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The US government owes lots of money. When US-based banks and other financial institutions faced a similar problem (ok, not a similar problem, but a crisis) - the US government, through the Federal Exchange, performed "quantitive easing", i.e. printed money in exchange for ceremonial totems, to the tune of 3.5 Trillion USD.

Question is - if the government is willing to do that for private institutions, why does it get all crazy about the impending doom of a default and have arguments about debt ceiling increases, where it could theoretically just QE the money (should be about 1 Trillion or so)?

I'm not saying QE is a good or a bad thing, but usually the argument you hear against using it is the inflation argument. The thing is, if this didn't bother the government then, why would it bother them now (or for the increase during the Obama years)? Is it because the composition of who's going to get that money?

Now, if you say it's some form of fiscal responsibility/conservatism - then why is the federal government continuing its excessive (not to say insane) military spending when it's mired in debt?

Another argument might regard the effect of paying off a lot of debt at once; but I'm only taking about the debt ceiling change, so it's not all that much, plus, I'm guessing it's almost all going to US-based suppliers and to salaries, so it should not have the destabilizing effect of filling foreign pockets with US currency.

Notes:

  • I didn't ask why they don't QE themselves out of all of the debt.
  • Yes, I've conflated the federal government and the Federal reserve, which is not a government body. If you think that's part of the answer, please explain why.
  • Please don't answer by writing "it's Donald Trump and he's an idiot / unhinged" - the Obama administration did more or less the same thing if I'm not mistaken.
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    "I'm not saying QE is a good or a bad thing" Yes you do. See "the Federal Exchange, performed "quantitive easing", i.e. printed money in exchange for ceremonial totems" or am I mistaken? – Trilarion Aug 25 '17 at 10:08
  • "...but usually the argument you hear against using it is the inflation argument. The thing is, if this didn't bother the government then, why would it bother them now" Inflation was very low then but as soon as the impression starts that the government tries to sneak its way out, the situation with the inflation would change dramatically. – Trilarion Aug 25 '17 at 10:09
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    What's a "ceremonial totem" and where can I get one? – Deolater Aug 25 '17 at 12:59
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    @einpoklum The very first sentence of Wikipedia's page on QE says otherwise... "Quantitative easing (QE), ... is an expansionary monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to ..." It continues "A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other financial institutions". Also, aren't the purchase and the money creation the same thing anyway? – user253751 Mar 16 '18 at 7:08
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    My point is your claim about it "not being considered" is based upon the political rhetoric, that is often offered with an ulterior motive. If someone wants to use a phony "crisis" to push a political philosophy, then there being a practical policy alternative to the "crisis" resolution of course isn't going to be offered, because it's not about the phony, manufactured problem in the first place. Then it's more about a solution in search of a problem. – PoloHoleSet Nov 5 '18 at 21:08
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Inflation

When the Federal Reserve uses quantitative easing, it adds more money to banking ledgers and removes investment opportunities. The amount that they can do is limited by the reality of the economy. Too much and they cause inflation. Not enough and there is deflation. While nominally under the control of the Fed, in reality the amount is determined by the situation.

Note that during recessions, banks tend to increase their reserves, which somewhat counteracts the effect of quantitative easing.

Mortgage-backed securities vs. government bonds

The biggest issue here is that they purchased mortgage-backed securities instead of the more traditional treasury securities. By doing so, they kept mortgage-backed security prices artificially high and saved investors from their bad decisions.

Treasury securities are government debt. So if they had stuck with buying that, as they normally did during crises, that would have kept the cost of borrowing by the government artificially low. This particular crisis was exceptional not in using quantitative easing but in using it to purchase mortgage-backed securities rather than longer term versions of the short term government debt that they normally buy.

Why subsidize mortgage-backed securities? Barack Obama made a deliberate effort to return the housing and mortgage markets to "normalcy" as quickly as possible. Mortgage-based securities are owned by financiers who support the mortgage market and thus the housing market. So bailing them out had an indirect impact on the housing market.

A cynical interpretation would be that bankers and other financiers make political donations and enjoyed the results as bailouts. Less cynically, there is a belief that if financial institutions fail, there will be negative side effects.

