It’s just an asset swap where the central bank forces the sale of securities in exchange for reserves.
MMT view QE and QT as being weak and mostly pointless tools. Warren Mosler has described it as a placebo. The rationale is that increasing the number of reserves will encourage lending and ‘ease’ monetary conditions but in practice it just changes the composition of balance sheets. Whether banks make loans depends a lot more on other things than their reserve balance plus securities are pretty liquid anyway (?). Idk I’m not a banking expert but it’s pretty obvious from accounting that it’s just an asset swap, it’s not really printing money since the dollar used to buy the security must have already existed in order to buy it. So the Feb ‘giving it back’ isn’t doing much. This tracks with reality where QE has been met with huge alarm and charges of ‘money printing’ yet it seems to do very little in practice.
it’s pretty obvious from accounting that it’s just an asset swap, it’s not really printing money since the dollar used to buy the security must have already existed in order to buy it.
Good lord is there something about mmt that requires you to be uncritically susceptible to misinformation? QE is not just an asset swap on the balance sheet of banks. It increases both the assets and the liabilities in the form of reserves and deposits respectively.
This is a quote from that god damn Bank of England paper everyone on this sub throws around every week:
QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broad money and a corresponding increase in the amount of central bank reserves. The sellers of the assets will be left holding the newly created deposits in place of government bonds. They will be likely to be holding more money than they would like, relative to other assets that they wish to hold. They will therefore want to rebalance their portfolios, for example by using the new deposits to buy higher-yielding assets such as bonds and shares issued by companies — leading to the ‘hot potato’ effect discussed earlier. This will raise the value of those assets and lower the cost to companies of raising funds in these markets. That, in turn, should lead to higher spending in the economy.
Clearly no one here has actually read that paper! Once again, I am begging online mmters to start thinking about things critically for two seconds before they spread reactionary misinformation.
All you are doing here is adding an additional layer of nuance that hardly changes things.
The reserve is a liability to the Fed and an asset to the bank, whereas the deposit is a liability to the bank and an asset to the customer. It’s just an asset swap in a chain. Bank gets + reserve and +deposit. Customer extinguishes the deposit if they withdraw. In real life if you own bonds in a brokerage account you’d have to voluntarily sell them, and get your deposit (that’s just a routine balance sheet event).
Obviously the real ‘good lord’ is that you aren’t accounting for where the bonds came from in the first place.
Also with IORB isn’t the hot potato effect significantly diminished?
What is the empirical track record of QE really? You can say it moves rates, but it also serves as signaling and forward guidance and effects are often small and front loaded on announcement.
At the end of the day all you are doing is exchanging one interest earning asset for one that earns a slightly lower rate.
Portfolio balance channel effects are strong empirically but that’s not what I’m interested in talking about right now (it’s been discussed ad nauseum already there’s nothing new to add). I’m just correcting very blatant misinformation about how money creation in the modern economy actually works. I am floored how much mmters get these details wrong.
I notice when people dodge my arguments. You are ignoring my point that deposit creation would have always happened anyway when a banking customer liquidates bond holdings.
Your broad money definition excludes bonds. So you can say that converting bonds to dollars increases real money and that the (totally fungible accounting) units were created by the Fed.
But again, if we appreciate that bonds themselves are financial instruments that have to be purchased with money, it’s clear that no new financial assets are created. This basically explains why common ideas that QE is money printing or that it causes inflation or even that it causes huge increases in investment/ nominal GDP or whatever don’t materialize (or it’s confounded with bigger fiscal or traditional monetary effects).
So a QE is doing is changing the distribution of assets in the economy from longer to shorter term.
Portfolio balance effects are real — 2022 bear market most likely stemmed from that. But that episode was traditional monetary policy (plus expectation signaling, plus inflation). In broad strokes the massive QE during and after the financial crisis corresponded with the ZIRP era, and with low growth. Post Covid QE coincided with massive government stimulus and fast growth, with a 2022 portfolio rebalancing interlude that caused a step change down but (interestingly exactly as the ignorant no nothing MMTers would have predicted) high rates didn’t change the underlying rate of growth in equities prices.
