It's usually done via the central bank, but yes, of course they can.

WTH! This doesn't have anything to with University of Kentucky of basketball.

That's rather...disturbing, Sassenach,I gotta say, about how a government or its central bank can "create" money like that.

JimHackerMP wrote::laugh:


That's rather...disturbing, Sassenach,I gotta say, about how a government or its central bank can "create" money like that.

Governments are what have throughout history 'created' money. From back before the days of Croesus. Even when it was just pressing stamps into lumps of gold, silver, or alloys to make coins.

If anything the issue is that it's not just governments that create money nowadays, but markets. Banks 'create' money when they leverage assets to lend out. And when markets in stock, or futures, or CDS instruments assign values to things that don't exist yet, that is also creating money.

However, when governments do such things, they do have to be careful about it, because currency is about trust. The means currently is Quantatitive Easing, which started once base rates were lowered to the minimum and still the credit flows were bunged up: http://en.wikipedia.org/wiki/Quantitati ... After_2007

Basically, when the government issues bonds, as well as normal private investors buying them, the central bank 'creates' money to buy a load. The idea is that when the bonds mature the money will be 'uncreated' again, if it hasn't already. but so far we aren't going to see that happen for a while - interest rates will go up to a more 'normal' level first I expect.

Quantitative easing (QE) is a type of monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective.[1][2][3] A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base.[4][5] This differs from the more usual policy of buying or selling short-term government bonds in order to keep interbank interest rates at a specified target value.[6][7][8][9]

WWOOOOOOOOOSHHHHHHHHHHH!

Well I figured increasing the money supply could be done by fiddling with buying and selling government securities; by issuing a bond, the government borrows money which means it pays it back with interest and....something like that. That's the only way I had figured it was possible. I cannot figure out why I think that it just seemed....logical. But as for the quantitative easing....wow. I can understand a lot of things but that went over my head (if it involves mathematics, it will go over my head by about 10 feet).

I did get up to page 80 on an unabridged copy of The Wealth of Nations, lol. Then again, Adam Smith keeps it pretty simple. (Though the late 18th century English is a a hinderance keeping it from being "light reading" but it's more readable at least than The Federalist Papers.)

It's really very simple, they just prefer to pretend that it's complicated because they don't want the proles to lose confidence in the soundness of their money.

The central bank presses a button a computer somewhere which magics several billion dollars (Pounds/Euros/Yen) into existence which they then use to purchase existing government bonds from various bondholders. In practice they usually buy directly from banks or pension funds. Since banks and pension funds typically have strict rules about the amount of capital they have to hold and the type of investments this has to be held in, it usually means that they then have to go out and buy new bonds issued by the government to replace the ones they sold (which in any case represents a more or less completely safe bet since they can always sell them again at need when the next round of QE happens). The effect of all this is to drive down the cost of government borrowing. The way it works in the bond market is that what they call the 'yield' is inversely proportional to the price. The yield is essentially the rate of interest demanded by lenders. Bonds which are perceived as less of a default risk have a higher demand, meaning a higher price and a lower yield. When QE is happening the demand to hold government bonds shoots up and so they're able to lend at very low rates of interest.

QE is sold to the public as a way of stimulating the economy but really it's just a way of easing the pressure of interest repayments on government debt. The problem of course is that all the money used for it is completely new money that magically appears in the overall money supply, which in theory ought to be inflationary. It hasn't been yet, but other factors have been in play.

There are two reasons that it's not inflationary:

1) It is not pumping money into circulation, it's really helping banks to reduce the extent to which they are over-leveraged and free up credit. But they are not making much more credit available than they were before 2008, because they were getting stupid about it then.

2) Because the credit crunch and recession were creating a lot of deflationary pressure that has not really gone away yet.

I'll take your word for all of that, lol. However, it sounds like you've confused yield with coupon rate. Isn't the yield the coupon rate divided by the price? And that's why there's that inverse relationship between price and yield? Which means yield isn't the same as the coupon rate unless you bought the bond at precisely face value (100). Right?

