Quantitative Tightening Explained (and What it Means for Markets)
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- เผยแพร่เมื่อ 11 มิ.ย. 2022
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THIS VIDEO WAS REUPLOADED TO CORRECT AN ERROR - SEE THE COMMUNITY TAB FOR MORE. APOLOGIES.
Quantitative Easing Explained: • What is Quantitative E...
You might have heard that the Federal Reserve is laying out plans for "quantitative tightening," but...what exactly is QT? I explain the process and what it means for the economy (and your investments) in today's video.
If you'd like to support the channel, you can do so at / theplainbagel :)
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This channel is for education purposes only and does not constitute financial advice - Richard is not responsible for investment actions taken by viewers. Please seek out a registered advisor if you require assistance (while Richard is a registered portfolio manager at WDS Investment Management, he does not provide advice through The Plain Bagel, which is not affiliated with his employer).
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Didn't you release this a day or two ago?
I get it. It's a correction to the original.
Soooo, watched both this and the first upload and couldn't spot a difference.
Should I be concerned about some notable incorrect 'fact' lingering at the back of my mind now from the first version (and if so, what was it?), or was it some minor or inconsequential inaccuracy?
Is it true that the rich people with money are mad that their money is worth less due to inflation thats why they force the government to fix inflation? Cause our country is ran by the rich?
Exceptional job as always. Thank you.
QE= Fake it till you make it
QT= Ready or not, here's your bill.
Best comment for this! 💯
Spot on
Not really. The QT bill is basically a zero percent loan. Honestly, I'm not certain what really happens with the principal payments during QT. The only thing I'm certain about is the Government is losing a major buyer of Government debt that purchases said debt with printed money.
I see a re-upload by The Plain Bagel. I re-click like button. I re-watch the video.
Good man. Here to do the same! Richard's awesome, and shouldn't be punished by the algorithm for wanting to correct an error that most people didn't even notice!
And re comment
Oh good, it's not just déjà vu.
@@jamesmacefield2801 what was the error??
@@Prizax There's a community post from Richard himself that explain the little change. You can find it on his channel.
Hey everyone, yes this is a reupload! Please check out the community post I put out today: th-cam.com/users/postUgkxVIoju507HTpylVACCocSYMx-fSRFUTG5
Your link doesn't work
@@PragmaticAntithesis Fixed!
There is so much information jam packed in this. I'm finding myself rewinding constantly to catch the impact of what you just said. Excellent video!
Thanks for sharing your insight, my favourite teacher!
Thanks for explaining this! Quantitative easing and tightening have confused me for a while.
Always good content! Btw, I like the split colour background, nice effect.
Really enjoyed this, thanks.
Updated video, thanks Richard 😊
I totally understand now. Thank you for the video
Thanks for the valuable video!
Animated examples are very useful, helps to solidify the concepts. One thing that I haven't found on your channel is some kind of guide about free resources. Like, how would you replace your tools from your work by other tools that are more or less cheap or free. Would love to learn. Thank you
Tools?
Thank you so much.
Respect from Argentina!
Great explanation!
Perfectly explained great animation easy to understand.
Thank you Richard!
Thanks for this!
Hello brother
fantastic explanation
Very well explained
Thank you very much. Finally, I understand.
adding a comment to show my appreciation for the re-posted video
This re-upload to try and put a little disclaimer on how QE isn't "technically" printing money is a quibble that's going to be seen as distracting from the central thrust of people saying that QE is essentially money-printing (which it is), even though I doubt that was your intention to begin with.
That's for the comment I was confused when I saw this as a recent upload, I was like, "I could have sworn he already posted a video on QT"
There should be clarity as to what reserves are and how they can be used.
Publishing factual information is important, especially for someone with a CFA. Read their code of ethics if you think accurate reporting isn't of upmost importance. And no, QE didn't cause inflation. The data doesn't support the claim that QE caused high inflation today.
@@MrSupernova111 you can't be serious
"QE is essentially money-printing (which it is)"
But you could also say that even normal monetary policy is money printing. After all that's what the central banks job, i.e. monetary policy, is, deciding how much money to print (or in some rarer cases, how much money to destroy).
can't believe this content is free
Just came here to hear how much of a QT i am
Inflation is crazy. My new paycheck with a 15k raise more feels more like 5k. Cost of living as rose and rent is higher. No one I know can't save for the future or enjoy extra spending/life 😢. What's the point anymore....
Thanks
Do you have a video on Reverse Repos ?