This was somewhat successful. In many areas, house prices have already recovered to their prerecession values. Of course, it is unclear if that means that they are recovered to their natural levels or inflated back into a bubble.

Why is inflation a worry now but not then? During a recession, banks don't see a lot of good loan opportunities. As a result, they loan less. However, with a reserve requirement of 10% (the value in the US), 90% of the money in the economy is created by bank loans. If they make fewer loans, that means less money in the economy. Federal Reserve purchases of debt (short or long term government bonds plus mortgage-based securities this time) swell the cash portion of bank reserves. This encourages banks to find places where they can invest it.

During the recession, the primary worry was that there was too little money in the economy, which can cause deflation. Deflation has the same risk problems as inflation plus it causes employment losses. So we'd rather see inflation than deflation. So they were looking to expand the money supply. Quantitative easing was the method.

After the recession, that shifts. Banks start lending again, creating money on their own. So the Fed wants to soak up most of the money that they created during the recession. They do this by selling the mortgage-backed securities and government debt that they bought during the recession.

The debt ceiling

Another issue is that the debt ceiling includes debt owed to the Fed. So this wouldn't actually help the particular problem of needing to raise the debt ceiling. Whether the bonds are owned by the Fed, banks, government trust funds (e.g. Social Security), private individuals, or whatever, they all count against the debt ceiling.

TL;DR: So the literal answer to your question is that it wouldn't work as Fed reserves count against the debt limit.

To bailout the government like they did mortgage securities, the government would have to issue a large coin (say $1 trillion) and deposit it with the Fed. The Fed would then send back cash in return. The government would spend the cash like any other money they receive. That would not count against the debt limit because the government can coin money. It would still cause inflation, as it expands the money supply. So it would replace other inflation causing activity.

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    Won't you put the TL;DR at the top? :-) – einpoklum - reinstate Monica Aug 25 '17 at 15:54
  • Why subsidize mortgage-backed securities? - Because the system was bailed out instead of being forced to self correct. But now no one is willing to invest their own money in these because we have already seen what happened. So now we have a double bubble ready to pop but fortunately the government owns all those worthless mortgages this time so the banks wont be the ones out money when they fail. – SoylentGray Aug 25 '17 at 21:01
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QE was FED buying medium and long-term bonds. The effect of that was to reduce the interest rates of long-term bonds. The question's premise was that this was done to help banks, but it wasn't. It had the opposite effect.

This can use some context. After the financial crises, FED lowered the short-term interest rate (FED primary job is overnight lending to banks) to allow more borrowing to stimulate the economy. But this created a large difference between long-term borrowing interest rates and short-term interest rates. This allowed big banks to borrow at cheap rates and lend out at higher rates. That's usually how it works, but the difference this time was too high.

As a result, banks had no incentive to seek investments in the economy. They could just collect the difference in interest rates (known as "carry trade"). In order to make this a less attractive strategy, the FED started buying medium-to-long-term bonds (aka QE). This made the carry-trade strategy pay out much less. So it forced banks to put more money in the equities markets (aka "stock market").

The result was the "all-hated rally" because it created a slow rise in stocks which most institutions (who still had a memory of having been hurt by taking on too many risks) didn't have much taste for.

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This is an excellent question and it speaks to the fact our media and our schools teach and speak to this topic as if we did not have the worlds' reserve currency.

Also, we have been living in a time period where we are dependent on central bank interventions. The world hangs on every pronouncement of the Federal Reserve.

So what? So we have the worlds' reserve currency, what does that mean? And what does the world care about a United States based central bank?

Because any change in Fed policy creates a brand new sea of winners and losers everytime. The point I am heading towards is Triffin's Paradox or Triffin's Dilemma.

The core of Triffin's Paradox is that the issuer of a reserve currency must serve two quite different sets of users: the domestic economy, and the international economy.

So the printing of money is not necessarily just to pay down U.S. debt. I get this view because we tend to individualize what learn regarding systems and we say, well if I was at the helm I would just print enough to pay off my debts and we would be all good.

Again, the United States does not exist in a vacuum, we supply the world with the currency they need to pay their debts.

