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Offline Rune

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This is where QE inflation went
« on: October 28, 2014, 08:28:50 PM »

I thought this chart was pretty interesting, as it explains why we have observed no USD inflation despite the massive QE in the US.

If money velocity begins to pick up again, inflation will be joining it with a vengeance.


Offline toast

Re: This is where QE inflation went
« Reply #1 on: October 28, 2014, 08:39:00 PM »
So where did it go? "Low velocity of money" is not a place money flows
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Offline bytemaster

Re: This is where QE inflation went
« Reply #2 on: October 28, 2014, 09:09:13 PM »
So where did it go? "Low velocity of money" is not a place money flows

The FED is paying banks interest to hold their reserves at the FED.   Thus banks don't lend to high risk customers, but low risk FED and the money sits there. 

In other words the FED is using NuBits style motivation for "parking funds" by printing more money.
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Offline Rune

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Re: This is where QE inflation went
« Reply #3 on: October 28, 2014, 09:12:11 PM »
So where did it go? "Low velocity of money" is not a place money flows

You know how "burning bitshares is like distributing the shares proportionally to everyone else"?

It it a specific instance of the equation of exchange (http://en.wikipedia.org/wiki/Equation_of_exchange) M*V = P*Q. When you remove money from circulation permanently, it is like reducing either Monetary base (M) or  velocity of money (V) permanently, resulting in lower prices (P) and thus deflation which is a benefit for coin/share holders.

What we have seen with QE is that while monetary base M has increased (due to printing of fresh money), velocity of money V has proportionally decreased (because banks park that fresh money directly with the central bank), causing P to remain constant. Once V increases back to its natural level (when the now bank-owned QE money is actually used in the economy), P will shoot up exactly by the proportion M was originally increased.

edit: judging by this chart, the dollar could be currently overvalued by more than 10%. I'm not sure if there's a plausible scenario where this all comes at once, though.
« Last Edit: October 28, 2014, 09:29:55 PM by Rune »

Offline kisa

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Re: This is where QE inflation went
« Reply #4 on: October 28, 2014, 11:09:13 PM »
So where did it go? "Low velocity of money" is not a place money flows

You know how "burning bitshares is like distributing the shares proportionally to everyone else"?

It it a specific instance of the equation of exchange (http://en.wikipedia.org/wiki/Equation_of_exchange) M*V = P*Q. When you remove money from circulation permanently, it is like reducing either Monetary base (M) or  velocity of money (V) permanently, resulting in lower prices (P) and thus deflation which is a benefit for coin/share holders.

What we have seen with QE is that while monetary base M has increased (due to printing of fresh money), velocity of money V has proportionally decreased (because banks park that fresh money directly with the central bank), causing P to remain constant. Once V increases back to its natural level (when the now bank-owned QE money is actually used in the economy), P will shoot up exactly by the proportion M was originally increased.

edit: judging by this chart, the dollar could be currently overvalued by more than 10%. I'm not sure if there's a plausible scenario where this all comes at once, though.

Another explanation would be that FED is printing money to offset the decreased velocity. E.g. if credit starts flowing into the economy and prices start feeling upward pressure, FED would withdrow stimulus by reducing the balance sheet (selling government and mortgage bonds which it has been buying since 2009).

Dollar 10% overvalued versus what?

Online Pheonike

Re: This is where QE inflation went
« Reply #5 on: October 28, 2014, 11:18:29 PM »
Think of it like this, a full tank of gas should only be getting you 90% full for the that same price.


Offline Rune

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Re: This is where QE inflation went
« Reply #7 on: October 30, 2014, 09:09:36 PM »
So where did it go? "Low velocity of money" is not a place money flows

The FED is paying banks interest to hold their reserves at the FED.   Thus banks don't lend to high risk customers, but low risk FED and the money sits there. 

What does the FED do with the reserves? What is the purpose?

From where I'm standing it basically looks like blatant reverse robin hood. The point seems to be to enable the banks to take advantage of the 10% overvaluation of USD as it enters the economy. I never understood QE in the first place, to me it just seems like a tricky way to render other countries unable to blame you of doing what in the long run is essentially competitive devaluation.

Offline Xeldal

Re: This is where QE inflation went
« Reply #8 on: October 30, 2014, 09:28:54 PM »
Two of my favorite books, because of there simplicity.  To often economics is made into some overly voluminous, complicated mess of math and obscure concepts.  When it reality it can be broken down into a few simple pages (first book) or a simple allegorical cartoon (second book).  It overly complicated on purpose to keep you from realizing whats being done.

Billions for Bankers, Debt for the People
http://nationalpeoplesparty.files.wordpress.com/2012/07/billions-for-the-bankers.pdf

How An Economy Grows, And Why It Crashes
http://www.libertarianismo.org/livros/pshaegawic.pdf

and I guess I'd throw in there, Henry Hazlitt's, Economics in One Lesson, just to round it out.
https://mises.org/books/economics_in_one_lesson_hazlitt.pdf

Sry, I know this isn't a book club, just felt like sharing.

oh, and one more just for fun. "The American Dream"
https://www.youtube.com/watch?v=IaDt9T7BF38

 

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