Would you consider updating this video based on the March 2024 fed meeting? This was helpful but updated context would be awesome.
Is it good time to buy bond now? Why or why not? Thanks
This is similar to the Open Market Operations (OMO) done by the Reserve Bank Of India (RBI) to control money supply in the Indian Economy. Very nice explanation
I would look back further at the economic policy of Paul Volcker in the 1970's and 1980's to see meaningful examples of how the monetary policy would positively effect inflation. Those recent Monetary policy changes were intentionally made to dampen markets. As you said too much money is chasing few actual good products. The difference between Powell and Volcker is Volcker caused two massive US recessions and raised interest rates by huge basis point hikes to combat inflation. This is supported by Milton Friedman's teachings that inflation is always a product of monetary policy. If it cost more to speculate on the market than to actually make sound investments. Demand for high risk investments like tech business and retail markets will crash. People will buy what they need and not what they want. Nothing is infinite not even growth it should make sense that the market has to fall at times.
Milton Friedman's theory is disproven. But yes, people will buy the goods that are the actual main cause of inflation, energy, and energy-intensive goods such as food. One way to combat inflation is to cause a recession, but at what cost - such a sad affair that many intelligent people aren't keeping their eyes open for better solutions.
Respect!
What're the differences between today's and yesterday's videos?
I have a community post explaining the reupload: th-cam.com/users/postUgkxVIoju507HTpylVACCocSYMx-fSRFUTG5
It would be really nice to see a follow up video to this now that we've seen a bear market rally in July, a new low for the markets and the crisis' in various other economies like Sri Lanka, China, United Kingdom, etc...
People to invite onto your channel: Jeff Snider; Emil Kalinowski; Joseph Wang; Perry Mehrling; Richard Werner; Hugh Hendry; Alfonso Pecatiello.
Thanks for the fantastic video. How will we know when quantitative tightening is happening? Will there be a formal announcement?
There’s already been a formal announcement that it’s likely beginning this month. We will alternatively have reports on the size of the Feds balance sheet released regularly
@@ThePlainBagel Yep, just read it on a Reuters report: The statement said the Fed's balance sheet, which soared to about $9 trillion as the central bank tried to shelter the economy from the pandemic, would be allowed to decline by $47.5 billion per month in June, July and August and by up to $95 billion per month starting in September.
@@ThePlainBagel has the BoC announced similar plans yet?
@@GubeTube19 Yes!
You can check the FOMC's public statements on their website.
Why do you think the market will recover? Recency bias?
Wasnt this vid already posted?
The Fed has been very slow in increasing interest rates by a reasonable small amounts over time. So now they are going to have to INCREASE interest rates by higher amounts as they begin to realize this. The recent .75 increase is indicative of this.
Dated comment
Some persons have short positions. Thats why they are saying “the end is near” thank you bagel for being objective.
Wasn’t this video already up?
Is this a reupload or did I just dream about this video?
I made some corrections; there’s a community post for more info
But maybe you also dreamed about it
We don’t know you
Why is there no period of neither inflating nor deflating the balance sheet?
Thanks for the video, very helpful
Wondering - the coupons received while these assets are held... do they go against the balance? If so, (in theory) they could have a positive balance if all assets were sold / matured? What then happens to the positive balance? Not sure if this has actually ever happened. Assuming they would keep the 'positive balance' for the next time they need to QE?
The interest on the debt is given back to the government, not 100% certain though.
Profits central banks generate is called "seigniorage" and can be transferred back to the country's treasury department.
recent coupons have been very low.
Typically any bond payments would be income for the central bank. This income from money creation is called "seigniorage" as another commenter above noted. Some of it is used to pay for the expenses that the central bank accrues in it's operations (such as salary for staff) but most is given to the treasury on some timescale. Sometimes it can also be used to increase the amount of forex reserves. However, in this case if the intention is to tighten then I'd guess the money is just destroyed.
@@stuartporteous7762 And the Federal Government uses this money to pay its bills. Notice that this process of QE and QT, however circuitous, eventually "monetizes" US debt. Historically, this has not been a successful strategy for profligate nations. Lacking in our unending debates surrounding Fed Reserve interest- rate hikes has been any talk of the role of longstanding US Government budgetary indiscretions. Wake up Americans!
Hey why did you reupload?
What happens if the securities that the Fed bought during QE then default before and/or at maturity because new interest rates are too high to support a refinance at maturity?
Nothing. The Fed has the money printer, they do what they want
I’m confused, this is a reupload right?
