Hello everyone, I try to understand the real use of a QE when a central bank wants to stimulate the loan market to householders and private compagny investments… like japan in 2001, USA with QE, maybe ECB tomorow. My theory is that by the central bank buying sovereign debt, the yield decrease so much that investors do not want to hold them anymore and try to search for better investment to make, like corporate bonds for example… And the same for banks that do not want to hold soverein debt anymore but instead increase the loan in order to get some return… Am i right or wrong ? if im right, why central bank do not buy directly private debts ? it would stimulate the credit market more than offering cash to banks… Best regards, Coritani
Push you to spend or invest the cash in your bank account.
I think that the central bank can do that whith the conventional interest rate policy. If it put the main rate at 0% (1) and lend cash at a low rate to the banks (2), then you have no yield in your bank account (1) and almost free credit cash (2)… If the QE would generate inflation i could understand it but look at USA inflation after 3 x QE… 1,6% This is not the kind of hard measure that would lead me to spend my money. Moreover, companies and householder are in a way of reducing debt since 2007. So there is a low demand for loans. So in what the QE is better ? I think my theory still stand as If you decrease public debt yield, then you force investors to leave this market and to go in others : equities , commodities, loans market, real etate What do you think ? I find it very interesting
This is so 2009.
Not for me buddy, tomorow Mario Draghi releases the first bazooka. You got three before us
Furthermore, the GDP equation tells us that : GDP = C + I + G + X – M .
According to Keynes theory, if all the consumption is freezed, then C, I and X - M can’t rise up GDP. There is only room for G, a huge spendings politics that can be helped by the “monetarisation” of public debt via QE… More and more assumptions but nobody seems ever be able to answer me.
What is the real use of QE? Exactly the question Draghi’s asking himself right now.
Lets hope for a legendary trading day today!
I dont’t think you will have your dream trading day… everything is already priced Our genius president Hollande told monday on tv “yes, the BCE will do QE”… haha a new concept of worldwide insider trading Super Mario was very glad
We’re yet to see that mate - remember second round of negative rates cut. Similar thing happened, news was out earlier, everyone piled on massive shorts hoping it will eventually push the eur down - and then when the Draghi confirms it, Euro spikes up to 1.39, everyone panics, exits and then euro tanks. Similar story in Gold market. Hard to predict these things.
Yesterday was excellent though. Game on!
yes i remember 06/05/14 when draghi put marginal deposit rate at -0,10% and new “targeted ltro”… everythng was out before but there were still some pips to take the d day. anyway, could you please answer my primary question ? you seem qualified
€QE is not targeted towards private debt but capex of companies. Private consumption is quite stable and not depending on central banks buying govies. In the US, QE stimulated capital spending, which is still very low in Europe, esp. in peripheral economies and those who didn´t undergo reforms. A nice side effect is the depreciation of the currency, but a lot of QE is already priced imo.
Simply put, the main purpose of QE is to artificially create an environment that makes it feasible for (or promotes) businesses to continue operating as normal or increase capacity. It’s almost as if you fracture a leg, the doctor gives you a pair of crutches to walk with (think of QE as those crutches which basically injects money into the economy), until he gets better (which is when they stop QE)
As for the suggestion that low IR is enough, as it gives interest free cash i.e. QE adds no value: Yes there is cash but due to continued deflation or no growth, there is very less confidence in the economy and FI’s are not willing to lend. Hence, they must do QE, which they do not just by printing money - but by systematically buying those assets, which the CB deems are most likely to reinduce confidence in the economy. Once that happens, it’s a snowball effect after that - FI’s willing to lend again, businesses taking more risk and hurray we’re back to a normal growth environment.
An alternative is BoE’s FLS scheme which is not technically QE, but it avoids avoids the issue of banks unwillingness to lend. Politically the way Europe is structured, it’ not possible to implement FLS in my opnion. Hence, Draghi is doing what he’s doing.
- I agree QE is already priced in to market, mid yields in France are .7%. But now it’s about follow through - if our boy genius doesn’t deliver, then bonds will collapse, yields shoot up and the artificial environment I mention above would cease to exist.
Finally, I’d like you to understand that the environment we’re in these days is highly unconventional - this is new world economics, so instead of looking at equations, first try to understand it intuitively and then back trace it back theoretically.
I hope this helps - cheers!
in this order.
fight deflation. print monety, devalue currency, to remain compeititve
add liquidity. try to keep errbyody afloat.
makes rates cheaper, so people take more risks.
save rich ppl.
QE is basically life support for the economy, it doesn’t mean that the economy will suddenly start growing fast, but it’s there to prevent the economy from imploding…barely.
QE is throwing money from a helicopter. There’s no guarantee people will spend the money, it can get stuck on trees on its way down from the helicopter.
the sovereign debt that the bank buys, is it freshly issued by the govt or they buy the debt already existing in the economy, because in the later case the FI can just choose not to sell the debt to the central bank??right??
The primary objective of QE is to recapitalize banks by allowing them to front run the fed’s purchaes of assets from the market.
Primary Objective (Wall Street):
Aggregate appreciation of Treasuries -> Premium goes up, net a reasonable return. Allow banks to repeat monthly
Keep proceeds from treasury sale as excess reserves with the fed, earns .25% annual.
Stay in the 1%
Secondary Objective (Main Street):
Buying bonds raises prices which lowers overall investment grade rates, eventually this impacts all bond classes. We’ve seen this through the tightening of the Investment grade-HY spread from 2010-2014(ish)
^ Lower rates allows shitty companies to take excessive risks which allows them to expand their business through hiring more employees or buying new equipment etc.
Lower rates depreciates FX rates which should temporarily increase exports as export companies realize a 1-time incremental gain from the increase in exported goods.