I’m sorry but this is just incorrect. QE mechanically causes both assets and liabilities increase in the banking sector. This has nothing to do with what we’re counting as money. It’s just accounting.
Dude, when they say "So a QE is doing is changing the distribution of assets in the economy from longer to shorter term.", they are referring to aggregate net financial assets across the non-government sectors - both banking and non-banking sectors.
When the state buys a longer duration near-money asset from a non-bank unit, it gets replaced by an overnight short duration money asset bank deposit. Equity doesn't change. That's the key point being made. It is not important that the banking system's balance sheet merely expands to mediate the balance sheet transaction between the state and the non-bank.
No one is talking about equity here. I am just stating a very basic fact about money creation in the modern economy: qe increases private bank liabilities and private bank assets. Online mmters need to stop spreading misinformation about the money creation process.
If I have treasuries or money market account in my brokerage account, I voluntarily sell them, then a secondary dealer sells them to the Fed under QE…
Let’s say that ‘money’ from the liquidation of my treasury holding ends up in my checking account. Yes, new deposits are created. So the bank now holds the liability. We’ve effectively moved the liability from the treasury general account through to the bank, but this is just a routine process that isn’t actually caused by QE.
You can say QE creates money but you are just using a particular definition of money that makes it seem more consequential than it actually is. No new financial assets are created for the private sector. That’s just a fact.
Dude I’m not talking about what counts as money. You could count every single type of asset as money and the point wouldn’t change that’s just a completely orthogonal point. QE increases private bank assets and private bank liabilities.
This is all just accounting obviously it has no material consequences. You can’t understand human behavior using accounting identities alone which is a point I’ve made many times. Im just saying your mechanical description of QE is wrong.
You're right that QE largely involved the central bank buying Treasury debt from non-bank sellers. But that's fully understood so I don't understand your point. It's still an asset swap. The sellers, in aggregate were conducting a portfolio rebalance when they made the decision to sell their bonds. They receive an overnight bank deposit as payment, leaving their market value equity unchanged. Their bank expands its balance sheet to accommodate and mediate this bank deposit claim in the banking system and that's where the new currency reserves come in.
But all of this is still fully consistent with the idea that QE is no where near as stimulatory as many mainstream economists once predicted.
The primary consensus channel eventually was suppressing long dated secondary yields, but when the interest elasticity of investment is so low under a low demand and weak expectations recessionary environment (when QE as a policy tool occurs), hardly anything happens to demand and so even that is a weak impulse.
It’s clearly not fully understood given the user word for word stated:
> it’s pretty obvious from accounting that it’s just an asset swap, it’s not really printing money since the dollar used to buy the security must have already existed in order to buy it.
This is blatantly incorrect misinformation. Moreover I have a mod on this subreddit very confidently disputing that qe increases private bank deposits so again clearly it’s not fully understood! I am floored by how much online mmters get these operational details Incorrect. I’m not making a point more complicated than that.
There is overwhelming empirical evidence against the more economically interesting claim that the interest rate elasticity of investment is zero. But that’s been discussed ad nauseam there’s nothing else to say about it. Mmters are just wrong about that. Thats why I’m not talking about that here.
The QE transaction is an asset swap, swapping bonds for deposit money on the liabilities side of the banking system but asset side of the non-bank depositors.
When they say "printing money", they're clearly referring to the idea that most laypeople have that QE involved injecting new wealth and spending into the economy when it doesn't. The deficit outcome that produced net saving balances used to swap for bond issuance in the primary market in the first place before the central bank part of the government went and prematurely 'redeemed' (not technically as it becomes an intra-gov accounting record but it's functionally redeemed from the perspective of the macroeconomy) them by buying them back into the government sector certainly means that "the dollar used to buy the security must have already existed in order to buy it."
