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Comment by cs702 | Hacker News Reader

On a related note, since mid-April, the Fed has withdrawn –$140B of liquidity from the financial system:

https://news.ycombinator.com/item?id=32929454

and earlier this year announced that it plans to continue withdrawing liquidity from the financial system at the rate of $90B/month for the foreseeable future. The innocuous term for these withdrawals is "quantitative tightening."

There are no historical precedents for quantitative tightening of this magnitude.

It's the first time any central bank has tried it at this scale in a modern monetary regime.

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Note that many people on this and other forums have been talking about how the fed just prints money forever and is out of control. This is them destroying money.

It might not be enough for you personally, but let’s not pretend that money printing only goes in one direction.

Note: as a base expectation, you want to be printing a small amount of money unless circumstances dictate otherwise. In a growing economy, if the growth in the money supply doesn’t keep up with growth, you’ll eventually see deflation. This is explained by the following identity (where the velocity of money is typically observed to be fairly constant):

[Price] * [output] = [velocity of money] * [money supply]

To be fair, wasn't this preceded by 'quantitative easing' which itself had 'no historical precedents?'

Like, it's in proportion to the last big thing we did, albeit in the other direction. I'd argue that's pretty close to precedent.

There's at least one other historical precedent for insane levels of quantitative easing, Japan: https://fred.stlouisfed.org/series/JPNASSETS

Japan has been at it for a long time: https://research.stlouisfed.org/publications/economic-synops...

But AFAIK there's no historical precedent for persistently going in the other direction at such an insane scale.

oh c'mon. there wasn't really precedent for QE before '08 and they did it anyway. there sure ash wasn't precedent for buying corp debt ETFs as a even more radical form of QE in '20. the fed did those anyway but now that they're trying to wind it down that's somehow radical and needs a "innocuous term"??

$90B/month isn't even making much of a dent in the balance sheet.

Here is the historical (since 2004) time series and data: https://fred.stlouisfed.org/series/WALCL

at $90B/month it will take 89 months to unload.

$90B/month = $1.1T/year in withdrawals of liquidity from the financial system.

A trillion here and trillion there, and pretty soon we'll be talking about real money.

> $90B/month it will take 89 months to unload

The optimal Fed balance sheet is estimated to be around $4tn [1].

A Fed with a ballooning balance sheet distorts financial markets. A Fed with no assets must do weird stuff to fight inflation, which distorts financial markets. (In a non-reserve case, a central bank with no reserves goes bust.)

[1] https://advisors.vanguard.com/insights/article/thefedsplanto...

Fed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0

> Fed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0

Inflation has multiple causes. Fixed-money economies experienced inflation and deflation throughout antiquity.

Still, Fed is responsible for 90% of inflation.

> Fed is responsible for 90% of inflation

You're really jumping straight from proposing a zero-reserve central bank to theorizing the source of inflation?

Very interesting. So historically, it appears that the FED balance sheet reserves is 25% of GDP. I wonder what it is for other countries. Especially rapidly developing ones.

> wonder what it is for other countries

It varies pretty widely. I don't think there is good macroeconomic theory for its correct value, or even if there is a correct value.

https://tradingeconomics.com/country-list/central-bank-asset...

It doesn't seem 100% accurate (see: UK balance sheet). But the pattern is evident. The older/more developed an economy, the larger the central bank balance sheet.

Which also seems like a correct line of thinking to me. In younger developing countries, more money is created by individuals/businesses via credit. Central banks don't need a large balance sheet to encourage more lending, banks already have a high demand for loans and have very high interest rates for credit.

In older/developed countries, less money is created by individuals/businesses via credit. So central banks are forced to increase the size of their balance sheet which allows banks to offer more money for lending by reducing the interest rates because without low interest rates, there will be no credit growth.

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