Quantitative Easing Explained
Originally printed 2 years ago (this is a refresher)
***Originally printed on August 14th 2020 on our blog, we felt a quick refresher of how we view QE would help our new readers***
A reader has asked us to explain how central banks support asset prices through its balance sheet expansion or what is known as asset purchases or “QE.”
[FED PRINTS MONEY - US TREASURY ISSUES DEBT - FED USES MONEY TO BUY SECURITIES (GIVES CASH TO RECEIVER) RECEIVER USES CASH TO BUY ASSETS OR USES LEVERAGE TO FACTOR INVEST]
OK, lets break this down further:
QE policies show the true nature of central banking...i.e. “ASSET PRICE TARGETING.”
Ask yourself this question, who holds all the assets?
The answer, a mere 20% of the population or to a greater extent the top 1%.
So when you target asset prices under the guise of stable prices and full employment, which is a joke now right, because Covid Stimulus has shown us you could have 30 million unemployed and record stock prices!
When Central Banks like the FED print money and buy assets from private and governmental agencies, it does one very important thing, it supplies cash and capital to the very top of the financial food chain which academic economic theory denotes or should we say in hopes that it "trickles down" (Reagononomics) to the general main stream economy. Well in reality we all know what happens, those closest to the spigot merely arbitrage interest rates and use leverage to profiteer and boost asset prices, but, it also causes all of this to happen:
Allows all public companies to borrow at very low rates to buy back shares, which in turn allows the corporation to issue options, to then exercise them, to then issue debt, to then buy back the stock, artificially boosting its price by reducing the amount of shares available...there's a reason why the amount of public companies has been sawed in half...which leads to point #2
Artificial low rates allows for excessive speculation and leveraged buyouts, i.e. M&A mergers and acquisitions at valuations that would not otherwise be possible without the expansion of central bank balance sheets...i.e.monetary printing...QE...and artificially low interest rates...why spend money on labor and CAPEX when you can get a better risk adjusted return by playing the financing game with money so cheap...plus who cares about profits...its all about the Modigliani & Miller propositions of corporate capital structure...i.e. debt doesn't matter, which leads to point #3 its a tax shelter...
Corporate Debt is a tax shelter...i.e. it lowers the WACC, (Weighted Avg Cost of Capital) by reducing the corporations Net Income therefor reducing the corporations tax liability...think lower corporate tax rates now, which is not only exacerbating the financialization of firms, but it reduces the governments income...which leads to point #4 massive government debt loads and perpetual Qe4EVR
Governments are now the defacto bad bank and they made that choice long ago starting with the BOJ in the 90s (well let’s be fair Reichsbank in the 20s) and now all are in the same boat, which is why interest rates will stay low forever, because as of now that US $600bn a year interest payment is only going to get worse and worse. Which leads us to point #5 massive amounts of income disparity,much like the late 1920s and 30s.
Income Disparity is at its widest since the depression brought on by the most idiotic "trickle down" BS economics that is, money never trickles down, rather it gets financialized and muddled in a vicious little hedonistic circle...think who owns companies...think who invests...think who owns all the assets...all the debt...the top 1%, with low interest rates and government cronies to back you up with monetary and regulatory policy, there is no need to create anything other than an economic structure that continues to funnel all profits to the very top...think executive pay vs worker or just look at this chart of the Share of Income the top 1 tenth of 1 percent has, denoted by the left axis and the share of income of the Forbes top 400 or top 25kth of 1%, 10% and over 3% respectively:
The fundamental function of true capitalistic market places has been hijacked by the central banks, a private corporation none the less who controls and enables the government to run fiscally irresponsible. It shouldn’t come as a surprise that the top 5 counties per capita income in the United States are centered around DC.
#Correlation anyone?
Finally the move in the Metal markets lately vaulting higher, Bitcoin as well shouldn’t be a surprise either as throughout time, the one and only true money in this regime has and will always be Gold. (& Silver).
Yea we know its boring, but 1oz of gold buys the exact same amount of goods and services as it did in 1920 as it does today, some 100 years later, let that fact set in for awhile.
Gold is the real anchor of monetary policy…when inflation hits and it will hit…gold will be the only asset class to survive…then again, you can’t farm and eat it so, in that regard, who knows, by then mankind will have to come up with a new system that focuses upon society collaboration, equality of opportunity and one less focused upon greed and profits, but we are stoics at heart.
We originally posted this 2 years ago almost to the day and you can see now the inflation that is embedded in these policies with a 12 to 18 month lag. The causes of inflation as we have outlined above should be much clearer now. Central banks are clearly to blame as are our politicians. Both these entities, the central banks and politburo (US not Russian) clearly have one single solution for every problem, that is more money or in simpler terms more and more debt!
We still feel interest rates are not the real solution to the problem, but rather would prefer a massive reduction in bond buying and central bank balance sheets. We do not suspect they will go this route, because let’s be honest, money is never destroyed, only inflated and until we demand more from our leaders and those in control of money, we here at Econemotions will continue to believe the monetary crutch will continue indefinitely.
Till next time…please share and subscribe!
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