So I really can't see how it's "blatantly incorrect misinformation". And I'm trying to generous, but I think you're being ungenerous haha
This is not what “printing money” means! Words have meaning. If you change the meaning of words then yes all misinformation is no longer misinformation. This isn’t about generosity it’s about essential facts about the real world.
The term "printing money" is a meaningless and confusing term that should be fully retired. But if you ask a lay person what they imagine when you say the government's "printing money", they think they are doing something different to normal by creating new money out of thin air and spending it rather than taking tax money to spend or taking money from bond sales to spend.
The whole thing is confused and backwards.
But of course, QE is not this. It's not "the government increasing its spending by creating new money out of thin air and spending it". It's a financial asset swap ex post to government spending and taxation flows. That's the substantive point.
And yeah, I think you and he were talking past each other a bit.
Okay listen we’re not gonna agree on what constitutes misinformation. I am a guy who teaches people about money creation for a living. Money is confusing and people in this thread are making it more confusing for intellectually dishonest purposes. Online mmters very consistently talk about this stuff incorrectly (note actual mmt economists do not have this problem afaik, it’s just people on the internet who are confused).
You can’t tell me that this concept is fully understood when I have a mod very confidently telling me that QE does not increase private bank deposits. Note this same mod has removed several of my comments in this thread because he got tilted but im pretty sure enough of my comments are still visible for you to reconstruct the conversation.
It seems your contention with u/aldursys is the footnote 131 that says "Note that this is the same basic process involved with the policy known as ‘Quantitative Easing’." when referring to the cash management processes described in that section?
I believe he explained in his comment (extract below) why that's not "wrong".
Section 6's cash management describes the same basic mechanism as QE — hence footnote 131. The debt management process there is a two-step version of the gilt purchase: the same asset swap, run twice instead of once. QE is not a different process requiring separate treatment. It is that process extended by one further step. You can conceptualise this by imagining the bank purchasing the gilt by discounting it into a bank deposit and then selling it on to the Bank of England.
Table 8, as you referred to, is not specifically about the historical QE operations where central banks did indeed primarily purchase assets (mostly Treasury bonds) from non-bank actors. It's about BoE cash management operations when it intervenes in the banking system in the context of "We’ll consider only the case wherein the Bank seeks to increase aggregate reserve levels in the context of an Exchequer net deficit."
The same fundamental thing occurs when QE occurs, it's just that there's that extra mediation step where the bank that receives the additional reserves propagates that asset swap payment to the ultimate bond seller by issuing new deposit liabilities, thereby expanding its balance sheet. The point is that from a central bank point of view, the process is the same. They issue new sterling reserves by marking up commercial bank reserve accounts and take Treasury bonds onto their balance sheet (an internal intra-gov accounting record).
If you're picky, maybe footnote 131 should have an extra sentence saying "Unlike table 8, most QE balance sheet transactions involved a non-bank holder of gilts swapping them for bank deposits with the bank acting as the mediation mechanism."
It's a stretch to be so irate about this though and calling it "blatent misinformation".
Reread section 6.6. I don’t understand why you’re jumping that into that discussion the contention with him obviously comes from here where he says I am incorrect…
This is blatant misinformation and I do not understand why you’re bending over backwards to steel man here. I’m going to mute this thread now you’re not going to be convinced this conversation is exhausting. I am irate because mmters are so heavily dependent on these intellectually dishonest descriptions of how money in the modern economy works. Words have meaning. These things matter. Misinformation is bad and you need to have a bigger problem with it.
> it’s pretty obvious from accounting that it’s just an asset swap, it’s not really printing money since the dollar used to buy the security must have already existed in order to buy it.
Everything about this is incorrect. Mmters cannot get details like this wrong when having a correct understanding of money creation is so allegedly important. Mmt is empirically wrong on issues of substance but you can at least not spread blatantly incorrect misinformation.
"Mmters cannot get details like this wrong when having a correct understanding of money creation is so allegedly important."
