Understanding the Fed's "Money Printer" (QE, the Stock Market, and Inflation)
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- เผยแพร่เมื่อ 30 ก.ค. 2020
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If asset prices reflect expectations about the future, the market rising should be viewed with optimism, but there might be less optimism, and there may even be pessimism, about a market that is being artificially propped up by a central bank. What if the central bank can’t print any more money and stock prices drop? And how can all of this money printing be good for the country’s currency?
Referenced in this video:
- Money creation in the modern economy www.bankofengland.co.uk/-/med...
- Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist? www.federalreserve.gov/pubs/f...
- Open Letter to Ben Bernanke blogs.wsj.com/economics/2010/...
- Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison www.federalreserve.gov/PUBS/i...
- A General Equilibrium Approach To Monetary Theory www.jstor.org/stable/1991374?...
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Ben, what a great video. I commented about three weeks ago that I didn’t think your description was 100% accurate. I stand corrected. This video is worth more that a semester at Harvard Business school on macroeconomics. I’ve always been fascinated by the global financial system, but honestly couldn’t get my head around what QE does. After reading one of the books you recommended and other readings I feel like my eyes have been opened. I know you’re 100% against trying to time the market, however after being enlightened by your description I’m convince more than ever that we are in a massive asset bubble driven by false fears that cash is worthless and the false belief the Fed can fix an economy with this much unemployment. Thank you for the great videos and information. You have a gift!
Thanks James. It was good to read this comment. Another book on this topic that I recently enjoyed was _The Case For People's Quantitative Easing by Frances Coppola._
Same here: I watched the video and started wondering whether Ben was really right here. As it turns out, he's right. I can also recommend a lecture on Coursera called "Economics of Money and Banking".
Amen brother!
@@BenFelixCSI which was the other book you had recommended
Ben Felix I suggest you look into how QE is actually deflationary. QE sucks funds out of the on-balance sheet M1 funds and forces banks to increase M0 FED reserve account funds. So the funds are stuck in the reserve accounts and therefore deflationary.
Also no currency is fiat, every single currency unit has an off ledger book entry only asset attached to the credit, this is each unit of currencies Drawing Right, it will also have an Allocation number which refers to purpose of that units creation, a project or program to ledger the funds onto the front side system. This whole fiat currency nonsense has to end, please go research how the global currency system actually works not how you think it works due to the propaganda you read written by an mystical pseudoscience economist.
This is tough. My head is spinning right now. But I've always wanted to understand it, so I'm coming back. Thanks for taking the time to teach that. Everybody talks about it, but no one knows exactly what it is. Here is a suggestion for a later video: MMT; Thanks again.
Cliff Notes version: MMT is a crackpot theory.
@@johnp7739 Based on what though? It not making sense? What within finance capitalism makes sense? None of the financial innovations conjured up make sense to me.
Exactly! Yup CNBC doesn’t have the brainpower or patients to explain something like this...
@@johnp7739 If I am not mistaken, MMT dispenses with the notion of gov't debt entirely. Says the gov't can just create the money it needs as long as it has optimum taxation ?
I’m from Brazil. Ben Felix’s videos are amazing!!
I don’t understand very well that video, to be honest. My english is very poor!
Maybe a portuguese subtitle will help me.
This is extremely informative. I am going to watch it 20 times.
It is a video spreading wrong information..
@@bla-ig4bd what's wrong about it?
@@hman2912 All of it. The idea that the FED's monetary policy has not resulted in increase in cost of living is delusional, and only a rich guy who is invested in financial assets would have a vested interest in convincing you that that BS is true
I'm gonna need to watch it 20 times just to understand it.
@@jtonna1624 Do you have proof?
I say it as Econ PhD student: this video nails it.. it's unfortunate that many economists themselves are not fully aware of how money is created and things started to improve only since the Great Financial Crisis.. the video summarises well the latest academic insights on how (uncoventional) monetary policy works
And excludes every important detail which renders the entire thesis bogus
Google User such as?
@@brido88 Such as the fact that the Federal Reserve has over 7 trillion dollars in government and corporate bonds and other debt securities - securities that were bought on the open market.... and that they have voiced their intention to continue to flood the market with liquidity and keep interest rates artificially suppressed, such that real rates on long-term bonds are negative for the first time in american history.... that the CPI is designed to mask rising consumer prices, as anyone who has studied it knows... need I go on? This video is filled with so much misinformation and outright lies you'd think it came straight out of the FED
Google User But what does that all mean? What is your crystal ball telling you?
