.


The money is going to equity markets, on leveraged terms, not to increasing loans. Low interest rates play a part in that. The Fed forgot to empower the little guy, they directly empowered only the big guys. See investment firms recently accounting for over half of all home sales and cash sales comprising 60% of home sales. That easy money was put to good use by the folks who were first to get it, everyone else not so much. Corporate profits at all time highs while the wealth inequality grows and grows and labor participation rate falls. Some think that where all that Fed money is dumped has a role to play in the outcomes we see in the economy. Unhealthy outcomes if your not at the top.


The Fed can't sell it's purchased debt instruments without locking in massive losses. They have already moved from the idea they would sell, to the idea they can/will hold to maturity. Intention vs reality.

Rationalizing why intentions aren't occurring through extolling more bad policy in reality (though good in intention or whatever is needed for the rich to keep feeding) causes suffering to people. Here we have QE2 3 infinity while poverty and stagnant wages push down quality of living for a majority of Americans. But equity markets are a pinch from all time highs. The argument that everybody owns some was touted by Romnney during debates, we know who owns "some" and who owns EVERYTHING else.

Sorry for rant. The focus on intention of policy rather than results is killing the country. It's a great lever used against the majority by the few in power.

 

[OverVolt]

The problem with this and all of the logic here is a misunderstanding of what the Fed is, and how money gets 'printed' in the new world.

The fed does not just print money and engage in building things. It expects a financial instrument in return - ie, debt.

Basically they purchase high risk debt (MBS) and US treasuries, these instruments represent debt from previously spent money. The idea is that these instruments are replaced by cash, so that cash can then be lent out again.

example : A bank holds $1 billion in MBS, mortgage securities. The bank has 10 billion in deposits, 9 billion in investments including the 1B in MBS, and 1 billion in cash. The 1B in cash is their 10% reserve amt, so they cannot make loans. The Fed buys their $1B MBS', now the bank has 2B in cash, and can make up to 1B in loans.


If you have a problem with this, then you have a problem with how the US gov't spends its money. After all, by the time the Fed gets the debt instruments the money that instrument represents has already been spent. They are just replacing the debt instrument with cash that can then be spent again, but the Fed isn't the one spending it.

The Fed also expects to be able to sell those instruments in the future.

The banks aren't lending out the money though. Which is why inflation is pretty tepid despite the printing. JPM has massive reserves. It does reflect the direction of the banking sector as a whole though.

http://www.bloomberg.com/news/2013-...nks-lending-least-of-deposits-in-5-years.html

You get the idea.

 

[Spungo]

Sarcasm sure. The USA is built on the entrepreneurial energy of risk takers who chose to start a business, create an invention, pursue an idea, etc. Don't bet against America.

I'm already betting against America.
NASDAQ-100 inverse ETF. I have a 10% buy order trailing stop on that one.

The banks aren't lending out the money though. Which is why inflation is pretty tepid despite the printing

That word. I do not think it means what you think it means.
What is the real inflation rate?

If we calculate the inflation rate the exact same way the government did prior to 1990, the inflation rate is averaging around 6.5%, which is basically double the official rate. However, if we measure inflation the same way the government did back prior to 1980, the inflation rate clocks in at a mind-numbing 11%.

Of course, Americans already know this. All you need to do is go to McDonalds

Since 2002 the Big Mac has risen in price at nearly three times the rate of (officially stated) inflation.

 

[AViking]

We all know that the federal reserve has been buying $85 billion every month is what it calls quantitative easing (QE).

Lets put that $85 billion in perspective.

Aircraft carriers

85 billion would buy 6.5 super aircraft carriers. The USS Gerald R. Ford (CVN-78) currently under construction cost $13.5 billion.

The United States has 10 aircraft carriers in active duty. Three more are in the planning phase or under construction.

With just 2 months of this quantitative easing we could double the number of aircraft carriers. Which would provide thousands of jobs for close to 3 decades.

Three gorges dam

Three gorges dam, the largest construction project in the world only cost $26 billion in US dollars, and took 9 years to complete.

With just one month of QE spending we could build 3 three gorges dams.

A documentary on netflix about the three gorges dam said 40,000 people were employed to build the dam.

One month of QE could employee 120,000 people for 9 years, have some spare change left over, and build 3 super dams at the same time.

We need more aircraft carriers? lol

Where do you propose we build some of these dams. You might want to look up the impact that the 3 gorges dam had.

13 cities, 140 towns, and more than 1,600 villages have been submerged under the world's largest reservoir. An official count of 1.3 million people were relocated.

Since partial completion in 2006, there have been reports of cracks, landslides, ecological deterioration, and accumulation of algae (water becoming murkish)

Although the dam was supposed to control flooding on the Yangtze, 2010 is on track to be one of the worst flood years ever

For us to build something like this it would cost much much more since we actually give a shit about our population. Hopefully.

What you fail to realize is that the cost of the flooding is in excess of $50B just for 2010 alone. Not to mention the thousands killed. Good luck pulling that off in the US.

By July 20, the Yangtze River at the Three Gorges Dam experienced its highest river discharge in 130 years, and the highest since the dam was built. The dam's walls released 40,000 m3/s of water, while 30,000 m3/s of the river flow was held back in behind the dam, after water levels in the Reservoir had risen four meters overnight.[66] The reservoir's water levels peaked at 158.86 meters on the morning of July 23, whereas the "alarm level" of the reservoir was at 145 m. All ferry service in the Reservoir was halted as total flow rate exceeded 45,000 m3/s, although the crest of the flooding passed the dam by July 24.[26] A second peak in the river arrived at the dam on July 28,[60] when the peak flow from the dam was a record 56,000 m3/s.[65]

By early August, a thick layer of garbage covering 50,000 square metres (540,000 sq ft) and 60 centimetres (2.0 ft) deep, including tree branches, plastic bottles and domestic waste, swept into the reservoir by floods since July threatened to clog the shipping locks at the dam's wall. Workers are removing 3,000 tons of garbage daily, and the company responsible for the dam has paid for 150,000 to 200,000 cubic meters of garbage to be removed annually.

 

[AViking]

Another way to look at $85B is that it's about $250 per USA citizen.

 

[Texashiker]

We need more aircraft carriers? lol

Where do you propose we build some of these dams. You might want to look up the impact that the 3 gorges dam had.

Thread is not about buying anything.

This is about putting the spending into perspective.

The QE that has been going on for the past year, we have nothing to compare it to.

Take a $5 bill for example. I know I can go to mcdonalds and get a $1.25 cheeseburger and a large coke with that $5.

What can you get with 12 payments of $85 billion? Half of that is going into mortgage backed securities? A news article I linked to in this thread said the fed is buying around $40 billion a month in mortgage backed securities. Over a year that is $480 billion.

That is like buying a whole state.

How many homes will $480 billion buy? And that is just for a year of QE.

With a average home price of 125,000 - and I hope my math is right here - that is 3,840,000 home mortgages the QE is buying every year.

 

[AViking]

I think there are better ways to put it. For example in CA they have built 23 new prisons in the last 30 years but only 1 research university. They spend about a billion more housing inmates than they do on higher education. That is the kind of perspective that really tells a story and not buying unnecessary things like aircraft carriers and terrible dams.

 

[Texashiker]

I think there are better ways to put it. For example in CA they have built 23 new prisons in the last 30 years but only 1 research university. They spend about a billion more housing inmates than they do on higher education.

How much did all of that cost?

 

[AViking]

California spends about $9B-$11B on prisons depending on the year. I think they got spending down a bit (I just googled it) so now they spend 9% of the state budget on prisons and 11% on universities.