Very sus
“Let me issue and control a nation's money and I care not who writes the laws.”
So as a pleb, just hold a diversified portfolio, DCA, and ride the wave.
"dude... uncool :(" the background music remind me of history oversimplified
In the 1970s are there relationships between inflation and unemployment rate?
Came here to drop a comment after seeing it re-uploaded
QE went on too long resulting in runaway real estate appreciation. The real estate market is so constipated with no supply to meet the demand, given that money for buyers was practically free. We need QT so housing prices will come down by at least 25%. Buyers freak at the thought of 7% interest rates but who remembers 1982? Try 19% interest rates.
In last 10 years tech sector grew exponentially but the non tech sector was lagging, in 2022 we saw tech falling and oil and commodities surging
This is just a long winded way of saying "increasing the supply of currency increases inflation." Which is already obvious.
Stupid question: Does and should the FED pay attentions to the stock market? As far as I understood the FEDs responsibility is the economy and the currency, but somehow it is often implied that the FED is making its decisions according to market reactions.
They shouldn’t but they do. More importantly, they care about the credit market. The real damage occurs when the junk bond market freezes and companies can’t refinance their debts. That would probably force the Fed to pivot.
Great question : Yes, the FED should be paying attention to the economy and currency, however they seem to play to the market instead. That is one of the reasons we have this current high inflation from which large corporations have benefited from over the past few years. Hmm..makes one wonder doesn’t it?
Hi Richard! I have a question about about the Canadian economy for you. I am a little worried for the Canadian real estate market. The recent rate hikes can put pressure on the mortgage holders since the variable rate holders' payments will go up. Also, the general increase mortgage payments can price into the real estate value and crash the prices. Therefore, the people who bought in late and took out as much as they could while the rate were down would not be able to sell and cover the whole mortgage price in the future. I am most concerned for the Vancouver and Toronto markets. Could this cause a wave of defaults and hurt the banking sector similar to the US in 2008?
Absolutey right! The Canadian real estate market will collapse in the next 2-3 years and it will be ugly!
Anyone who says ‘X will happen’ is an idiot.
Unlikely. While it's true that people who just bought *may* find themselves unable to recoup their costs if they sold in the near future, the number of people in that position who need to sell isn't likely to be high. You won't see a market collapse in any of those markets, and the conditions you described aren't the only factors that led to the 2008 crash and the resulting real estate crash in parts of the US.
Recession is coming baby!
This is an inevitability in the U.S. again too. Different circumstances than what led to '08, but the effect will undoubtedly be the same. We are already seeing the transition in plenty of locales. Stagnation growing in the market place, and prices are already coming back down rather quickly. The defaults will come as the recession puts alot of families in dire financial restraints, which has already begun, and especially once investors and speculators accept that the price peak has since past them by. Inventory will be a lot different by even just the end of this year, let alone into next year, as the recession ramps up and interest rates are that much higher than they are even at now. There are already a lot less shoppers. Expect a 20-30% correction come next year, in both the U.S. and Canada.
reupload?
this sounds familiar...
Someone, please tell me what QT looks like in T- account FED balance sheet ? Thank you
More borrowing, less lending.
Unless you need to retire and cash out your stocks now, market drops always just seem like opportunities to buy more stock. It can’t be that simple though. What else do market drops cause?
The “real world” effects from market fluctuations is something people will always debate.
If a company doesn’t need access to capital, it could arguably have 0 impact on day to day operations. If you’re a start up looking for funding, or a company trying to IPO, the equity market is certainly not favorable right now. If your a company trying to borrow to invest in a new project, the increase in rates might make the investment less appealing.
It causes people to freak the hell out
Suicides
The market drops cause the fed to reenact the Greenspan put. Hence why we buy the dip.
QT is why Keynesians always leave the party before the bill is due...to avoid being called out for their "ideas"
QT, at this point, is a neo-lib application, not what MMT suggests.
Qe is basically money printing with extra steps so meme is accurate.
yisus that was hard for my small mind
the word is 'increase' not 'hike'
when the federal reserve sets interest rates, why can't they simply just remove the money it earns from the interest out of circulation?
They set their own interest rate. Everyone else simply copies them.
If they raise their rates, more people will borrow from the gov, and they can burn that money. If they lower their rates, more people will borrow from the government, and they can print that money
QE has?
Always 🥯 💯
So basically it’s like Prednisone
I prefer to call it Quantitative Teasing
So what do they do with sold balance sheet asset?t they bought it with created money anyway
If the intention is to tighten then they basically destroy it.