@@brido88 No crystal ball. I am stating facts that are verifiable by anyone who wishes to investigate, instead of resting on so-called youtube "experts" with an obvious Keynsian slant. But if you want me to make a prediction, I will: over the next 5 years you will see the dollar weaken considerably (already happening) and prices across the board will consequently rise in ways you never thought possible in America. With the purchasing power of the dollar undermined significantly, you will see many American businesses suffer - especially ones dealing in luxury goods, such as Apple for instance. Apple is the biggest bubble in the American stock market at the moment for my money, and I am personally short as of last week. I expect Apple's Market Cap to be half of what it is today in the next 2-3 years
Thanks Ben for the video. I'm a CFO I've been studying finance and monetary policy for about 25 years and you have done the best job that I've seen on how QE works. From what I have learned so far, everything you say is correct. I've had to put the jigsaw together from information that I read and learned along the way to understand how QE works and it took me many years. I wish you did this video 10 years ago and you would have saved me a lot of time. If people got their heads around your video, then they would be miles ahead of most bankers, finance professionals and politicians. You've done a great job in explaining the monetary system in a simple manner, thanks again for your great work.
"im an cfo"
I must agree. It takes time to put much of this information together and have it sink in. This is not “banking 101.” I wonder how many bank clerks even understand this level of finance.
Many kudos to Ben on his research and efforts in compiling this video, it is most appreciated here.
They know what they are doing
always thier decepion and ahead of pesants. The trillion dollar conspiracy. The creature from Jeklly Island. Edward G Griffin
👆⚠️🐍✈🌧🌧🌚☢⚠️
CHEMTRAILS UN is in NY FED ,IMF ,BIS. Banking Cartel runs the show nobody say this the way I do it consumed good portion of my life to know. Once anybody do Lable conspiracy exacly it is all.🤏🧠
Don't make it twist even more Banking Cartel own and run the whole world and create war with thier military and secret servis.
When SLAVE indebted unable keep on paying or disobey.
Ah yes, it's complicated stuff this QE magic. And it would need to be to make the trick work. What to do however ahead of the wide spread wreckage caused by this spell? An internationally diversified asset mix across the major asset classes? Sure, better than holding cash ultimately. And apparently better than gold too. Yet, if only there was an enduring inflation hedge and store of value. There is, in its nascent form at least...but one won't learn much about it here given that Ben, (although he gives brief mention to it) doesn't yet fully see that it is at hand. Anticipate that this will change with time perhaps, but ideology may ultimately stand in the way.
Fantastic - As a lawyer and PhD (abd) in finance I’m combing through the federal reserve act to double check the transparency issues, but as far as I can see, to date, you are spot on and one of the few money managers who understand this. Thanks for sharing!!
QE isn't strictly printing money, but what if the government is collecting poor performing or risky assets that the government won't be able to collect their value back?
Don't worry, that's not what they're doing. They're buying assets from certain people with political influence at inflated prices, to transfer wealth to the elite knowing the public won't complain because they forget we have to cover the cost later through increased taxes.
Then it's money printing because they're effectively transferring reserves to the private banks of the individuals who held the junk debt that they've now sold to the Fed reserve. Same thing happening to equities but the conduit are global central banks and the primary banks.
would love to hear ben felix on this!
Credit worthy borrowers LOL, is the US credit worthy with 30T in debt going to 150T in 20 years? The signal of higher interest on US bonds is broken if the Fed puts them on their balance sheet.
There is a risk of loss on individual bonds, but consider the scale of the purchase and that the Fed will sell back in a less uncertain environment. This is how the Fed was able to make a net profit off of the commercial paper it bought following 2008. Not to say losses are impossible, but it seems pretty unlikely without some sort of catastrophic economic failure.
To the curious, this is one of the most intellectually satisfying videos on the subject. Many other videos, like most economics textbooks, basically peddle the mistaken theory of fractional reserve banking.
Thank you so much, Ben, for great explanation!
When I was learning these concepts ten years ago, I could only dream of such a clear, easy to grasp video.
This is blowing my mind. I'm going to have to watch this video at least 5 times.
Incredible video, Ben. Glad to see you back. Even if the wait was long, the quality of your content is always a good reward. You deserve a wider viewership in the TH-cam finance world, as you're simply the best.
This explanation is a gem! I passed my A-level exam in economics in 1988 but never understood this topic at this level 😂.
With the quality and information in your videos, you deserve 10x more subscribers. Insightful and well-researched video as usual, eagerly waiting for the next video Ben!
Such a shame, schools need to be teaching this stuff, so important.
They won't it's international
@@SentinalBais1 I learned most of this in second year macro.
I agree!
Then more conspiracies would be discovered and inquired about hence they dont teach it
@@fredliu168 Second year macro...high school or college?
Excellent video and recommendations at the end of it too. Welcome back Ben, I hope we see more and more of your rational, sensible insights in a time of madness.
