Is QE Inflationary? | Quantitative Easing Explained

[@alexwollin5649]

This is the most comprehensive explanation of QE i've seen so far.

[@EPBResearch]

Thanks, Alex. I look forward to posting more videos like this on different topics commonly debated.

[@karm4703]

Wow, I've been reading about QE for 2 years now and this is the most comprehensive video I've seen so far! Thank you I'm a fan!

[@donchedelnirvana2261]

Exceptional clarity. Hardly anyone is able to explain the distinction between reserves and circulating money.

[@robkraft708]

I've watched several QE videos but this is the only one that explains the topic clearly and accurately. This provides a good explanation of the limits of QE and clearly points out that QE is not "literally printing money", and also points out that money is not just "handed out" to people to use for spending sprees, which would cause inflation.

[@peterfmodel]

This explains why QE’s main impact was on equities and asset prices between 2008 and 2020. The question which needs to be asked is why QE was introduced in the first place. I always thought it was about bank liquidity, but based on your explanation the banks never used that theoretical liquidity. Then the only conclusion I have is QE was introduced to boost asset and equity markets, basically the share market. Of course I suspect the increased liquidly that QE provided made the banks more confident of restarted inter-bank transfers, so it was purely a morale boosting exercise, which did work. But when the money began to move into the non-bank sector, the share markets boomed. This may have been an unforseen result of QE, I am uncertain of this. Thus current inflation may have been a result of the massive US deficit spending in 2021-22, coupled with the economic impact of the lockdowns and covid reactions. Fuel based inflation could have been initiated by the anti-oil policies implement in 2021, as well as the Russia invasion a year later. This is a Good video, it is making me sort out things a bit clearer in my mind, but I have to say if this video and my conclusions are correct the impact on share prices will be massive. Shares which provide a dividend which is competitive with the cash rate will do well, but other shares will collapse. High levels of inflation will hide this collapse. A share worth $100 12 months ago need to grow to $108 just to retain the same value. The only minor issue is the inflationary impact is occurring in Europe as well as the US and in that case the additional liquidity the ECB raised was used to boost government spending, which is inflationary. I will need to drill down into that a lot more. Europe's inflation could be an energy thing as it only started when energy prices went up. In the US inflation took off as soon as the Government started spending money it did not possess.

[@EpicICP]

You've stated that when a NonBank sells a Treasury for cash, that cash generally stays in the financial markets. But if I own a stock, and a NonBank sells treasuries and pushes that stock up; then I can sell my shares and spend my profits into the real economy. Isn't that inflationary?

[@Kas1122]

yes and how about money used in financial markets buying bonds for example that should be inflationary since more money for companies to spend etc.?

[@faterlandas]

Literal meaning of inflation is increase in currency amount. Increasing prices are just the after-effects of increased money supply (inflation).

[@ryancrowe4423]

Eric - well thought out and presented at the right level. Looking forward to seeing more content, thank you.

[@EPBResearch]

Thank you for the feedback. I'm super glad it was valuable! More to come.

[@poervids]

First, thank you for the video. Not sure I agree there are only 2 ways money gets in to the real economy. When financial markets grow, individual investors pull excess investment out of the market and use that in the real economy. Correct?

[@ricardoroopchan5]

Terrific explanation I knew what QE was but I didn't realise that banks are just given more reserve room to incentevize their capital market activities and not necessarily loans to the real economy.

[@ioannislazaridis4887]

My warmest regards to a great young of Armenian origins economist. Thank you very much for all your useful information you share with us via social media. Regards from Greece.

[@Michael-xm4ux]

Well explained. A lot of people are afraid of understanding the balance sheet of each party involved. But it’s very foundamental when it comes to understanding how everything works

[@gmanger7]

excellent overview and primer on the mechanics behind QE. For as long as folks have been bemoaning the feared inflationary impacts of QE, it's amazing that this deceptively simple explanation hasn't made its rounds. Well done in taking a complicated concept and making this easily digestible for us.

[@EPBResearch]

Thank you! Please share the content if you found it valuable.

[@yoshtakeuchi]

For a layperson, such as myself, this is a great explanation of QE and its effects. Thank you!

[@bishbad7131]

sir, you are one of, if not the best channel I've found creating relevant and informative videos about today's economy. thank you so much and god bless

[@manup5716]

Eric, very clear and understandable. This short video format is excellent to explain crucial economic mechanism.

[@drott150]

Great video. Three premises and a question: 1. The Fed wants to create inflation (as a stated goal) and has had trouble achieving it for many years. 2. Our cashless society is underway and soon will be mandatory (i.e. no one will be able to withdraw cash even if they wanted to). 3. The political will for Universal Basic Income (UBI) is growing every election cycle. Question: Are the Fed and other central banks desirous and anticipating a UBI system? They can funnel spendable money directly into ordinary people's accounts and finally do away with the inflation obstruction of people's reluctance to go in debt along with lending and lending standards. If they were able to instantly deploy directly spendable money this way to huge numbers of people, they could move the needle on inflation in a very big way, very quickly. I doubt we would have much of an economy or currency for long, but it sure would boost inflation, which is the holy grail they seek year after year.