@@seneca983 I think they sell it open market
@@Rapture-2045 Yeah, the security is sold on the open market. Meant that the money they get from is destroyed if the intention is to tighten.
@@seneca983 I c tnx
Banks don't lend from reserves, it's an asset swap so it doesn't cause inflation. So QT does not cause delfation. At most it causes a wealth effect, but it's mostly placebo.
Even less discussed is the short term inflationary aspect of interest rate hikes caused by cost push and debt roll over, though It will crush demand at a high enough rate by causing aggregate debt to contract.
Monetary policy = trash.
Inflation will come down soon as fiscal pull back and high prices crush demand.
I'm like 99% sure bank loans require a certain amount of collateral in their reserves, this QE directly effects the loans they can give out.
@@asimplewizard Each bank need reserves traded at the overnight rate but this has no effect on aggregate lending, as the bank of England says in 'Money creation in the modern economy'
'Whenever a bank makes a loan,
simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money'
In other words lending creates reserves, it is not constrained by them.
@@schumanhuman "In other words lending creates reserves"
No, that's incorrect. It creates new deposit money but it doesn't create reserves.
@@seneca983 That was true under a fixed exchange but that has been gone in the US and elsewhere since 1934, today the new loan creates deposits, the banks overdraught loan from the Fed then creates new reserves, the fractional reserve requirement has zero effect on ability to lend.
@@schumanhuman "today the new loan creates deposits"
The part I quoted from your comment didn't say a loan creates *deposits* but rather it said it creates *reserves* which is incorrect. It does create deposits but not reserves.
If gov buying gov bonds then money is coming back to gov. How is that money going to the market???
The fed is buying govt bonds. They aren’t the treasury which is issuing the bonds.
Economy is economy
Is inflation overstated because the "basket of goods" measured does not change to take into account the average person's strategy to deal with rising prices, for example by substituting cheaper goods or doing without?
The main inflation causes are rising energy prices and issues in the supply chain. Look at inflation rate for services which still cost energy but are not mostly composed of that cost - they are aound 2.9%. QT works by reducing that rate by slow amounts, ideally, or more realistically, by causing a recession in a worse scenario. Unfortuntely, policy makers decided against MMT, which could have helped preventing recession.
deja-vu?
We crashing. Normally the Fed would bail investors out by reducing Interest Rates. They don’t an option to do that right now, and so…..
New here. Skeptical of anyone claiming knowledge but also open minded.
He seems okay, been watching for a year
Thirty-six hours
Rolling in pain
Praying to someone
Free me again
Oh, I'll be a good boy
Please make me well
I promise you anything
Get me out of this hell -John Lennon "Cold Turkey"
Cash is king
Re-click that like button
Have a comment!
Richard is a QT.
It was Money Printing!
Seethe! Cope!
It is not going to happen. In June Powell's Fed put up some mortgage backed securities for sale from its balance sheet. No one stepped up to buy them. Actually, during the month the Fed actually added to its balance sheet. Powell has often said one thing and has done the opposite. Looks like QT is just not going to happen. To what result? Who knows. Interestingly, in Japan the country continues to dump its trove of U.S. Treasuries. No trouble selling low coupon bonds there. Wonder why.
It just happened
didn't you make a Quantitative Tightening like 2 days ago? or should check my room for co2 poisoning
The fact that you didnt talk about the "cantillon effect" makes the vídeo half true.
The printing money Will stop some of that.
hello sir i find your content very intersting, just one thing u speak away away to fasdt think that some of your followers are not a native so please slow down when you speak thx
You can change the playback speed on videos you want to learn from!
@@penguinlaurent Good idea :)
@@majiddehbi9186 also I'm not sure if subtitles work on this video but you could also have subtitles on.
When he says "Buy Assets" he means Bailout for private companies
No, typically those assets are government bonds (though sometimes more "exotic" assets like corporate bonds are bought).
So they buy real assets with made up money and then sell them for real money?
Why’s this posted again lol
Since sending guns to Ukraine will likely increase inflation due to the money being circulated back into US defense companies, couldn’t the US donate money instead of guns to reduce money supply therefore causing QT while helping Ukraine?
Aren’t rates low already compared to 2008, how does this help when rates already low?
So yes, short-term rates are low (thanks to the government cutting overnight rates) but longer-term loans like mortgages can take time to adjust. Think of it as because those loans take longer to "refresh" (ie the loan to be paid and re-lent out), its harder to influence them immediately with overnight rate cuts/hikes. QE/QT tries to address those longer-term debts directly.
printing money was not good for people like me only the great players and corporations.