Ben. I have been one of the very early supporters/followers of your channel, even one time we talked privately. It is amazing to see how your channel has grown. You are one of the few people who talk about money on TH-cam, not out of of thin air, but out of knowledge. So lots of respect!
This doesn't mean I agree with you all the time, but just appreciate that you are informed and then promote knowledge, rather than just blabla to attract subscribers.
Great job explaining a complicated subject. This is why I always come back for more videos.
Thanks Felix. Finally someone who gets the money creation mechanism right, there are to many "experts" on YT who spread misinformation about the topic.
Hi Ben, thank you for the video. I have some questions as it contradicts my current understanding.
1. How is it able to counter deflation if the Feds assets purchage is not inflationary?
2. In 2008 Fed purchased sub prime mortgage backed securities which were toxic. When Fed buys those assets at a value that market is not ready to pay due to their quality being known, is it not more than changing the composition of the reserves? like changing fake gold with real gold seems to me like injecting money.
sumcse wow great second question. Really hope Ben responds to this!
Great second question
I’ve always been wondering the second question. And now I’m curious to know the answer to the first question too. Ben, if you’re reading this, please answer these 2 questions!
Great questions!
Great question. For the second question, as you would know, we had inflation during and after the 2008 conundrum. Since the loans were being made out to consumers, not in the reserves. Banks had little reserves.
I'd been really struggling to understand the money creation process by banks for ages. This is the best explanation I've found. Thank you
gibberish.. misdirection..
you borrow you owe
gvt let banks invest in derivatives.. you pay their losses
ever see rot schild on t v or online ?
smug smiling superior.. they own banking.. you don't 😮
Congrats Ben! Your content is valuable, clear, and helpful. You deserve the recognition!
Fantastic breakdown, mate - very comprehensive. Must've taken a while to pull this all together. Many thanks! 🙏
Hi Felix, I've been keeping myself busy learning as much as I can about Common Sense Investing with Index Funds for the past 2 years. Still, I discovered your channel just a couple of days ago and I can't believe you have so few followers. This is by far the best source of information I found so far. You offer great content! Thank you!
A man of your word! Thank you Ben, exactly the video I was hoping for. Glad you're back.
By far the best explanation I've seen on this topic, and the only one I have seen without a blatant political slant behind it. So much to take in, I had to watch it several times.
The best video by far that I've seen about this topic. You're just a genious.
I just found this channel. This guy is so incredibly good. No-nonsense and provides studies to back up all of his talking points. On top of that, the graphics displayed to reinforce the concepts are so helpful. Watching this video basically completely dispelled some false beliefs I was holding and made me instantly hungry to learn more about how money works. What more could I ask for from a youtube video?
You don't seem to understand he is mostly perpetuating a self-serving gaggle of establishment theorists and financiers that crashed the global economy in 2008, using circular logic to enrich themselves. Maybe look at the world and see how this stuff is actually working out.
You Sir are a godsent! You explained in one video what nobody else seem to ever get around to explaining. Thank you. For a finance novice, you really helped me today.
Financial literacy classes teach students the basics of money management: budgeting, saving, debt, investing, and giving. That knowledge lays a foundation for students to build strong money habits early on and avoid many of the mistakes that lead to lifelong money struggles. Thank you for an excellent video.
If interest rates are lowered you'd expect more borrowing so there is an inflationary effect of reducing rates even if it only acts to reduce deflation.
Good to have you back Ben! Been looking forward to your solid insights on investing and personal finance.
Much love to you Mr. Ben you’ve taught me so much since I’ve found out about your channel recently. Please keep up the good work, I hope to enlighten others just as much as you have. ❤️
After watching the video I went for your recommended book Pragmatic capitalism by Cullen Roche , am halfway through it and I remember you're explanation while reading the 7th chapter from the book about moneyness, so i come back to watch it only to realise, I understood all that I read in the book after watching this in depth explanation. It is now a much clearer picture for me .
Thank you Mr .Felix I genuinely appreciate your efforts .
Am a business school student who has probably learned more from teachers as yours then from my school ones.
I think you make a pretty good case on the neutral impact of the fed's action. But here is a premise that I think you are missing. When the feds acquires assets from the financial banks its only a neutral transaction if you assume a pre-acquisition positive value of said assets. However these assets are usually junk, like the CDLs of the 2008 crisis. So by the fed acquiring these assets, it saves the banks from going down with their junk bonds or assets and in turn failing to fail. On the other hand, you can't deny the impact that governments are having on inflating the stock market, e.g the US treasury has been giving liquidity in the form of loans to companies that would be have struggled or failed with or without the pandemic (among many, Boeing comes to mind). To deny the inflation of the stock market evaluations by governmental policies is to deny the reality and the spirit that is causing these unwavering evaluations in the midst of uncertain future economic performance
Inflation is not only how much money is out there which of course works towards to spending , but also how much people and companies spend. Yes by indirectly increasing credit Feds increase the money supply which can be spent. Say someone buys $350K house by feds help then refinances and has cash in the bank and can spend. but that's indirectly. While it is contributory it does not mean it creates. Inflation is in general price of consumer basket going up, and it cannot go up if people are in recession or depression because they don't want to spend shit. At the same time feds are coming with their money printing tricks during those recessions and depressions not to allow economy to completely freeze and stock market completely collapse. What else do you want them to do? Yes, let's make bitcoin our money which will become $100K during these times, everyone will start growing their lemon trees and there will be no economy?
