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Comment by wintersFright | Hacker News Reader

So if bernanke rained money from his helicopter but everyone sold their neighbour a massage that night then the money is not devalued because it was absorbed?

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I'm not an economist, but my understanding is that the quantitative easing that Bernanke has been using over the last few years is more or less equivalent to raining money from his helicopter, only into financial markets. Runaway inflation has not resulted because there are sufficient downward pressures on prices to counterbalance the easing.

>"Runaway inflation has not resulted"

Runaway inflation has not occurred because something like $3TT in wealth evaporated from the balance sheets of (mostly) the shadow banking system during 2007/2008. That's massively deflationary. The printing of money has filled that void.

Which is a sort of capacity to absorb the extra spending and acts as a downward pressure on prices.

This makes my head spin. Is there an ELI5 explanation of this somewhere? How can 3 trillion dollars suddenly evaporate, and how can newly printed money fill this void as if nothing had happened?

I'm not very good at ELI5, but briefly: all debt is a liability on one balance sheet, and is therefore an asset on someone else's balance sheet. That's an accounting identity.

If you go belly-up and can't pay your debt, then the financial asset disappears from the other balance sheet as well. Poof.

Picture owning $100,000 in bonds of a company that goes bankrupt. One day you have a net worth of $100,000, the next day it's gone.

Here's a second try.

Imagine that lots and lots of people own shares in the mineral rights to various oil fields. Oil is at a really high price, all those rights are being traded for tons of money, and they're assets collectively valued at billions of dollars.

All of the sudden, the value of oil plummets to a fraction of its former price. So cheap, in fact, that it costs more to get the oil out of the ground than you can sell it for. So all these mineral rights aren't worth anything anymore, there's no more income coming in from selling the oil, the fancy drilling and exploration equipment is being auctioned off for pennies on the dollar, and all the people depending on that money go broke. Then their employees, accountants, lawyers, dentists, real estate agents, grocery stores, furniture stores, and everyone else that depended on that cash flowing go broke. And, of course, a lot of people bought those oil rights or that expensive equipment on borrowed money that they can't pay back. So now the banks go under, and hurt anyone depending on those banks. That's a brief synopsis of how billions of dollars vanished in the blink of an eye in the Texas oil boom collapse (and then the Savings and Loan collapse) in the 80s.

The real estate thing is more or less the same thing, but with mortgage backed securities. Once it turned out that people couldn't pay back all those ridiculous mortgages they'd been getting, suddenly the right to collect those mortgage payments was worth a fraction of what it had been. And all the high-flying companies that were getting rich off of owning, trading, and packaging those securities suddenly were left holding little pieces of paper that went from being worth billions to being worth a tiny fraction of that. Because it turned out that those mortgages were worth way less than everyone had thought they were worth, all that money effectively just vanished.

Not really. QE is a swap. Bonds (or other financial assets) for cash. If I take a bond from you and give you cash, are you going to interpret it as a windfall and go on a spending spree?

Adding demand and thereby liquidity to a market creates a windfall that wouldn't have been there otherwise. Whether it's because you were sitting on a bond that was impossible to sell and now you have money because you sold it, or because you would have gotten $1000 for it and now you got $1200, that's a windfall.

Whether that money goes into buying groceries or buying other securities, I assume most of it will continue to circulate in the economy. If it doesn't, then it's pretty much a failure as a quantitative easing.

Nobody is ever involuntarily sitting on bonds, they are easily liquidated at any point; you sit on bonds because you don't want to spend the money.

>If it doesn't, then it's pretty much a failure as a quantitative easing.

It doesn't do much of anything, true.

Central Banks sit on bonds because holding USD in their reserve banks does not earn interest.

Central banks sit on bonds because they buy them as part of their open market operations, and they are legally required to make a market for treasuries so the government is funded.

normal people, no. USG yes.

The Fed does not own a helicopter. Congress does, but they're keeping it grounded.

Your example is ridiculous and contrived, but if there is enough massage capability because everyone has the free time to do so and everyone decided that's what they wanted to spend on, then yes.

So your position is, if Bernanke made it rain 100 trillion dollars and 250 million people charged each other $(100 trillion/250 million) for the massage, then money is not devalued?

Yes the example is contrived but it illustrates you are wrong.

The Fed cannot introduce 100 trillion into the economy without taking 100 trillion in assets out; if congress were to introduce 100 trillion into the economy, of course there would be inflation.

Also, people aren't going to buy 100 trillion in massages, that is fucking ridiculous, if you start from a ridiculous set of circumstances, you're going to arrive at a ridiculous ending point -- it's not instructive of anything.

Congress doesn't print money. The Fed does. Congress can spend money that it doesn't have by getting the treasury to sell bonds. Foreign CBs are not mopping up all those bonds which is why the Fed is buying them up with QE.

What is the problem with a toy model in extreme to illustrate the absurdity of your position?

First off, the Fed is a creature of Congress. Congress issues spending orders, the Treasury creates bonds and sells them to the primary dealers (who are contractually obligated to buy them), and the Fed will make liquidity available to those primary dealers if necessary. The practice of issuing bonds equal to the difference between taxes and spending is a self-imposed constraint, and is really a hold-over from the convertible currency era.

>What is the problem with a toy model in extreme to illustrate the absurdity of your position?

It's not illustrative of anything, other than a contrived absurd example.

If there was capacity to absorb 100 trillion in massages (equally absurd), then prices would remain stable.

Think of it like this: we hit a recession, orders drop and companies lay off workers and produce less output. From one day to the next the capacity for a certain level of output remains the same, but on the second day less is produced.

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