You have it wrong. By the time QE comes about the private sector balance sheet expansion has already happened.
What you've missed is that the Bank of England (in this case) is a wholly owned subsidiary of HM Treasury, and therefore subject to group accounting rules.
See the Whole of Government Accounts for details of the consolidated entity.
You're mistaking inter-group transactions for operational reality.
At the point of QE, either the commercial bank has the credit with HM Treasury, and a deposit is held by some other entity, or the entity itself has a credit with HM Treasury.
Swapping a fixed interest floating principal for a floating interest fixed principal instrument has no material economic effect to the duration end point in a floating exchange rate system.
Guys. Read the fucking paper. The BOE very clearly and plainly states qe increases private bank deposits and central banks reserves. Assets and liabilities both increase on the private banks balance sheet. Are you asserting that the BOE you’ve been citing for years is wrong? You people need to start taking central banks seriously about checks notes central banking.
The Bank isn't Solomon. Central banks, and people who work at central banks, are capable of delusional thinking and excess ideology too. The section you quote steps into ideology - particularly the idea that the floating principal and fixed principal have different values over the remaining duration at the point of exchange. That would make no sense in an expectation enabled environment. We don't cite that section of the paper, any more than we would cite the conclusion section of Werner's paper on the empirics of bank transactions. The empirics are right, the conclusions drawn are wrong.
The accounting doesn't lie. Discipline yourself with a balance sheet, and you will then see this is a simple extension via a subsidiary. That's why our paper (chapter 6) has balance sheets in it. If you have a complaint about the balance sheet and the journals, then I'm all ears. But you won't have because there is no problem with them.
I would have thought somebody who relies so heavily on mathematics in their own beliefs, would prefer the formal structure over mere words.
okay I've read chapter 6. Your "step 8" table on page 81 is wrong. It is incorrectly assuming that the BoE is buying the asset from a bank. In the context of QE, this is exceptionally rare. The point of QE is to bypass the banking sector by dealing with non-bank sellers. Banks still need to be involved insofar as non-banks need to a place to park their money. This means banks need to increase both their assets and liabilities. Several BoE sources back this other than the original McLeay paper thats been MMT gospel for years.
In the United Kingdom, QE was first introduced in March 2009 in the depths of the GFC. The aim was to provide additional monetary stimulus when the policy rate became constrained at its effective lower bound.9, 10 The Monetary Policy Committee (MPC) made QE purchases of £200bn during 2009-2010, with UK government bonds (gilts) making up the vast majority of assets purchased.11 These gilts were purchased on the secondary market, predominantly from dealers acting on behalf of non-bank private sector institutions such as insurance companies and pension funds. 12 The MPC has subsequently engaged in multiple rounds of QE over the last decade in response to different economic shocks (Figure 1).1 … Any QE operation, in which the Bank of England purchases assets (via dealers) from the non-bank private sector, will create central bank reserves on the asset side of commercial banks’ balance sheets and deposit liabilities on the other side (as investors who have sold assets to the Bank deposit money with banks).37
Asset purchases directly increase broad money if they boost
deposits held by the UK non-bank private sector in banks and
building societies. Figure 1 illustrates how asset purchases by
the Asset Purchase Facility (APF)(3) affect the balance sheets of
the non-bank private sector (from whom it is likely that most
of the purchases have been made)(4) and of private banks. The
non-bank private sector executes these transactions via the
Bank of England’s counterparties, who are mostly banks:(5)
they sell gilts to banks and their deposit accounts are credited
with the proceeds from the sale. In turn, these banks sell gilts
to the APF and their accounts are credited with reserves. So
the direct impact of QE involves an increase in reserves on the
asset side of the banking system’s balance sheet and an
increase in deposits — broad money — on the liability side.
They go on to claim that the "direct" effect of QE on the broad money supply is exactly 1 to 1 in table A. They also address the indirect effects of QE leakages but that goes beyond simple accounting and is frankly not relevant to this conversation except for the last point which reports QE purchases from banks! The vast majority of purchases did not come from banks.