@@arrrryyy I did not make any case for or against inflation at the feds hand. But if you admit that without the feds action the market would have tanked, then inherent in that premise is that the feds have affected (may we say bloated) the current evaluations. And thats all I am saying.
@@jojoplacide I agree with you. There is really naive assumption going on here that all investments which are funded by private banks are good investments. There are tons of zombie giants at this point like Boeing you mentioned. Because will Boeing bounce back? Everyone is taking it for granted - but lets take this example to extreme for the sake of this argument - Boeing stops doing anything. It just exists with it's loans, grants and assets. Now the giganting commercial papers issued by boing are being bounced back and forth between private banks and FED. New bonds are being added to repay old bonds. FED and Private banks keep jugling, consolidating and re-packaging those loans. At the back of it there is Boeing stock which basically is backlog of loans to repay. Gov bails out Boeing so it can pay back the loans which was given basically by the same entity. It only creates illusion of adding value. We have a saying where I come from - stirring tea doesn't make it sweeter.
Fed isn’t buying junk debt. That’s absolutely false
@@miketorse yes in the literal sense they might not be junk grade bonds. The point is that the fed is buying bonds and assets that would other investment institutions deem less valuable. Otherwise other funds would buy these bonds.
Great to see you back ben! I agree with everything you've said here, but it's worth noting the recent trend towards OECD governments and central banks buying up corporate bonds and even investing in ETFs in a bid to shore up asset prices. These actions certainly fall outside the specific topics you're addressing in this video but they're worth bearing in mind when discussing the recent asset price recovery, as well as market confidence in general.
Nice! You are one of the best finance channels on youtube its well deserved!
So much useful information in a single video. Great to have you back Ben!
Glad to have you back man! We butted heads over gold a year ago. I'm glad I went all in (plus leverage via options) in April, up big time.
Facts, the average lifespan of all fiat currencies that have ever existed is 50 years; no fiat currency has ever lasted for more than 100 years. Meanwhile, gold has always been seen as a store of value everywhere. If you think about the great diversity between all the different societies all throughout the world all throughout history, and the different ethics and values they all hold, one would expect to find very little agreement/consensus among them. Gold as a store of value is one of those few things they all agree on. I think that says something remarkable about its endurance and power that won't change anytime soon.
I'm not claiming gold is superior to equities or real estate, only that it's superior to holding fiat which is guaranteed to lose value in the long run. Especially in times like this when governments and central banks become totally unhinged and reckless, hell-bent on destroying the value of their currency. How can you say that all this money printing and deficit spending will lead to deflation rather than inflation? The US government is doing major deficit spending to give out generous unemployment benefits and business loans (that will likely be forgiven) to people and businesses. In other words, we are doling out borrowed money to people who aren't producing anything. More currency units + less production = inflation no?
Anyway though we often disagree and have different perspectives, I always find your analysis and perspective invaluable. Keep it up man!
Thanks Edric! I have more gold research that I need to turn into a video. We may butt heads again soon :)
I agree with this comment... Love to hear this new perspective on money printing, but it still doesn't add up for me. This video left me with a lot of questions. If the money the banks recieve when the central bank buys their bonds doesn't get loaned out, then where does it go? Does it get used by banks to buy things? If so, it IS entering the economy and will cause inflation long term. If it just sits there and doesn't get loaned out that just seems unlikely. Is that what you're saying? It just sits in the banks? Personally since covid happened my bank started offering me 2.2% interest (down from 3.7%) on my line of credit so you know what I did? I borrowed a ton of money to buy stocks and precious metals (and have made a great profit doing so). The banks created a bunch of money and I used it to buy things and the prices of those things went up incrementally when I put my bid in (inflation). Please explain what happens to the money that is given to banks in exchange for their bonds cause I'm still confused
@@logansept The deflationary effect from people getting unemployed (and not borrowing) is greater than the inflationary effect from you borrowing money because the interest rate is lower.
