End of QE2 or Where did it go?

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LongerPrimer
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End of QE2 or Where did it go?

Post by LongerPrimer »

So, The Fed bought up a lot of assets from banks and US Treasury thus adding cash and liquidity to the economy. Money Velocity is still very low, http://m.research.stlouisfed.org/fred/s ... &units=lin

Where do you think the Money went? :confused
Last edited by LongerPrimer on Wed Oct 29, 2014 11:22 pm, edited 1 time in total.
Erwin
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Re: End of QE2 or Where did it go?

Post by Erwin »

Not enough consumption, the money is being saved. If you are Keynesian, which by the way I am not, this calls for higher fiscal spending, i.e., big public work, etc.
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Oicuryy
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Re: End of QE2 or Where did it go?

Post by Oicuryy »

Edited to delete the graph that was here. There is a link to a better graph in my post below.

Ron
Last edited by Oicuryy on Thu Oct 30, 2014 1:09 am, edited 1 time in total.
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market timer
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Re: End of QE2 or Where did it go?

Post by market timer »

Mostly in excess reserves. I believe the consensus thinking now is that interest paid to these excess reserves will become the key policy rate once rate hikes commence next year.

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Oicuryy
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Re: End of QE2 or Where did it go?

Post by Oicuryy »

Here is a stacked area graph of the components of M2. The biggest increase was in savings deposits.

http://research.stlouisfed.org/fred2/graph/?g=PgA
market timer wrote:Mostly in excess reserves.
True, but the OP asked about M2 velocity. Reserve balances are not part of M2.

Ron
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Clive
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Re: End of QE2 or Where did it go?

Post by Clive »

market timer wrote:Mostly in excess reserves. I believe the consensus thinking now is that interest paid to these excess reserves will become the key policy rate once rate hikes commence next year.
So are you predicting a Quantitative Tightening going forward rather than a prolonged Japan negative real yield type scenario?

Central Banks printed new money to buy treasury bonds from banks/pension funds, so fewer treasury bonds available, demand the same or rose, treasury bond prices rise, yields decline. New (more) treasury's issued at lower yields/longer term. Overall large debt spread further out over time at a average lower interest rate cost (debt restructured).

Much of the cash banks received from selling treasury's to the Central Bank have been deposited into savings as per that chart that Oicuryy linked to. Either from a economic angle the state would need to maintain negative real yields for a prolonged period to deflate the value of those savings (rates below inflation), or raise interest rates to reduce the price of treasury's and use the Central Bank reserves to buy back treasury bonds it had sold at relatively high prices/low yields at a discount.

Recently with 5 year average Japan Nikkei 225 dividend yield = 1.7%, recent S&P500 dividend yield = 1.94%. Japan 10 year treasury yield 0.5%, US and UK 10 year treasury yields 2.3%. Japan inflation 3.3% (having risen up from 1% levels last year and broadly 0% over the last decade+), US 1.7%, UK 1.2% - the indications are not to be pushing for prolonged negative real yields - so your prediction may very well prove to be correct IMO.

A increase to 5% on 30 year Treasury yields could knock stocks and bonds down by 30% and reduce the debt mountain by 30%, leaving stocks and bonds relatively fairly priced, banks ok and the economy reasonably well positioned (back to 'normal'). Shorter term/rolling bonds/CD's would do OK under such circumstances (mature at par, roll into higher yields).

2.5% T-Bill by year end 2015 perhaps?
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LongerPrimer
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Re: End of QE2 or Where did it go?

Post by LongerPrimer »

Never imagined that "savings deposits" were so high. :shock: That's a lot of idle money. :annoyed

Currently holding a high cash level (FDIC insured) in IRA-ROTH trading accounts. This cash is almost as much as the total value of these accounts in Feb 2009. :confused
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LongerPrimer
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Re: End of QE2 or Where did it go?

Post by LongerPrimer »

mpt follower wrote:Not enough consumption, the money is being saved. If you are Keynesian, which by the way I am not, this calls for higher fiscal spending, i.e., big public work, etc.
If not a Keynesian, then what are you?
I forgot if there was/is another type of econ theory being taught? :confused
Tamales
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Re: End of QE2 or Where did it go?

Post by Tamales »

LongerPrimer wrote:Never imagined that "savings deposits" were so high. :shock: That's a lot of idle money. :annoyed
I wonder if "savings deposits" is strictly individual bank accounts. At a current level of about 7.5 trillion, that would be an average of a bit over $60k per US household, which does seem high.

I recently came across a federal reserve document released last month called the 2013 SCF Chartbook (Survey of Consumer Finances) which has all sorts of interesting breakdowns of consumer accounts and assets/liabilities. Google is not being cooperative at the moment so I don't have a link.
larryswedroe
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Re: End of QE2 or Where did it go?

Post by larryswedroe »

AS others have said monetary base went soaring, but we did not get the great inflation (and collapsing dollar) that many predicted. That is because while monetary based soared, the money supply did not. The reason was velocity of money fell. Both the money multiplier (banks did not lend the reserves they built up) and the velocity of money fell (people weren't spending). Now the reverse may happen as well (hopefully), as the Fed unwinds (shrinking the MB) you'll see velocity pick up along with the money multiplier. If the Fed unwinds too quickly the economy will suffer, but if they unwind too slowly inflation will become problem. This is art unfortunately and no clear red or green light lets the Fed know what speed to go at and when to stop and start.
Larry
AviN
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Re: End of QE2 or Where did it go?

Post by AviN »

LongerPrimer wrote:
mpt follower wrote:Not enough consumption, the money is being saved. If you are Keynesian, which by the way I am not, this calls for higher fiscal spending, i.e., big public work, etc.
If not a Keynesian, then what are you?
I forgot if there was/is another type of econ theory being taught? :confused
Freshwater economics:

http://en.m.wikipedia.org/wiki/Saltwate ... _economics
Wayson
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Re: End of QE2 or Where did it go?

Post by Wayson »

LongerPrimer wrote:
mpt follower wrote:Not enough consumption, the money is being saved. If you are Keynesian, which by the way I am not, this calls for higher fiscal spending, i.e., big public work, etc.
If not a Keynesian, then what are you?
I forgot if there was/is another type of econ theory being taught? :confused
Besides the above-mentioned Freshwater economics, there's also the Austrian School of thought.
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market timer
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Re: End of QE2 or Where did it go?

Post by market timer »

AviN wrote:
LongerPrimer wrote:
mpt follower wrote:Not enough consumption, the money is being saved. If you are Keynesian, which by the way I am not, this calls for higher fiscal spending, i.e., big public work, etc.
If not a Keynesian, then what are you?
I forgot if there was/is another type of econ theory being taught? :confused
Freshwater economics:

http://en.m.wikipedia.org/wiki/Saltwate ... _economics
Here's a recent blog post on the state of New Keynesian economics, relative to RBC (or freshwater economics), in academic research: http://noahpinionblog.blogspot.com/2014 ... eping.html
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Re: End of QE2 or Where did it go?

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