[@lindamull189]

Thank you for your post. Your comment is the only one hitting on target the real question that needs to be asked. There is no difference between economics and politics. What is their goal? To keep up the transfer of negotiable paper waste; in that it is made up, presented as business but is, truth tell, the way of pillaging the people? The Democrats are being found to have signed confidentiality agreements=the sounds of silence. They were screeching all the 4 years Trump was our president. We were to be coming out of what I see economics as "Economic Hitmen". What is the real economy? Virtual grinning focused on non-physical assets but instead the prognosis of future profiting via those still left working? The transference of sweat to future profits. As the whole explanation of this vid is going on, I sit here totally disgusted at how subsidiaries and stimulus BS is being spread out once again like the mold and dross that it is. As for WallStreet, they made their bed when, en masse, they chose the option of shorting concerning GameStop and who are the ones running to their rescue who'd previously told the public via their media narratives Trump was all for big business interests? Too bad about solar wind energy. It works as well as economics and politics does!

[@antoninomatos9077]

This is exceptionally clear.

[@EPBResearch]

That is great to hear! Glad it was helpful.

[@n4870s]

QE lowers rates, low rates stimulate real estate purchases. Banks are willing to lend for asset purchases. Real estate boom is creating economic growth and inflation of just about any goods and services related to homes. Also QE creates wealth effect.

[@ponzianomanning3071]

You are a brilliant teacher. Thank you Eric!

[@tomsturgeon9411]

Eric great stuff and super helpful, well presented. Thank you

[@calebgoh59]

Hi, another intended goal of QE (if I'm not wrong) is to lower long-term interest rates via boosting demand for long-term treasuries and hence lowering their yields. What is your take on the effectiveness of QE in terms of suppressing say the 10Y treasury yield?

[@ferndaily5377]

The problem with QE is it incentivizes money to go to assets, which people want to make unrealistic returns on assets. Especially tax and rent related assets which have absolutely no productive value and in which asset owners have absolute power to push those prices fees etc onto people who cannot outright afford the productive asset and put it to good use.

[@samaltimore4124]

Excellent explanation...

[@danmatera1885]

Did he ever release the follow up video?

[@Tezi28]

Question...from this explanation, it shows two ways money to come back into the real economy. 1) from the Treasury and 2) from loans. Could you explain why the financial market can't add money to the real economy? It seems to me if the markets go up people could sell their rising stocks and go buy things in the real economy. If enough people do this then wouldn't that lead to inflation, however temporary, in the real economy?

[@jayworley1583]

It's my understanding that the Fed ended reserve requirements for banks in 3/2020 and hasn't re-implemented it. In return, the Fed has ramped up its reverse repo operations.

[@MengerMania]

You're getting close by recognizing The Fed does not create "money." You are, however, making a significant error by assuming the financial markets and the "real economy" exist separately. QE (by buying securities from banks) acted as a way to improve the capital structure of banks; in which case the money supply did not increase. When the Fed buys securities from non-banks, the money supply goes up, period. You have no way of knowing how that money gets spent. Generally, the best presentation about QE I have seen. Be careful to not make unsupported statements.

[@aleksandergorecki7534]

Asset directly impact economy. Its goin to companys and they use those money as investment. At the end its going to economy just not to normal people. And increasing reserve out of thin air ia giving u ability to increase number of loans whic of obviously is inflationary.

[@sz8558]

You and Alf are the balls!

[@ericjaenike3937]

Love to see you putting out more content. Keep it up!

[@HouseholdDog]

2022 here. The answer is "yes"

[@hlehman1987]

What about when the FED buys a treasury from the Federal government? Can you explain that? Is it cash that the Gov then spends into the economy?

[@yackawaytube]

However, if you keep QE for too long (2021 to 2022), banks ARE willing to lend money and consumers are willing to take loans as the economy improves, which injects money into the real economy and hence runaway inflation.

[@redcapitalist]

❤ excellent video

[@groovinkeyz]

At 7:20, why would the reserves (asset) of a bank increase when FED bought bonds from a non-bank customer? Are the reserves actually a buffer for all banks anyway regardless of where it comes from?

[@vajliakduke6231]

Reserve is liability of Fed. Deposit account is liability of commercial banks. Non-bank uses liability of bank as means of payment, non-bank cannot use reserve. So the Fed cannot directly buy it (bonds) from non-bank. In fact, if you pay attention, this really looks like commercial bank create loan to Fed so Fed can use newly created bank deposit to buy bond. Just like how they create loan for you to buy new car.