@@DiamondTear ok that's interesting I could see that making sense short term while there's a recession and job loss, but then once people get their jobs back wouldn't that long term cause inflation? They always try normalizing interest rates but they never get up before the next recession hits and they have to lower them more and more and more each time.
Logan Sept - yes. Long term inflation is coming as they want it to inflate away the debt...
WHEN THE WORLD IS ON FIRE WE THOUGHT HE LEFT US. BUT NOW BEN FELIX RETURNS TO EDUCATE THE MASSES ON THE TRUTH ABOUT QUANTITATIVE EASING!
I was missing my guidances trough these dark times.
Thank you Ben, for this very instructive video, that yet requires to be seen 10 times for a beginner like me :)
Indeed, it's good to explain what QE means, a mysterious word used every time and everywhere.
Stellar as usual. I love how you break things down. Thanks for educating the masses, Ben!
Yet here we are in 2022 and 2023 facing a hyperinflation crisis and a banking crisis.
Thumbs up, Ben. Excellent presentation. I'm nowhere near an expert in this field but I'm not sure I can wrap my head around it not leading to inflation. When I look at real assets, such as houses, cottages, cars, commercial RE, stock valuations... prices have skyrocketed. Look at the average family income in Ontario versus the average price of housing in the last 10-12 years. An experienced teacher was making $85K a year, 12 years ago and the average house was $500K, now that same teacher makes $97K and the average house is $1M. There has been massive inflation the last decade, if it's not due to central bank policy and action, what is causing it? Household debt is rising every year breaking records.
i really like your style of enunciation, it makes a difficult topic like this much easier to follow by easily maintaining my attention.
Watching this in Q4 2022 is insane 🤯👌🏾
This is probably the most rational financial explanation I have heard since the start of this pandemic. When I speak to colleagues and friends about the situation in the stock market, it seems like everyone else is smarter than the FED and financial experts. I keep hearing ''We are hearing towards inflation doom'' and '' the only reason stock prices are up is because the FED is buying stocks ''. Its nice to have some rationality. Thanks, Ben.
If you sub to the channel you can call him Ben.
Yes fed has nothing to do with current stock boom, and there will never be any inflation except when you start looking at houses prices
Alexander Hamilton haha yes, thanks for pointing it out (modified)
@@azapray I hope you rethink how you think about the fed and the market =) The repo market almost died in 2019 before corona. Corona save it because it allowed more 'emergency measures' - spending. So now we're kicking bigger cans down the road
Just wish I had understood it.
When fed printer goes BRRRR, you buy stocks
I’m brazillian and I wish I could understand better. My english is very poor. 😅
In summary, the Fed reserve has been printing money over the last 50 years by buying mortgage backed securities and junk debt plus equities and property via banks and Blackrock.
This video is amazing. Such an articulate video , explaining information in the truest and most applied form. I can't thank you enough. Cheers mate. 👍
I consider myself to be a fairly smart engineer. I understood zero amount of this video.
You're not alone
I believe it's a part of your brain you don't exercise often. Therefore, these concepts seem foreign to you. Another analogy is Democracts and Republicans don't understand each other's points of view.
come on guys, make an effort! I have an arts degree and got it all in the first go!
Quite normal, you should read an introduction to modern economy
you need some understanding of basic accounting.
Happy your back. Your pretty much the best econ/finance teacher on the web. Thanks
I rewatch this vid on occasion. Timeless info here. Great work. Thanks you!
He always looks like someone is trying to make him laugh just off camera and, personally, I am all for that!
The error in Mr. Felix's thinking is that money is loaned only to "credit worthy investors." At the present time, this is untrue. Both banks and the Federal treasury directly have made huge loans to credit unworthy companies. These are the "zombie companies that we hear about By buying these "junk bonds," the Federal reserve system acquires credit-unworthy securities from the banks that are extremely unlikely to be paid back. The Federal treasury has also made huge outright "grants" to various companies to develop vaccines, pharmaceuticals, etc. Mr. Felix's assumption that banks are the only entities that are pumping money into the economy, and that banks only lend to "credit worthy" companies, are dangerous fallacies. He also fails to take into account the effect that very low interest rates to depositors that result from the Fed's keeping its interest rate to banks and other financial instituions extremely low. The extremly low interest rates paid to depositors makes savings nearly impossible, which severely hurts people's retirement prospects.
Yes very important points to consider. Maybe it falls outside Mr.Felix's purely economic perspective, but the social and political implications of this should be important to every citizen.
This.
If any of the bonds or securities the fed hold gets defaulted on, it will garner inflation as if the fed just gave it away...
They even gave grants (i.e made a loan) to shit tier companies like Kodak, and it's unlikely Kodak will be able to repay that loan in full.
