/biz/ - Business & Finance

>>804313
It's all fine and dandy on paper, until you insert the human element. most systems are great, until greed & politics get in the picture.

>>804315

From what I've read it seems that when a central bank is asked to print money, and the holder has a stable economy, then the deal mostly revolves around interest rates.

But when the motive for money creation is QE, then the central bank is more likely to also ask for government bonds as collateral. Do they also stick various interest rates on it (as they would in the "healthy economy" scenario from above) , or not ?

It just seems odd they would consider issuing anything, especially when the holder only has weak collateral in exchange. Surely they must have an angle where profit is made, that's what I'm curious about because otherwise there would be no need to make a distinction between QE and typical money printing (apart from the associated risk).

>>804313
>But does QE comes with the same interest rates as "standard" money creation,

I'll admit that I don't know what interest rate comes from "standard" money creation and how that surfaces into the real economy.

The reason why I think I don't know this (maybe just my personal ignorance) is because non-physical money plays a much larger role in the economy than physical money (in terms of it's effect).

QE interest rate is the inter-bank lending rate. In the UK this is ~0.5% (http://www.global-rates.com/interest-rates/libor/british-pound-sterling/british-pound-sterling.aspx))

> or are they alleviated in order to help the struggling economy ?

Yes, interest rates are deliberately lowered in a crisis to stimulate aggregate demand and bank lending for investment (both of which increase AD). The process of creating digital money and purchasing gov-debt lowers the yield, which means interest payments are lowered, helping a struggling economy.

Your understanding is good on the subject but as an economist, I can truly say that I don't know how "standard" money is created (well, it's printed at the royal mint, but distribution?) and distributed and upon what interest rates.
I'd imagine that if it is lent out at interest, it would be a similar rate compared to other interest-generating products such as bonds, securties, gilts.

QE is a good reminder than cash is not a good store of value

>>804447

>QE interest rate is the inter-bank lending rate

So if I'm understanding this right, QE interest is the technically "lowest" interest rate a central bank could proffer (since it's the rate the banks themselves use to trade amongst each other).

>non-physical money plays a much larger role in the economy than physical money (in terms of it's effect)

Yeah, I suppose it does make sense when you look at it in terms in investment, e.g. it makes more sense to lend to a business worth $10000 in asset, than to a person whom simply owns $10000 in cash, since one is clearly more likely to generate profit.

>well, it's printed at the royal mint, but distribution?

I'm pretty vague on this as well. I've read that it's government whom handles most of this through various discreet stimulus and injections in the public sector. Sounds like a statist's version of trickle down economics to me, but I'm wet behind the ear on this so I'm probably wrong.

Thanks for the concise response, it helped make the subject a bit clearer.

>>804476
>QE is a good reminder than cash is not a good store of value

Agreed. I think the EU is slowly waking up to this, albeit very begrudgingly.

You're confusing and conflating two separate concepts. QE and interest rate policies are inter-related, but not the same thing.

Traditional expansionary interest rate policy involves the central bank lowering the prime lending rate (there is no such thing as the "QE interest rate") and purchasing short-term debt in order to provide additional liquidity to a nation's banking institutions. This tends to drive down other interest rates as well, since the cost of borrowed fund is lower. This policy is considered expansionary because it promotes lending and credit in the economy.

QE is a policy typically used when the prime rate is already so low that further expansionary policy using traditional policies is unlikely to have a meaningful effect. Under QE, the central bank will purchase longer-term assets from financial institutions. As with all such transactions, increased demand raises the price of these assets, which lowers the prevailing interest rate. This allows the central bank to more effectively influence longer-term rates, as well as providing liquidity to banking institutions.

Both policies tend to be inflationary, but since these policies are typically used during times of weakness in the economy, inflation is offset by impeded demand and wage stagnation. As the economy improves (demand rises, unemployment drops), the central bank will move away from these policies to avoid undesired inflation levels. This is what was seen in the US in 2014 & currently.

These policies also tend to devalue the currency. This tends to mitigate some of the positive impacts on the economy, because it increases the cost of imports (including oil, raw materials, and manufacturing components). In the US, this effect was negated by the historically strong worldwide demand for the dollar. In Japan, by contrast, QE has never had the same demonstrable effects (despite multiple attempts) because Japan is so reliant on imports and because demand for the Yen is not strong.

>>804520

Ok, I think I'm starting to understand the difference now. Thanks for the post, lots to chew on.

Easy to understand individually, but hard to visualize how all the pieces fit altogether.