And so as a nation that issues the reserve currency of the world, we must run a trade deficit to supply the world with surplus currency to hold in reserve and as a result, we face the paradox that the needs of global trading community are generally different from the needs of domestic policy makers.

The global trading community requires that the issuer of the reserve currency run trade deficits large enough to satisfy the demand for reserves, while domestic audiences such as you and I want and benefit from a strong export sector, that is, a trade surplus.

You can’t have it both ways: if you want to issue a reserve currency, you have to run a trade deficit that is commensurate in size with the global demand for your currency.

It is impossible for any nation to maintain the reserve currency and run trade surpluses. If you run trade surpluses, you cannot supply the global economy with the currency it needs for reserves, payment of debt denominated in the reserve currency and domestic credit expansion.

So this is not an issue of partisan politics or who is in the White House.

The issue is the Fed can't please everyone. That's the dilemma.

The Fed does not just pass policy with the United States in mind, it has to pass policy with the global economy in mind, that is, emerging markets, Europe and so on.

  • Thank you for making this point. You did not, however, address the question of "why then but not now?" If I understand you correctly, you're suggesting the QE after the 2008 crisis was very harmful to other economies, but was considered worth it because a failure of the bailed-out institutions would be even more damaging. Is this what you're saying? If so, can you add a sentence or two regarding the negative effect the QE had (as opposed to the crisis itself)? A link would also work. – einpoklum - reinstate Monica Nov 5 '18 at 20:56
  • @einpoklum, I will do my best to address these questions, but no I was not suggesting that QE was harmful to other economies. Remember, QE is printing money so there is more USD available for other economies to pay their debts, it was harmful to us citizens in the domestic economy, because we were paying our debts with a weaker dollar and higher inflation as a result of the printing. When you ask "why then, but not now?", could you explain what happened then that is not happening now? and I promise to do my best to address it. – Daniel Nov 5 '18 at 20:58
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The simplest answer is you can't use quantitative easing to fight debt, because its impossible to borrow your way out of debt. QE is a loan scheme to lend money at intentionally lower rates in the hopes of increasing the money supply and then having the surplus money stimulate a lagging economy. It sort of worked in the US, the housing market was propped up, but there wasn't a huge amount of growth otherwise, and it allowed the housing market to continue with business as usual with only minor tweaks to the activity that caused the crash in the first place.

QE was part of a larger scheme to essentially bail out the housing market, which was arguably a good decision since housing is usually most people's largest purchase and a significant portion of their net worth. Mortgage backed securities were also an extremely popular asset for many and they were rated too high compared to their level of risk. QE was a way to transfer what had become essentially junk bonds to the fed and give companies extremely safe bonds in return.

The only way to actually reduce the debt is to spend less than you make, which the federal government hasn't done in a very very long time. As for military spending, its not really a huge issue, there is definitely waste in that spending but its not more wasteful than the other 80-85% of the budget. As for why the US keeps spending a lot of money on its military, its a combination of treaty obligations and the military being one of the few things the federal government, and only the federal government, are explicitly allowed to do.

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    The "simplest answer" is not correct, because QE is not really borrowing; QE is not a loan scheme; and the phrase "spend less than you make" is meaningless, because money is just a social construct, not something evaluated by the gods. – einpoklum - reinstate Monica Aug 25 '17 at 15:52
  • All you needed to say was You can't use quantitative easing to fight debt, because its impossible to borrow your way out of debt. I would remove the rest of the answer if it were mine. Or at least remove the opinion that it was arguably a good idea to bail out the housing market. You are alienating the people who would support this answer by including that – SoylentGray Aug 25 '17 at 21:02
  • Quantitative Easing isn't the borrowing of money. It's the printing of money. And printing money actually works in reducing government debt. It in fact reduces all debts. It doesn't reduce the numbers, but it causes an inflation which reduces the value those numbers represent. – Philipp Feb 12 '18 at 9:23
  • This is just plain wrong. Negative rate interest bonds do reduce debt and if the Fed would buy more government bonds the interest rate gets effected. Creating inflation is also a way to reduce debt. – Christian Feb 12 '18 at 11:25

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