Many more errors than that, such as: Currency is not money. Yes, fractional reserve still exists... the reserve is ZERO, So it is even Worse. A word he avoids is Counterfeiting. And the historical fact that the central bank cartel successfully impoverished the world and compromised its governments. Central Banks, fractional reserve, tied to a progressive income tax, is NOT remotely capitalistic, it is marxist (as even Senator Aldrich himself said). Every dollar the FED creates steals value from existing ones, and they then hand it out to whom they chose. It is controlled wealth transfer. A blatant corrupt system and anyone supporting it is either blind, or a criminal... like all the thieves that masterminded it.
The fed does not generally buy anything below investment grade. The exception to the rule is that they will buy so called "Fallen Angels" which are companies that were downgraded to "High Yield/Junk" status as a result of the pandemic but would otherwise be investment grade.
Really informative video! I never realized how in-depth the financial system is until I watched this video! Keep up the great work!
Great to see your videos again. I didn’t knew the way Canada and USA money creation works, I thought they had the usual % retention on deposits like in my country in order to control the multiplier. Great video as always!! 💯
Glad you're back! Thanks for the amazing and timely video; I love your content. Congrats on 100K subs!
Welcome back! We've missed you! Congrats on 100K subs
Hi, I am from Brazil ( the country where everything can happen even the impossible ). Glad you are back. You help me a lot. I watched all your videos, excellents.Thanks.
Ben, I am so glad I came across your channel as well as the Rational Reminder podcast. I am studying for my Wealth Management Essentials, and let me tell you this video has changed the way I view many policies and financial concepts. Greatly appreciated.
Now that I watch this video a third time. It's funny how he hold up the silver award like it means nothing to him while staring deep down onto our souls and thank us. It's kinda creepy and cool at the same time
He's alive!
This is certainly informative and I will watch multiple times. It is comprehensive and a bit over my head so I will watch slowly.
Glad to see you back as I came across your channel last month and I immediately sub cause of your unique content.
I'm gonna need to watch this 5 more times and take notes.
It's complicated because it's legal fraud.
“Borrowing is the money-creating process that allows for saving, not the other way around”. Really cool concept to understand, thank you so much for this video.
Great video! Would be great if there is a part 2 of this video addressing some of the concerns in the comments ! Amazing content Ben :)
I consider myself a dunce in economics, but you’ve explained the FED like no one has to me. Well done!
Hey Ben, from the sound of it looks like you are referring to QE we've head in the aftermath of 08 crisis. How about the current situation with Covid 19? Do you factor in helicopter money from the government and its effect on inflation? Also, why do you think USD has recently started losing its value to gold and other reserve currencies?
The currency reflects the strength of the economy and the US is having virus problems more than europe or Japan. Remember depressions are deflationary events. They print in order to keep prices stable in aggregate. Powel said there should be more ongoing fiscal stimulus (helicopter money)to avoid further contraction and lay offs.
Ben, you are just so good at what you are doing! Keep up the great work.
I have already watched this 20x. This is basically a class on economy for me. God Bless You!
Love hearing the tangible actions that you're implementing to make progress towards your dreams!💪
Today it's not about return ON capital. Today it is about return OF capital.
Really well done Ben!! You are one of the few TH-camrs that is not spewing one of the long rejected money multiplier / fractional reserve banking / QE = printing myths. Keep it up!
I had been waiting to see a new video from you! Thank you and I appreciate your time. 🙏
Thanks for this! This was a nice reiteration of the podcast topics which helped the slightly more confusing bits click.
Great video! But I always get stuck on "the Fed buys treasury bills from a bank." WHERE did the bank get the T-bill? From depositors' money, right? What's the bank's motivation to sell to this particular buyer, the Fed?
So what was the cause of inflation?
Thank you. So much clearer than anyone else I've seen.
Best explanation of QE on TH-cam so far! Thank you very much!
Someone told me that it's the best time to buy because there will be a huge pump
The cost of living is making people go into different businesses anyways, but my problem is that the rate at which money gets finished on little purchases is so surprising
Wait so let me get this straight. You're saying that the bank reserves that the fed trades to the private banks for government bonds just sits with the private banks and doesn't enter the economy in any way? So trillions of dollars that the fed has printed are just sitting with private banks. Maybe a dumb question, but what do the banks do with that money? Do the owners of the banks take it home and then spend it? Or just never touch it... I'm confused. If it doesn't get lended out then where would it go? If quantitative easing is healthy for the economy, why not turn the dial up to 11 and print 100 trillion tomorrow so we can all be rich? Why does the fed talk about trying to "normalize" rates if it's doesn't even matter? Presumably they try to "normalize" rates to avoid inflation right? Sorry I'm still trying to understand all this but to me I have an overwhelming gut feeling that you can't just magically end a recession by lowering interest rates without future consequences down the road. You might need to do a series on this topic to explain your position more fully so I can understand.