[@Michael_Peters]

When the Primary Dealer, PD, (you have "Bank" in your video) buys from a nonbank, is the PD creating a loan to purchase UST or is the PD using its own existing money to do so?

[@wildcsgotactics]

That's one point which is not very clear from the video. Would be interested in an answer as well!

[@wildcsgotactics]

That's one point which is not very clear from the video. Would be interested in an answer as well!

[@Michael_Peters]

@@wildcsgotactics The bank does indeed create a deposit to purchase the UST.

[@ferndaily5377]

It's actually worse than just creating cash because cash would be innocently spent on goods that would drive economic growth and banks would loan specifically to people with more money or businesses to dilute and own instead of dilute and grow.

[@a.nelprober4971]

The interesting question is how long does it take QE to take effect? The answer would appear to be 2 years

[@IE-cz9qq]

hi eric, agree that QE itself is not inflationary, BUUT QE combined with fiscal deficits is inflationary right? and thats how it actually was done, looking at the ficsal defiscit spendig of the las 12yrs

[@surakshachoudhary2880]

At 6:53 how do the bank’s deposits go from 180 to 190? That was never explained.

[@bryarhlavaty3072]

Just get rid of the reserve requirement. That's basically all QE does mechanically

[@MarketFund2k]

It's been two years. We have record inflation. Can you make an update about why this was wrong? Thanks

[@EPBResearch]

Good question. We can make an update!

[@vajliakduke6231]

7:10 wait a minute. What does this look like to you? When the commercial bank give you a loan so you can buy a house or a new car. When you use it to purchase the car, your asset goes up (a new car), your liability goes up (debt owe to bank). The commercial bank expand their balance sheet on both side. The seller (car producer) has an asset swap deal as from a car to bank deposit account. When the Fed buy bond from non-bank: Fed's asset goes up (bonds), Fed's liability goes up (reserve account). The commercial bank expand their balance sheet on both side. The seller (insurance company for example) has an asset swap deal as from bonds to bank deposit account. The different number 1 is that you can't force bank to lend you unless you're credible enough and have qualified collateral/income stream. So, in another word: Fed forces bank to lend them aka create loan so they can use it to buy bond from the public (non-bank). The different number 2 is when you get a loan to buy car, total purchasing power in the economy goes up. But when you get a loan to buy bond, especially Treasury securities, total purchasing power doesn't go up that much. That because with monetary system, Treasury securities are already money. Especially short-term Treasury bill. It is in fact better money vs bank's deposit account. Deepest and most liquid market in the world, widely used as collateral for repo transaction. So swap a car for newly created loan is money printing, but swap Treasury securities (again, already a form of money) - not really printing.

[@billybrant6818]

Some comments have already covered this a bit… but is this why the fed took housing prices out of the count for inflation back in the 70’s/80’s? Because if we still had those being counted then inflation would be about 5% annually (before 2020 and all the Covid money printing) instead of around 2%. So in reality the money from quant easing goes into the real economy eventually as peoples homes go up in value through speculation and they sell them for cash. I’m sort of simplifying it a bit, but it seemed like your assertion that quant easing doesn’t effect the Real Economy is a bit off if we take this into account…

[@Christian-fx9ur]

What is an example of a "nonbank?"

[@paulbrown6283]

EPB Research, how much QE went abroad? And to whom…

[@ni10]

Thanks a lot.

[@furd8883]

So the only way that QE can be inflationary for consumer prices is through loans from a bank?

[@mayare1919]

Great job

[@peachypietro9980]

You missed a bunch of things, Eric, and it's confusing. For one, how is money going into non-bank financial institutions - which act as a wealth funnel into the accounts of rich turds - not inflationary? Even if that money is being invested, it's still going somewhere that's not contributing to GDP, essentially held on to, and not truly being taxed (since capital gains tax is a joke in this political economy). For another, those reserve accounts at the FR fluctuate between the Treasury Tax & Loan accounts and private, high-level accounts depending on how balanced the Treasury's account is vis a vis Congressional appropriations. Just for clarification to anyone wondering about what exactly makes up those reserve accounts.

[@troytroyus913]

Great!

[@RossDavis777]

Eric, thank you for the great visual explanation - I wonder if you can elaborate on the effects of "bank" saleable securities being converted into non-saleable reserves(is this not a constraint on the banks in some ways?) and where the "bank" gets the cash to buy the "non-bank" securities that are then converted into more reserves? Also, from my limited knowledge there are no reserve reqs for loans now so effectively they are there for inter-bank liquidity and asset test reqs? George Gammon, Jeff Snider and Liz Alden covered some of these things in a recent video, but it would be great to get a clear visual like the one you just did and this side of things. Thanks again.

