Is QE actually deflationary?

[Kman]

I've been watching videos from this guy who has some interesting points but it's hurting my head and I'm not sure I fully understand

He says:

• QE initially is deflationary not inflationary
• Fed forces commercial banks to sell them bonds but instead of giving them the currency they put it in collateral accounts and hold it
• Before buying the bonds they lower interest rates so banks do make a profit on selling, even if the currency isn't given to them
• Lower interest rates encourage lending and that's what increases the currency supply not the fed buying the bonds

But then he also says

• Commercial banks are currently making it harder to get loans, again reducing liquidity
• Commercial banks and foreign banks are buying long US bonds with dollars so reducing dollars in circulation
• They're reducing loans and buying bonds to force the Fed to again lower interest rates and do another round of QE buying the bonds allowing commercial banks to make an easy profit 

But if the Fed are putting the money into collateral accounts and not actually giving them the currency how does it benefit the banks?

It it because the currency still shows on the banks books allowing them to lend more? 

I'm not sure how long this will take to play out but his overall prediction is

1. Deflation, bonds and dollar go up
2. Stock market crash
3. More Fed QE, lower interest rates
4. Banks sell their bonds they drove up
5. Banks buy the equity crash they just caused
6. Wealth fund managers also pile in to this crash because they sat out in March and wont want to miss it again 

And then banks will release the purse strings and start lending, inflation?

Thoughts?

I guess another reason commercial banks might want to do this is so that when they agree to play along they can ask to get the regulations imposed on them after 2008 removed, I remember reading some of them were already removed around March

 

 

[HawkHybrid]

I think of qe as not driving the markets but a reaction to what has already happened.

qe is supplying more currency to meet the flow required for the use of said currency.

it's the gauge and not the driving force so is neither inflationary nor deflationary.

currency is a method of accountancy. those who are fixated on things like qe have a

poor understanding of currency.

 

HH

[Kman]

18 minutes ago, HawkHybrid said:

qe is supplying more currency to meet the flow required for the use of said currency.

But is it supplying more currency? or like Steven Van Metre argues above QE is more about increasing the amount of loans thus increasing currency, but if loans don't increase then QE is failing

QE was first done in November 2008 and you can see the amount of loans actually fell until 2010

And you can see despite a massive spike up in March this year when QE was started it's beginning to fall off now, how important is that fall in relation to liquidity and currency/equity/commodity values?

[HawkHybrid]

33 minutes ago, Kman said:

But is it supplying more currency? or like Steven Van Metre argues above QE is more about increasing the amount of loans thus increasing currency, but if loans don't increase then QE is failing

 

quantitative easing is not money printing. you hear them talk about using the currency from

qe to buy loans. this is because qe provides more access and manoeuvrability to currency.

the access allows for more supply of currency.  it's like a company creating more shares to

take on more projects, this does not determine the success rate of the projects(and as a result

the success of the company moving forward).

 

my guess is that the commercial and industrial loans chart is part of the accounting. the fed

takes on it's balance sheet those loans that are now removed from commercial and industrial

loans. the loans are still there. just re-organised to reside under the feds balance sheet. it's an

accountancy move that frees up currency at the banks so that it can flow more easily.

think of it like moving items from tesco's shelves back to the warehouse in order to free up

space on the shelves to sell a different selection of items. it's primary objective is to aid logistics.

 

HH

[Roy]

You see, that's the difference between reading a book and watching a youtube video.

 

[Kman]

34 minutes ago, Roy said:

You see, that's the difference between reading a book and watching a youtube video.

 

Share some of your knowledge(lol) instead of just being annoying?

I don't believe you've read any books 🤡 if you have, what wisdom did you use to benefit from the crash in March?

What wisdom have you shared since March to help all the noobs like myself that were interested? I can't remember any? 

All I know is this thread 🤭

I'd love you to say anything insightful?

[KDave]

Like HH my understanding is that QE is not in itself deflationary or inflationary, it is just liquidity. 