Read “why gold, why now”...
They remain in the bank's balance sheet, and they'll stay there if the economic outlook doesn't change. Currently, banks have 3 trillion dollars in excess reserves from the 1.5 trillion prior to the FED interventions. The reason why inflation hasn't picked up, is because aggregate demand hasn't recovered and banks are reluctant to lend money, because the pandemic exacerbated the credit ability of the private sector, thus leading to the reduction of the velocity of money.
In my understanding, this is why the wealth gap is getting worse. With each successive recession, assets get a helping hand from printed money which benefits those who live off of their accumulated wealth, while the majority experience potential job loss and struggle to find quality work with good pay.
However, distributing the printed money to consumers could lead to hyperinflation, because then there would be too much money chasing too few goods and services.
Central banks try to maintain some inflation because it stimulates the economy by encouraging people to invest instead of sit in devaluing cash. Deflation would be dangerous because the value of debt increases over time, making it harder to pay off in the future. So some inflation is better than none/deflation.
If you look into MMT, it explains why a sovereign federal government's debt is not the same as personal/private debt. Private debt is usually bad because it needs to be paid off, while national debt is good and sustainable because it funds crucial services. However there is a threshold beyond which hyperinflation exists. But people mistakenly think the threshold exists at a balance sheet with zero debt, when it's actually somewhere in the red. What matters is the ratio of national debt to GDP, not the amount of debt itself. Trillions sounds big, but the US has a much bigger GDP than its debt, and it still has lots of room to create further debt without spiking inflation.
Japan is a good example of how you can have massive debt with little inflation for decades. If their population were to start growing more rapidly though, there would be more demand for products and services so their inflation may look different then.
The problem many nations face is how to more fairly distribute the money that is created without triggering massive inflation. Right now, all of this monetary policy is only benefiting a very small slice of society.
@@PistonIgniter ok so to me it sounds like in this video Ben is saying that modern monetary policy doesn't cause inflation and may cause deflation... But we are saying no it does cause inflation long term (yes may be deflation short term due to the recession itself) not in the sense that money is raining from the sky, rather once the recession ends, people get their jobs back and start spending and loaning more, taking advantage of the low interest rates that never get fully normalized, and those loans have no money backing them up in the banks but the banks still make them knowing they'll be profitable.
I also think that all these CESB and CERB payments (talking Canada here) would cause inflation because that's government debt that I would expect them to never pay off besides them inflating away that debt.
@@blizzard762 sounds reasonable to me, if the government would just stay out of things we'd be better off. Instead they try to help and make things worse
Awesome to see you back! Absolutely love your content
I enjoyed this presentation for its verbal clarity. I expect to view it repeatedly and let it guide me on what subtopics I need to gain a grasp of. I like that it stated unequivocally that most money is created by banks out of thin air. The citizenry, at large, needs to be taught this.
It pains me to admit I've criticized the Fed a lot for this practice without fully understanding what they are even doing. This is an explanation that i needed to hear. Thank you.
Don't be pained......the Fed deserves to be criticized.
*What's stopping any of us from writing a big cheque without any reserves in order to purchase treasury bonds from the government and then collect the interest **_below_** the rate that any central bank can do, effectively undercutting them and getting the government's business in the long run?*
It seems like a lot of these articles and videos about American monetary system are speaking for the banks, saying how printing money is done in the name of "public good and stimulation of economy". But they never mention the beneficiaries of this system who gained money out of thin air on interest.
Is people gaining (even to an obnoxious level) a bad thing for the whole economy?
Best video I seen for a long time. I need to watch it again. Thanks
Why is keeping low interest rates so important? Why can’t the FED allow interest rates to naturally go up? My guess is to avoid bankruptcy tsunami of over indebted governments, corporations and households, throwing us back to 1930. The problem is, we can’t solve a debt problem with more debt. At some point, market forces will push today’s artificially low IR to where it needs to go.
Fama’s argument in the paper I mentioned at the end suggests that market determines rates and the Fed just follows the market.
@@BenFelixCSI ok, so why are market rates at or near zero and how does "the market" go into negative interest rates?
@@BD-me4nk It's all about supply and demand. At present, there is far more institutional will to loan money than there is will to borrow. Rates rise and fall until these things equilibrate.
"Money in the economy comes from a demand for loans from credit worthy borrowers." Therefore, if a central government increases its debt (a credit worthy borrower) this will increase the money supply. Is the increase in central government debt inflationary?
It isn't the creation of the money that is inflationary, but the limitation of real resources. A dollar creates no inflation until it is spent.
