QE looks suspicious
Some countries on the Bias planet are doing QE, which is quantitative easing.
Ah-ha.
QE looks quite suspicious. Is it OK?
Being just asked whether it is OK, I can't answer such a vague question. What's suspicious about it?
It seems to just be scattering money. Isn't someone getting some undue profits?
It isn't just scattering money; the central bank buys assets in financial markets. There is a big difference there.
What's the difference?
What Happens in QE?
To know the difference, we have to know what happens in QE.
Yes, I want to know it. Let me know it immediately!
. . . Well, for example, suppose an insurance company has 100 dollars worth of government bonds.
OK.
The central bank buys the government bonds from the insurance company. As the insurance company doesn't have any account in the central bank (note that commercial banks have accounts in the central bank, but insurance companies don't), the insurance company receives the payment of the government bonds as a deposit against a commercial bank, which instead receives 100 dollars as a deposit against the central bank, which is a central bank reserve.
For the insurance company, -100 (the government bonds) +100 (the claim against the commercial bank as the deposit) = 0 dollars.
For the commercial bank, -100 (the debt to the insurance company as the deposit) + 100 (the claim against the central bank as the reserve) = 0 dollars.
For the central bank, +100 (the government bonds) -100 (the debt against the commercial bank as the reserve) = 0 dollars.
Oh, so, QE doesn't change the net worth for anybody. However, is that meaningful? I mean, the insurance company got the commercial bank deposit instead of the government bonds, and the commercial bank has got to hold the debt to the insurance company as the deposit and the claim against the central bank as the reserve. So what? Is that good for the economy?
So, it seems.
Well, so the types of assets in which somebody holds his or her assets are important. Do they mean that somebody who holds government bonds won't buy anything, but somebody who holds money would buy something? Is that the aim?
I don't know the detailed mechanism in which QE is supposed to improve the economy, but probably, such an effect is an element of the mechanism.
So, Is Nobody Getting Undue Profits in QE?
So, is nobody getting undue profits in QE?
Whether undue or not, there are people who are getting profits. As the central bank buys assets in large amounts, the prices of those assets would get higher. So there are people who make profits from trading those assets.
Ah, that would be so. But isn't somebody suffering wanton losses?
Whether wanton or not, there are people who could suffer losses. If inflation is realized as intended in QE, people who hold assets as money will suffer losses. And workers or pensioners who don't get matching raises in their incomes will suffer losses too.
I thought so.
Is QE Sustainable?
Another suspicion on QE is that it isn't sustainable.
If you ask whether the central bank can continue QE for ever, it might be able to do so as far as the government continues to issue large amounts of new bonds: the central bank continues to buy new government bonds that have been bought by, for example, insurance companies.
So, all the government bonds or most of them would be held by the central bank.
They would be so, as a possibility, but of course QE isn't meant to be continued for a long time.
So, the central bank has to eventually sell assets it has bought. Aren't there troubles when it does that?
When the central bank sells those assets, isn't it natural or even inevitable that the prices of those assets fall? I mean, selling assets would cause the prices of those assets to fall, wouldn't it?
First, the central bank can hold those government bonds until the maturities.
I heard that the Japanese central bank is buying government bonds at prices over the face values.
In that case, the central bank can't avoid losses by holding government bonds until the maturities.
And even if it doesn't suffer losses in nominal values, it will suffer losses in real values because inflation is high because of QE.
That would be so.
And as for assets that aren't bonds, it can't take that strategy.
That will be so. However, on the other hand, it may be able to hold those assets long enough for the prices of those assets to get higher.
Hmm, . . . as the central bank bought assets at prices that are artificially raised by QE, it's doubtful that the central bank can sell those assets at the same or higher prices. I don't say it never can, but it seems a wishful thinking if it believes it can.
As for stocks, if we assume a market that keeps growing as a whole, it may escape losses; as for bonds, I don't know how it can avoid some losses.
Possibly, it can suffer large amount of losses!
It's a possibility.
If the central bank suffers a large amount of losses, what would happen then?
The central bank might not care if it suffers a large amount of losses, or it even might intend to suffer losses.
Huh?