2020 QE is not about supporting the banks, the actions the FED has taken to prevent the banks abusing QE (no buy backs, no bonuses) tells us the FED are only trying to provide liquidity, so the market can allocate capital where it needs it (companies can get what they need/want, good or bad). They are not doing this to help or punish the banks or pick winners/losers. They are allowing companies to borrow, they are keeping bond yields low to allow companies to fix their debts at low rates, which is what has been happening (see your commercial and industrial loans chart). They are preparing good companies for inflation and allowing those investing in real assets to do so cheaply, they are giving everyone else a chance to fix their debts. They have also been allowing government one last chance to borrow, and govt. are doing their part to replace the liquidity lost from lock down to prevent deflation (furlough, stimulus, 50k loans), and to invest in projects that will help drive the recovery (infrastructure). 

Once the recovery starts, inflation will tick up and they will start to allow rates to rise. They will allow inflation to run ahead of rate rises, which will reduce liabilities in real terms. Companies that are reliant on access to cheap debt will begin to struggle. Companies already with fixed debt invested in the real will be the winners. The consumer will struggle, as it is reliant on debt and last in the inflation chain. House prices will struggle because a house is worth what someone else can borrow. Government will struggle to maintain its ridiculous levels of welfare spending. You get the picture. The economy will be radically different by the end of the cycle. It will be the decade for gold and silver and value investing in companies the market currently hates, where as trackers and the traditional stock/bond allocation will be big losers. Don't mention pensions.

He is right that the stock market will crash at some point in the near future. It will either be limited to the growth sectors (tech) when they are no longer able to to borrow cheaply, but likely they will take everything down with them when they drop given the number of trackers involved in the market. It is what it is. With any luck the crash will not return value stocks to current valuations, but we will see. 

Everyone is investing now in tech companies thinking that low inflation low growth will be here to stay as per the last decade, looking backwards. Once the FED allows those rates to start to turn up, those tech companies reliant on borrowing (TESLA) will eventually be unable to do so, perhaps a year or two from now. They will all be forced to issue shares, and the share prices will fall. That will likely be what causes the stock market crash, if it doesn't happen before that. The FED is keeping liquidity flowing and keeping yields low for as long as is needed. This is the last chance to borrow cheaply, perhaps a year from now things will start to change;

https://news-american.com/2020/08/12/10-year-treasury-yield-holds-steady-after-strong-inflation-data-solid-auction/

The consumer price index less food and energy posted a 0.6% increase in July and the core CPI was up 1.6% for the 12-month period. The yield on the benchmark 10-year Treasury note initially rose more than 2 basis points to 0.685%,

Yields turned lower after the U.S. Treasury auctioned a record $38 billion of 10-year notes on Wednesday. Demand was solid for the benchmark bonds at a rate of 0.677%.

[5huggy]

CPI = CP LIE! - groomed/ manipulated figures that are adjusted to "SUIT"! 😉👍

IMHO!

[Kman]

11 hours ago, KDave said:

Like HH my understanding is that QE is not in itself deflationary or inflationary, it is just liquidity. 

But If it works how he says it works then the Fed buys bonds from banks but they put the dollars in a collateral account they can't touch

And banks buy bonds at auction with dollars - the treasury sold a record amount of 30-year bonds in August for $112 billion, that's sucking dollars out and those bonds will be bought back by the Fed who will put it into a collateral account it has to be deflationary

Commercial banks reserves get bigger from this process and interest rates are lower so there's more liquidity in lending but the actual available dollar supply is smaller

I've read that banks by law have to have a certain amount of reserves in bonds so this process loosens their hands to engage in more speculative activities because suddenly they have a big increase of reserves

Overlaying TLT on the DXY there seems to be a pretty strong correlation in dollar strength, maybe a little delayed - it's been shooting up recently is the dollar going to start following it? and be deflationary

The only time it doesn't look like it did was 2016 but maybe it was a delayed reaction

TLT: The iShares 20+ Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.

 

 

I'm starting to wonder if that sharp drop off in TLT lagged into the dollar and if that sharp uptick is what is coming next