Great video! Important to keep in mind that QE is still considered a controversial measure by economists. Although there is a neutrality in money, there is a point where prices become fully elastic, when 0 percent real interest rates occur, and that is when there is no difference in terms of liquidity between any of the assets. There is no data to use as a model on how that coupled with large amounts of debt will be handled by the market.
I like how you draw the dollar bills, so that they have SOS signal on'em :)
Good video btw
If QE pushes down long term rates by adding liquidity, and you say lower rates results in more money creation then doesn't QE result in more lending indirectly?
Sentinal72 that’s assuming that there is demand for loans. If there is no consumer confidence, a business isn’t going to go to the bank and ask get additional loans to invest in things like capex, even if the interest rate is down to 2%. If anything, they’d be cutting overhead as opposed to adding to their liabilities.
Well thats the purpose for QE no? Encourage loans and spending
@@AForEh But in order to stimulate the economy, by lowering interest rates there will be demand for borrowing. Is that not the case?
When is the updated model portfolio coming out? I feel like a kid on Christmas morning!
As always, great video! So many misconceptions about how banking works are cleared up from this video.
Awaiting the new model portfolio eagerly as well! Any updates Ben?
Where will that be? on this channel?
@@evanlebzu1 I believe either on the rationalreminder or pwlcapital websites.
Just like any other basic TH-cam channel. Tells the peasants the basic mechanizations of the system but no actual advice on where to use/put your money and no information on what the maker of the video IS doing with there money. They all just repeat the same basic things
@@Ryan-nm2si joseph carlson has a channel that does exactly what you say is lacking. His portifolio is open and he discusses his choices weekly. I find it extremely helpful, manly to see and observe another investor.
OMG I though you gave up like so many TH-camrs. Very glad you are back!
I rewatched this several time, full of solid points and insights
Was just curious, if quantitative easing has no influence on commercial banks lending out money and increasing the monetary supply then why do central banks pursue the strategy?
Because the risk of banks running out of liquid assets and refusing to lend altogether is large.
Just discovered you and absolutely loving the in depth expertise holy shit I feel smart after watching this stuff. And trust me I’m dumb as shit
We trust you. 😂
Your videos are my education tool. Welcome back from your break
Such a great video. Best I've found that explains what's actually happening with money creation and bank reserves. Amazing how so many people understand this wrong.
I still don't understand everything clearly but as an economics major, I can only hope Ill get there.
The truth about the economy will not ever be taught in a government school. You will be indoctrinated.
@@BeepBeep_773 Lol, dude he literally cites academic articles to support his explanation...
H The thing is that you should not heavily rely on “scientific data” in economics as it is often misleading or just outright bs. That’s because economics is not the same science as, say, physics or mathematics. You can’t repeatedly perform an experiment to test your hypothesis. That’s why theory and logical reasoning is the best way to understand economics.
@@zygi22 Ok and people can construct a theory that is pro-MMT & logically rationalize it. People can do the opposite, theory & ones own "logic" may also not be reflected in reality.
Research the truth about the Federal Reserve.
There are a few points I disagree with:
1) Lending doesnt always go to "credit worthy" individual/entities.
2) The govt, via stimulus packages (helicopter money), is simply giving away money outside the financial system without the need of anyone borrowing anything. That is sheer inflation right there.
3) The Fed buying ETFs corrupts the normal market forces by obscuring organic price discovery, thus inflating stock prices. The Fed should have no business participating in the stock market, period.
4) The Fed buying corporate bonds, some of them of troubled companies like Hertz ("credit worthy", right? LOL)
Umm, be careful with how you say inflation. There's asset inflation (stock markets, real estate, commodities). The Federal Reserve doesn't buy ETF's that is a misconception. They buy financial assets (treasury-bills, mortgage backed securities, CD's, and corporate debt), and they are able to liquidate these assets to the investors who hold them. These investors are going to have to go to more risky assets, like equity (stocks), and this causes market inflation.
And Consumer Good Inflation, this type of inflation is caused by the psychological process of consumer spending. Giving money to people via helicopter drops, doesn't cause (prices of goods inflation) people might cause consumer goods prices to rise when business's notice that people are purchasing their products fastly (Demand and supply). Printing money and giving it to people is one of the variables for inflation, the other 2 variables are velocity (Psychological spending habits of people) and also Business' raising prices.
By keeping the stock market afloat, the government is helping people retain some confidence, which will help stimulate the economy. Once it slumps, people will stop spending, and the economy will spiral downwards. Question is how long can they keep the market inflated.
I think he meant those things happen in the ideal scenario... of crz real world isn't ideal :D
Is the helicopter money in the US (and other stimulous measures) actually financed by "printing money" (inflation) or is it taken from the government budget / tax money (redistribution)?
@@tigers456 A long time man, this isn't pure capitalism anymore, never was to be honest since 2008