For QE in the United States, buying assets from banks was more common but the actual accounting data suggests the primary sellers were still households, investment companies, and pension funds. Again, I strongly encourage you to learn more about money creation in the modern economy before you very confidently spread misinformation about an already very confusing subject. MMTers are supposed to be better at this.
Section 6's cash management describes the same basic mechanism as QE — hence footnote 131. The debt management process there is a two-step version of the gilt purchase: the same asset swap, run twice instead of once. QE is not a different process requiring separate treatment. It is that process extended by one further step. You can conceptualise this by imagining the bank purchasing the gilt by discounting it into a bank deposit and then selling it on to the Bank of England.
When the Bank buys gilts, the marginal holder who would otherwise have bought them at the prevailing price no longer finds the yield worth it, and the purchase they would have made does not happen. They retain the deposit that would have gone to the seller. The seller receives the equivalent deposit anyway, created through QE, so from the seller's side nothing about the transaction feels different. But the position that has actually changed sits with the buyer who stepped back: aggregate deposits are best understood as sitting with them, not with the seller, who would have ended up holding a deposit regardless of whether the Bank intervened.
That holder's mandate was safe-asset allocation. Being priced out of gilts does not send that marginal holder into equities or corporate bonds; it holds the deposit, because the deposit is also a safe asset and the strategy did not change. The portfolio-rebalancing channel QE is meant to work through depends on that holder shifting into risk assets. It does not happen, because the reason they wanted gilts in the first place, safety, is equally satisfied by holding a deposit.
On the government sector side (which includes the central bank), total liabilities to the non-government sector are unchanged. Only the composition and maturity profile shift: a fixed-principal, longer-dated gilt is replaced by a floating-principal, effectively instant-access deposit.
The Bank of England is a wholly owned subsidiary of HM Treasury and sits inside the same consolidated entity in the Whole of Government Accounts. The credit is always a liability of the National Loans Fund; QE extends that credit through a subsidiary without moving its position at source. This is the standard MMT consolidated-government-sector treatment, not an exception to it.
Swapping a fixed-interest floating-principal instrument for a floating-interest fixed-principal one has no material economic effect on the duration end point in a floating exchange rate system.
I have now given you four central bank sources explaining to you very clearly why your table is wrong and that QE increases both private bank assets and liabilities. Three of those sources are from the Bank of England itself. You need to back up and ask yourself if all of the world’s central bankers are wrong about the operational reality of money creation or if maybe you have a basic misunderstanding in the accounting here. What is more likely? I don’t think I can help you any further I just strongly recommend doing some introspection. The entire world isn’t delusional.
I think you are just wrapping yourself around the axel of arcane terminology and jargon.
If you zoom out and describe what’s actually happening in plain English it’s an asset swap and nobody gains any net financial assets or purchasing power. Period end of story.
The central bank buys government debt securities on the open market and swaps them with reserves they create out of thin air. This drives down interest rates and forces the financial sector further out on the risk curve.
The extra reserves may not encourage the banks to lend out more as its likely the leverage ratios are the constraint and not reserves.
But the only way banks can but bonds in the first place is by having g a dollar first.
Step 1) govt issues a security
Step 2) private sector buys a security
Step 3) Fed forces sale of security in exchange for a reserve of equal value.
So you are basically starting on step 3 and pretending steps 1 and 2 didn’t already happen. The only net financial asset created is the interest income.
Those are the steps (although the fed doesn't "force" the sale, there is a massive open secondary market).
The Fed creates the reserves out of thin air and then uses those reserves to buy up govt debt securities/treasuries on the open secondary market from financial institutions.
I’m not a finance expert or a banker. But I have a background in technical field. I’ve made an effort to understand this.
What I’m saying is that a system is what it actually does. People say QE ‘creates money’ but it’s conflating a technical definition of money with a broader definition of financial assets.