A great while ago I was flipping through a book on mutual funds. From what the authors were stating on bond funds, I got the impression that yield is what you earned on your amount of investment in the bond, what you actually paid, in other words. (Like, if the bond was selling at "50"--which really means $500 for a bond with a FV of $1000--and the coupon is 5%, which is $50, you're still getting that 5% interest of the face value, fifty bucks; but because you paid $500 for the bond instead of its stated value of $1000, your "yield" is 10%, $50 divided by $500 is 10%.)

Or do I have that totally wrong?

You're right, but for the purposes of this discussion it amounts to the same thing. QE turns government bonds into a very safe investment which increases the price and drives down the interest rate.

By "driving down the interest rate" you mean the *yield* of the new bonds flooding the market drops because the price increased? Not the *coupon* of these new bonds? I still do not entirely get QE. But if I understand what little I manage to understand of it, then QE involves the government buying up a shitload of its own debt at a discount, in order to pay some of it off and thus pump more "cash" into the money supply?

By the way remind me: are either of you economists or finance majors?

Well I am not - Maths & Computer Science.

Central Banks are not quite "the government", they tend to be private monopolies with remits set by government. But they are a part of the establishment.

Isn't the U.S. Federal Reserve Bank (or Federal Reserve System AKA "The Fed") not really "private"/govt regulated; but the president actually appoints, with the advice and consent of the Senate, not only the Chairman of the Board of Governors of the Federal Reserve, but some (or all?) of the governors on said Board? Or maybe he just appoints the Chair, and the "governors" or the board, or members of the board of governors or whatever, are elected by the.....shit I dunno. But I would think that the Fed is more heavily government-controlled than the ECB or the Bank of England (which used to be entirely private, but came under the sway of H.M. Government more and more over the years) or the Royal Bank of Scotland/RBS which is more or less (I understand) totally private but has the ability to print pounds sterling but for Scotland (a concept I find amusing, that the Scots have their "own money" as far as paper at least).

HK used to have several private banks allowed to print the money and more or less make monetary policy; the Standard Chartered Bank and HSBC Bank (which used to actually stand for Hong Kong and Shanghai Banking Corporation, no less).

I would shudder to think if Citibank (or Shittibank as I call it) or B of A had the right to print American dollars, or contribute to American monetary policy.

Inflation in the UK just hit ZERO so if QE is inflationary it is keeping us from deflation. Deflation may sound good, if prices are going down, but it can have serious effects if people think it will last any time.

Of course, the main reasons for our very low inflatio are the slump in oil prices and a reversion to the mean after a couple of years of increasing food prices.

Good news though is that the cost of brewing beer is going down as the price of malted barley is reducing. And that's one purchase I won't belay due to deflation :-)

JimHackerMP wrote:I would shudder to think if Citibank (or Shittibank as I call it) or B of A had the right to print American dollars, or contribute to American monetary policy.

Every single national bank in the US, as well as a fair number of state level banks, is a member of the Federal Reserve System, and they contribute the funding for it.

That does not give them direct influence over monetary policy, but it's not to be ignored.

Of course. And as Thomas Jefferson said: "Banking establishments are more dangerous than standing armies."

speaking of which I hear that, due to economic crises possibly due to sanctions, price controls had to be put on vodka in the Russian Federation, lol.

Zero inflation I understand, or negative inflation (deflation if I'm not mistaken) is bad. It's good for a government's debt to shrink a bit with a very modest amount of inflation. But after Congress and the President spending money like xmas is 24/7/365, that makes the dollars in our massive national debt "bigger", correct?

You know what US Savings Bonds are? (well, pretty sure you do....) I'm sure they have similar products you can buy from HMG at banks in the UK....I assume. Thankfully they came out with a series I savings bond, wherein it pays a composite rate for 30 years, or as long as you hold it, 1/2 determined by the Sec. Treas. (or his underlings, probably), and the other half = the consumer price index. That portion of the composite rate is of course zero now, but the other half isn't bad. It's a much better deal than the older series "EE" bonds which pay a fixed rate of interest. But they actually stay ahead of inflation, being partially linked to the CPI. They're like the larger-denominated "TIPS" which are not redeemable securities; similar to the I series savings bonds, but marketable ones instead, like the rest of the normal, higher-end treasury securities issued by the US. They're also CPI-indexed to stay ahead of inflation.