Questions regarding quantitative easing money

Discussion in 'Currencies' started by primaticves, Feb 2, 2017.

  1. primaticves

    primaticves Member

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    Hey Guys,

    Question regarding quantitative easing. When they print all this money- where did it all go? Who ends up with all this money? From my understanding, it was to prevent a deflation with the contraction of money from the sub prime mess. If you can make it as simple as possible that would be great!
     
  2. Ipv6Ready

    Ipv6Ready Well-Known Member Silver Stacker

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    When QE money is "printed" the Federal reserve "lends" out the money.

    Basically the Feds buys in an "open auction" Government bonds and some safe Corporate Bonds

    This has two direct affects on the Bonds markets;

    1. Private Banks who normally buy the government bonds cant, as the Feds are buying the government bonds directly.
    Note: QE money is paid back at normal commercial interest rates to the Feds @ 2 or 3 percent per annum plus the principal at the end
    (just like the government would have paid back private banks who they borrowed from).

    2. Private Banks now can either deposit the money in Federal reserve (which they would have preferred to have bought government bonds) and earn 0.0025% (quarter of one percent) or lend out to other enterprises.
     
  3. Ipv6Ready

    Ipv6Ready Well-Known Member Silver Stacker

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    ^^ To simply think of it this way.

    Federal Reserve = Bank
    Treasury = Government

    Normally Federal Reserve does not buy Treasury Bonds .

    What are treasury bonds, think of it like when government needs to borrow for roads and hospitals, this money is normally borrowed every year from Big Banks like Citi and JP Morgan.

    But when the QE started, Government Paid back all the principle and didn't borrow from the big banks.

    So the money the big Banks received that they normally lent straight back to the government had to find a new home.
     
  4. primaticves

    primaticves Member

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    So they are lending the government money by buying bonds??


    What is the difference between the fed buying bonds from the government instead of the banks? Is it because the mess was created by the banks so the government is borrowing all this money to pay off the debt for the banks? Why can't private banks buy bonds from the government? Is it because of the subprime crisis that the government decided to borrow from someone else?

    I have a few questions regardign this but I will get back and have a think. :)

    Thanks
     
  5. Ipv6Ready

    Ipv6Ready Well-Known Member Silver Stacker

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    Yes


    You need to look at the mechanics of Government borrowing and how Treasury Bonds work, vast majority of Treasury Bonds are not new but rolled over ie renewed much like people who never pay off a credit card.

    Bonds can be for 1, 3, 5, 10, 20 and 30 years

    So if the US government borrowed $100 billion 5 years ago at 4% by selling to bonds to major banks, the government received the money up front, and than for the next 5 years payed the lender (buyer of the bonds) 4% interest only and at the end of the term (fifth year) returned the original 100 Billion dollars (the principle) and this have been going on for a long time, and when one treasury bond expired a new one was sold to replace it.

    Of course a Government can have a surplus budget on a given year and they might not renew a particular bond that expires but mostly they renew.

    During the GFC Major banks stopped lending to other Enterprise or Banks (stopped the flow of money) as they were scared they would not be able to get the money back if those business went out of business, so more and more major banks started to only buy (safe) T Bonds, driving the interest down and staving the enterprises of funds.

    Therefore to force the banks to lend money to enterprises and private businesses the Feds "printed the money" and bought the Bonds direct from the Treasury. By passing the normal Auction.

    What happens than is

    1. The Government department pays back the the holders of the Treasury Bonds (the principle) ie the $100 billion dollars + 4% and not renew the loan (rolling over)
    2. Normally the banks would have bought more bonds aka "rolled over" by buying the bonds again but this time they received a cheque for $100 Billion + 4% interest
    3. Suddenly the banks are awash with money, which causes a problem because they need to lend out the money to make enough interest to pay salaries and share holders.
    4. The bank can hold on to that money (which they can for a short time) or lend it to Feds but feds are only paying quarter of one percent, not enough to cover cost, so it forces the bank to lend the money to other business.
     
  6. Ipv6Ready

    Ipv6Ready Well-Known Member Silver Stacker

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    Also
    The Government will pay back the Feds, with interest. Some of it from Taxes like they always did, and other from making money on projects over time ie upgrading electricity grid and charging a levy.

    Furthermore some banks because they were so scared actually deposited collectively trillions of dollars to the fed at quarter of one percent, with this money, the fed than loaned it to other banks at 2 or 3% making money too or bought shares directly in companies. ie GM and Chrysler (US) RBS and Lloyds Bank (UK)

    With most of these the Feds are also making money. Because GM and RBS etc all are paying dividends, and the Fed bought the shares cheap and are slowing selling them at a big profit.
     
  7. tolly_67

    tolly_67 Well-Known Member

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    This is why the Q.E. was not inflationary. Most of the money ended up as excess reserve parked in the fed. ( as explained previously).
     
  8. primaticves

    primaticves Member

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    Thanks! I will read through it and make sense of this :)
     
  9. primaticves

    primaticves Member

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    Don't the banks own the Fed? Or is the Fed forcing other banks that they don't own to lend out money?


    This one I'm a bit confused. If they have all this money thats just been paid to them by the Government, can't they use that money to pay for the salaries and shareholders?

    Thanks!
     
  10. Ipv6Ready

    Ipv6Ready Well-Known Member Silver Stacker

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    Yes they can, for a short period. But this isn't Banks money, it belongs to the savers and super/pension funds who have deposited their savings.

    Your next question would be why not longer, because that would be eating into capitol they dont own. Contrary to what people think Banks have very expensive cost base but in relative terms operates at a tiny margin of 1.5 to 3.5% net.

    A bank that starts to use capitol will go out of business fast.

    Think of it this way

    You borrow $100,000 from savers at 3% interest (the depositors and savers)
    You lend this money out to other for 10% and make $10,000

    You need to pay taxes, 30% = $7000 left
    You need to pay interest 3% = $4000 left = Your income (for this exercise say you have no overheads)
    The original $100,000 Principle is left to "work again next year"

    This year due to QE you didn't lend any money out

    You dont pay tax = good, but

    You still have to pay $3,000 interest to savers
    You still need to pay for your income $4,000

    End of the year you only have $93,000

    2nd year of QE
    You dont pay tax = good, but

    You still have to pay $3,000 interest to savers
    You still need to pay for your income $4,000

    End of the 2nd year you only have $86,000
     
  11. primaticves

    primaticves Member

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    Ah ha! I see, I get it! :) Thanks for explaining!!
     
  12. BuggedOut

    BuggedOut Well-Known Member Silver Stacker

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    Sounds like a crock of sh*t to me.
     

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