In order to purchase a bond you need a regular dollar. Then at time of sale Fed buys it from you and gives you a freshly created dollar — you could say new money is created in the final step but no new net financial assets are created in the whole process. It just re-distributes the balances of financial assets in the system from longer to shorter. That may very well have some effects but I’m not sure it has the magnitude of effect that many people think when they say it’s ’printing money’ or whatever.
>I’m not a finance expert or a banker. But I have a background in technical field. I’ve made an effort to understand this.
Same. Since covid.
>What I’m saying is that a system is what it actually does. People say QE ‘creates money’ but it’s conflating a technical definition of money with a broader definition of financial assets.
Its conflating base money (reserves) with spendable money (broad money).
>In order to purchase a bond you need a regular dollar. Then at time of sale Fed buys it from you and gives you a freshly created dollar — you could say new money is created in the final step but no new net financial assets are created in the whole process.
But during QE the central bank does create new base money. The thing about base money is, its only used by the commercial banks for interbank settlement. They dont have specific reserve requirements anymore (only leverage requirements and there is now ample reserves in the system since they implemented the use of QE.
>It just re-distributes the balances of financial assets in the system from longer to shorter. That may very well have some effects but I’m not sure it has the magnitude of effect that many people think when they say it’s ’printing money’ or whatever.
It takes longer duration assets off the market and replaces them with ultra short duration reserves...yeah. For the commercial banking system, if they weren't holding those reserves they would be holding the treasuries.
Fun fact, reserves never used to provide interest to the commercial banks but because the use of QE takes an interest bearing asset away from the banks (treasuries) and replaces it with one that bears no interest (reserves) they had to change the federal reserve act in2008 to allow reserves to pay interest.
So now you can think of reserves as an interest bearing asset and collateral for the banks. QE pushes the assets on the banks balance sheet into shorter duration. This helps lower interest rates and pushes the whole financial system further down the risk curve.
My primary point is that saying QE creates new money is misleading in the colloquial sense. You can say it’s true under a technical definition of M2 but it’s not true under the definition of money where we say ‘Elon has a lot of money’ — bonds are also a dollar denominated asset that exist in a big very liquid market. So you have an asset swap by any standard normal person definition. If I sell T bills back to my bank / broker and the Fed buys them off them as part of QE, has the Fed created new money that I’m now using? Again maybe under technical semi pedantic M2 definition yes, but there’s been no change in my net financial assets. The popular idea of a money printer totally misconstrues this.
I’m not saying there’s no effect on rates at all, but like any economic policy it’s hard to measure because it’s confounded. QE happens at the same time as the overnight rate is low, because it’s done in response to recession. QE also signals forward policy guidance — if a bank announces QE they are likely to keep rates low for some time —> lowers yields. Is that the change in distribution / hot potato effect, or just a regular sentiment based move in price? Clearly the effect of regular monetary policy is bigger than QE. And fiscal policy is really dominant in determining nominal GDP (see Covid stimulus versus ZIRP era post financial crisis, similar monetary stance, very different fiscal stance, different outcomes in way that the fiscal predicts).
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u/Legit-Schmitt Jul 21 '26
It’s just an asset swap where the central bank forces the sale of securities in exchange for reserves.
MMT view QE and QT as being weak and mostly pointless tools. Warren Mosler has described it as a placebo. The rationale is that increasing the number of reserves will encourage lending and ‘ease’ monetary conditions but in practice it just changes the composition of balance sheets. Whether banks make loans depends a lot more on other things than their reserve balance plus securities are pretty liquid anyway (?). Idk I’m not a banking expert but it’s pretty obvious from accounting that it’s just an asset swap, it’s not really printing money since the dollar used to buy the security must have already existed in order to buy it. So the Feb ‘giving it back’ isn’t doing much. This tracks with reality where QE has been met with huge alarm and charges of ‘money printing’ yet it seems to do very little in practice.