[@chrisdark999]

The bank creates the deposit to buy the “non-bank” securities. They don’t need to “get” the cash, banks can create money

[@RossDavis777]

​@@chrisdark999 Thanks Chris -- I believe that is what Jeff Snider was saying also(special accounting privileges, etc.). I was hoping to spur a next level down the rabbit hole video as there always seems to be more angles, levels and counteracting deflationary/inflationary forces to consider.

[@Michael_Peters]

​@@chrisdark999So 1) PD creates new deposit 2) swaps this new deposit with non-bank for its UST. 3) PD swaps UST with Fed for inert bank reserves. End result is Fed gets UST, PD has Fed's new reserves (excess reserves "trapped" in reserve system), and non-bank has real fungible cash?

[@chrisdark999]

@@Michael_Peters yes, although the PD doesn’t create the deposit, the bank that owns the PD (most are owned by banks) create the deposit

[@Michael_Peters]

Thx! I’ve been told repeatedly that the money used to purchase auctioned USTs or USTs from non-banks is PD’s *own existing* money. Although this may be true, it’s not necessarily *existing* money, it could be the bank’s newly created deposit?

[@frizzizzi]

almost exactly 2 years have passed since this video, and QE did turn out to be inflationary, lol

[@devvashi7520]

Wait, if someone from the real economy cashs out on asset prices going up in the financial market doesn't that mean the cash made it's way into the real economy??

[@13mozg]

When you say in minute 3 that non-banks don't channel the cash for TSY they sold to Banks / PD, but channel to financial markets, so no new money is flowing to real economy... but how about newly issued corporate bonds and stock offerings which are alternative funding means to banks loans, aren't they?

[@FlashThe]

Yes, it is. Investment funds can also buy newly issued stock or bond from corporation and then those businesses spend that new money on their trading partners or pay their employees. But the thing is they don't want to hold those stock or corporate bonds at the first place. With financial markets condition, their asset allocation is done, say 10% of their portfolio on Treasury. If they want more risk assets they'd already did it. Now the Fed buy T-bonds and push rate to 0. Those investment Funds has to use cash (with no return) and look for other asset (not T-bonds). This action inflated financial market. With the economy in bad shape, company don't need new money for expansion, they need new money in order to survive, recycle debt, pay interest, etc. This situation is making new bonds issue by corporation become more riskier.

[@isawaturtle]

Incorrect to start with. The Govt is a fiat currency govt. Meaning that it creates the dollars via spending. So it hasn’t needed funding since 1971 when Nixon ended the Breton Woods system where the dollar was backed by gold at $35 an ounce. So bonds aren’t sold to raise money for govt spending. Correct however is that QE isn’t inflationary. All QE is, is an asset swap. Understanding money creation. Money is a zero sum game. For a dollar to exist, there also must be a debt. A plus $1 is matched with a minus $1. So when the govt creates money it add the same number to both the debit and credit columns of the $USD spreadsheet - that’s all - Just numbers. So if the govt creates a dollar, it already has a debt. Buying bonds doesn’t increase debt, it just changes its form. QE is just a moving dollars from treasury’s accounts at the Fed to reserve accounts.and doesn’t enter the real economy, so the video is correct there.

[@Eeshank2]

QE's long term effects are inflationary, however.

[@isawaturtle]

@@Eeshank2 That’s incorrect. QE is swapping bonds for reserves. Reserves do not enter the economy.

[@Eeshank2]

@@isawaturtle Have you been asleep since the last year? You're spewing lies. PPP loans (which were due to QE) and stimulus literally affected the economy and inflation. What you've been told are conspiracy stories.

[@isawaturtle]

@@Eeshank2 you blithered on with conspiracy crap and then claimed that I’m listening to conspiracy theories ? Dude go learn how things works first before commenting.

[@danielhutchinson6604]

Taking Tax dollars and using it to support Investors business adventures seems about as blatantly crooked as any Oligarchy? But what is new?

[@augustincloutier508]

That is way too complicated for me

[@Pete_Partak]

It drives up the face value of long-term treasuries which in turn has an indirect relationship with long-term treasury yields. Corporations and investors look for riskier investments to satisfy their demand for long-term yields. This creates asset bubbles within the market that ultimately wouldn't have been there if there had been no intervention in the first place. You have glossed over this point too dismissively from my perspective. Speculation is the inflation of assets, and we've created a system where our economy is dependent on the current balance sheet of the Federal Reserve to not change. When Powell attempted to offload this balance sheet in 2019 the stock market plummeted by nearly 700 points and he reversed course. You contradicted yourself at the end. "Doesn't cause inflation but causes asset inflation." QE has contributed to our current housing bubble as demand for mortgage-based securities has been artificially increased. This leads to demand for housing being driven up. You can directly overlay the federal reserve balance sheet with housing prices.

[@joec7238]

Ok lets see you can spend hours and hours of reading/listening to get to what took you 10 mins to explain