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QE DEBUNKED
I was having some trouble to fully understand QE and how it is impacting us, so I decided to investigate further
THREAD
I was having some trouble to fully understand QE and how it is impacting us, so I decided to investigate further
THREAD
1/
What is QE?
CBs buys long-term securities from its member banks
In return, it issues credit to the banks' reserves
To do that, they create funds "out of thin air"
What is QE?
CBs buys long-term securities from its member banksIn return, it issues credit to the banks' reservesTo do that, they create funds "out of thin air"
2/
It's a rather complicated process, but banks cannot use that money that they owe to the FED
I suggest that you listen to this podcast from
@MetreSteven
@SantiagoAuFund
To fully understand the concept
It's a rather complicated process, but banks cannot use that money that they owe to the FED
I suggest that you listen to this podcast from
@MetreSteven
@SantiagoAuFund
To fully understand the concept
3/
How does it work?
When the Fed adds credit to a bank's balance sheet, it gives it more than it needs to meet the reserve requirement
The reserve is the amount the Fed requires banks to have on hand each night when they close their books
How does it work?
When the Fed adds credit to a bank's balance sheet, it gives it more than it needs to meet the reserve requirementThe reserve is the amount the Fed requires banks to have on hand each night when they close their books
4/
The official story
Banks are supposed to lend the extra cash
QE Keeps Bond Yields Low : by increasing demand, the FED keeps Treasury yields low
Attracts Foreign Investment and 
Exports by devaluing currency
Remove toxic loans from the banks B/S
The official story
Banks are supposed to lend the extra cashQE Keeps Bond Yields Low : by increasing demand, the FED keeps Treasury yields lowAttracts Foreign Investment and Exports by devaluing currencyRemove toxic loans from the banks B/S
5/
Are banks lending the extra -reserve - cash?
When looking at previous QEs & the long term, it's not easy to see if there's any impact at all
I assume the big bump is PEPP/Emergency lending
Are banks lending the extra -reserve - cash?
When looking at previous QEs & the long term, it's not easy to see if there's any impact at allI assume the big bump is PEPP/Emergency lending
6/
When looking at tightening standards, it seems to follow a totally normal cycle pattern
Banks likely don't want to take more risk on credits if rates are low
When looking at tightening standards, it seems to follow a totally normal cycle pattern
Banks likely don't want to take more risk on credits if rates are low
7/
OK if banks are not lending, what are they doing with it?
Instead of keeping the money as reserve, they can spend on dividends & buybacks
They can also invest in risky assets
It's like a favor of the FED in exchange of the pain of keeping rates low
OK if banks are not lending, what are they doing with it? Instead of keeping the money as reserve, they can spend on dividends & buybacksThey can also invest in risky assetsIt's like a favor of the FED in exchange of the pain of keeping rates low
8/
If banks are not lending, does it spur economic growth & inflation?
There isn't proof of this but it looks like it doesn't really have any impact on the GDP
It is boosting housing & equities (skewing the chart so removed)
It is likely increasing wealth inequality
If banks are not lending, does it spur economic growth & inflation?There isn't proof of this but it looks like it doesn't really have any impact on the GDPIt is boosting housing & equities (skewing the chart so removed)It is likely increasing wealth inequality
9/
Does that improve the trade deficit by boosting exports?
Data says no, at least it is unrelated
After the 1st QE the Dollar strengthened ... but remember they're all doing QE
Does that improve the trade deficit by boosting exports?Data says no, at least it is unrelatedAfter the 1st QE the Dollar strengthened ... but remember they're all doing QE
10/
Summarized
More Lending 
QE Keeps Bond Yields Low 
Exports by devaluing currency
Remove toxic loans from the banks B/S
Summarized
More Lending QE Keeps Bond Yields Low Exports by devaluing currency Remove toxic loans from the banks B/S
11/
QE master: Japan
After 30 years of QE, 1/3 of their budget is servicing the debt
They've entered the "death loop" where their economy is declining because of inefficient capital allocation due to QE but at the same time they can't stop QE or they would bust
QE master: Japan
After 30 years of QE, 1/3 of their budget is servicing the debt
They've entered the "death loop" where their economy is declining because of inefficient capital allocation due to QE but at the same time they can't stop QE or they would bust
12/
Let's come back a little further down the road.
Why did the West start QEs in the first place?
"The Fed resorted to QE because its other expansionary monetary policy tools had reached their limits. The fed funds rate and the discount rate were zero."
Let's come back a little further down the road.
Why did the West start QEs in the first place?
"The Fed resorted to QE because its other expansionary monetary policy tools had reached their limits. The fed funds rate and the discount rate were zero."
13/
Well. Yes.
We're at the cross road. Our debt model, inherited from a millennial ago comes to the point were you get to get paid to receive money
CBs don't have any solution on this yet
Well. Yes.
We're at the cross road. Our debt model, inherited from a millennial ago comes to the point were you get to get paid to receive money
CBs don't have any solution on this yet
14/
I came to wonder what is the end game
Obvious states have an issue to finance themselves & as they didn't find any solution, CBs have engineered mechanisms which replace the market economy
This isn't sustainable as there are no incentive for governments to be efficient
I came to wonder what is the end game
Obvious states have an issue to finance themselves & as they didn't find any solution, CBs have engineered mechanisms which replace the market economy
This isn't sustainable as there are no incentive for governments to be efficient
15/
I hope this was helpful.
Don't hesitate to comment & retweet.
Cheers
Link to the top: https://twitter.com/TheMarketDog/status/1359376439833812994?s=20
I hope this was helpful.
Don't hesitate to comment & retweet.
Cheers
Link to the top: https://twitter.com/TheMarketDog/status/1359376439833812994?s=20
