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PAX, LUX ET VERITAS SINCE 1965
Post More on QE: The Hospital Analogy
Created by John Eipper on 01/08/14 6:29 AM

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More on QE: The Hospital Analogy (Bienvenido Macario, USA, 01/08/14 6:29 am)

Quantitative Easing, to my understanding, is an extraordinary measure taken by the Fed to stimulate an economy at stall speed through job creation, by providing cash and credit to business with their the near-zero Fed fund rates.

The best analogy is with a hospital emergency room. The ambulance with sirens and flashing lights carrying a patient is allowed to bypass traffic lights and laws to rush its precious cargo to the ER. In the ER, the patient is quickly put on a life support system and rushed to the OR. If the operation is successful, the patient is moved to the recuperating wing of the hospital and eventually sent home.

But, Heaven forbid, the patient may not survive the operation or doesn't make it to the OR at all, he or she is solemnly moved to the morgue. It is a fast, decisive process, where time is of the utmost essence.

However because of DC politics, the QE program as with any other federal program, it is now bordering on immortality. Not the patient; the procedure. QE is here to stay! Do WAISers have any idea how expensive it is?

Allow me give you an idea. In October 8, 2008 the national debt was at $10.2 trillion, equal to Jon Kofas's statistics (5 October) on losses in the stock market world-wide of about 20% ($10.2 trillion).

http://waisworld.org/go.jsp?id=02a&objectType=post&o=26467&objectTypeId=20717&topicId=1

Now the US National Debt is at $17 trillion. Americans born today are born into a financial bondage they never agreed to or were even consulted about. They are no longer born free.

Yet during Reagan's time interest rates went up as high as 20% (June 1981). During Eisenhower's time tax rates were as high as 90%!

What's the big difference between the Eisenhower and Reagan eras? Globalization.

I agree with Greenspan's recommendation exactly seven months ago--Taper now, even if economy not ready:

http://finance.yahoo.com/news/greenspan-taper-now-even-economy-113550289.html

JE comments:  I'm not that old, but it doesn't seem so long ago (1981) that the US debt hit $1 trillion.  At the time there were predictions of fiscal Armageddon.  Now a lone trillion is chump change.  The following link provides the numbers in all their glory.  They should have used red font:

http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm


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  • Quantitative Easing in Plain English (Randy Black, USA 01/09/14 4:17 AM)

    Among WAIS, a very few among us tend to use high-level, educational jargon to describe Quantitative Easing or other theoretical concepts per the economy. As someone who makes or made a living, by putting such gobbledegook into the language of the great, unwashed masses for readers without a PhD, I struggle for a valid interpretation.



    Big surprise, right?



    "He's only on a journalist with a BA," you might be thinking. I think of myself occasionally as the Howard Wolowitz of WAIS. Only, I'm a bit taller and a lot younger than Howard [and better looking, too!--JE].



    Look it up at http://en.wikipedia.org/wiki/Howard_Wolowitz .



    As I searched for a simple answer to what the heck quantitative easing means, I ran across a plain English explanation of what Tor, Bienvenido, Jordi and others mean when they theorize about QE.



    From Pragmatic Capitalism (pragcap.com) and the NY Times:


    Many myths are still floating around regarding the actual operational aspects and impacts of quantitative easing, also known as permanent open market operations. This primer will offer a series of articles that give the reader better insights as to the actual impacts of the program and how it works. Pragcap also offers a couple of real-world examples as you will read below.


    QE is Just Open Market Operations.


    "Quantitative Easing" (QE) is a form of open market operations that helps the Federal Reserve achieve its policy targets. For odd reasons, this program has garnered a specific mythical prominence in the media and in the investment universe. The truth, however, is that QE involves open market operations no different from the way the Federal Reserve always achieves its policy targets. When you hear that the Federal Reserve is changing their target interest rate, this will generally involve open market operations that alter reserves in the banking system in order to achieve this rate. QE involves permanent open market operations, which deviate from standard policy in that they tend to purchase varying assets from the private sector. The NY Fed elaborates:


    Understanding a QE Transaction.


    To better understand this it's easiest to condense the accounting into the two basic ways in which QE transactions occur. The first scenario is when a bank sells t-bonds to the Fed. The second scenario is when a non-bank sells the t-bond and the bank merely acts as an intermediary. In both cases the private sector has the same net financial assets before and after QE occurs. So it's best to think of QE as an asset swap that alters the composition of the private sector's financial assets, but does not add net financial assets.


    Scenario 1 - Bank sells $100 in t-bonds to Fed

    Federal Reserve balance sheet:

    Change in Assets = +$100

    Change in Liabilities = +$100

    Change in Net Worth = $0


    Bank's balance sheet:

    Change in Assets = $0 (t-bond is swapped for reserves)

    Change in Liabilities = $0

    Change in Net Worth = $0


    Scenario 2 - Non-bank sells $100 in t-bonds to Fed where bank acts as intermediary

    Federal Reserve balance sheet:

    Change in Assets = +$100

    Change in Liabilities = +$100

    Change in Net Worth = $0


    Banks balance sheet:

    Change in Assets = +$100 (reserve assets increase)

    Change in Liabilities = +$100 (deposit liabilities increase)

    Change in Net Worth = $0


    Non-bank public balance sheet:

    Change in Assets = $0 (non-bank sells t-bond and obtains deposit)

    Change in Liabilities = $0

    Change in Net Worth = $0


    JE comments: In a nutshell, it's robbing Peter to pay Paul--I think.  But to return to the commonly held understanding of QE, doesn't the Fed have to print--well, create--the money to cash out the t-bond?



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