Shes dfntlt a Qt
I guess peoples will use their bitcoins for mortgage payoff
those same mortgages they used for borrow money from the bank for investing in bitcoin
many Snowflakes.........Snowballs .............Avalanche
Enjoy
I see that you have re-uploaded this video, modifying your use of vocabulary using the word ‘bank reserve’ instead of ‘money’. My comment on the original version was not one of semantics, once you fully appreciate what this distinction represents you cannot conclude any of the points you made in the video.
It’s clear you put a lot of effort into your videos - and I don’t want to disparage you - but this video still spreads a lot of misinformation about QE.
I will first try and summarise an explanation of QE, I have left some sources underneath.
The theorised mechanisms by which QE is supposed to work don’t hold water; this is because most people (unfortunately even PhD economists) do not fully appreciate the distinction between bank reserves and ‘money’.
In very simple terms, QE does not represent the creation of anything (confusing, right?), it also does not “support lending activity”.
Fact 1: Virtually all of the money that everyone in the economy (companies, government, people) is credit.
Fact 2: Only banks can create credit
Fact 3: Credit is created when loans are ‘issued’
- Banks do not lend out ‘existing money’/credit that other accounts ‘deposit’ in the bank
Fact 4: Credit is a liability on a bank’s balance sheet (accounts payable)
Fact 5: Banks are not restricted in credit creation by the amount of reserves they have, the only limitation they truly have is the strength of their balance sheet and their confidence in the ‘borrower’.
*QE Fact 1: QE represents an overnight asset swap (that is continuously repeated) between newly created bank reserves and existing asset backed securities.*
- All that occurs is a change in the composition of a bank’s balance sheet (less securities, more reserves). If you look at the Fed’s balance sheet you will see that reserves are listed as a liability and the securities they “purchased” (not a purchase because it is actually only being held there is collateral - they cannot ‘sell’ the security, only exchange it back to the bank) as an asset.
Again, net change in a bank’s assets, liabilities or equity = 0.
Net change in central bank’s assets = + securities held as collateral
Net change in central bank’s liabilities = + new bank reserves
Net change in central bank’s equity = 0
Once you truly appreciate this, it becomes very clear that QE does not affect the economy in any appreciable way whatsoever. All of the credit that banks create that go into the economy are completely independent from QE (nothing has changed in their operations).
The “portfolio rebalancing” channel that you mention at 1:50 and its inverse at 5:05 is speculative, and based on the theoretical premise of imperfect substitutability. It is further nullified by two realities:
Reality 1: The bonds that are purchased by banks to be exchanged for reserves do not introduce any new money into the economy
Reality 2: Any marginal increase in demand for bonds is minute and temporary. This is because the market’s demand for bonds adjusts with any price increase, and the absence of off-the-run bonds (those now on the central bank’s balance sheet) has no impact on the market whatsoever (because they are rarely exchanged).
The most generous effect you can find in the literature is that a median reduction in yields of 50 basis points for every 10% of GDP on a central bank’s balance sheet.
I hope you can now clearly see that quantitative tightening is not reducing liquidity, since quantitative easing never introduced any to begin with. The premise that there will be less money in the economy is completely incompatible with the reality that only banks create money. Same with the yields. Same with inflation. Same with ‘inflated asset prices’ Same with any effect anyone claims QE has ever had.
In sum, QE is almost entirely psychological (due to very few people bothering to understand the literature).
Sources/FYI:
Simple accounting view of QE:
Can Banks Spend Their Reserves? - Fed Guy, 2020
Banks create credit:
Sheard, P. (2013). Repeat After Me: Banks Cannot And Do Not “Lend Out” Reserves.
QE is an asset swap (not money creation):
Blake, A., & Rule, G. (2015). Understanding the central bank balance sheet. {page 10}
Bank reserves do not affect credit creation:
Blake, A., & Rule, G. (2015). Understanding the central bank balance sheet. {page 13}
and
Carpenter, S. B., & Demiralp, S. (2010). Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?
and
Keister, T., & Mcandrews, J. J. (2009). Why Are Banks Holding So Many Excess Reserves?
Highest estimate of yield reduction by QE:
Gagnon, J. (2016). Quantitative Easing: An Underappreciated Success. {lol at the title}
"Banks are not restricted in credit creation by the amount of reserves they have"
No, that's incorrect. They are restricted. In the US there's a 10% reserve requirement for banks which means that they can't more than 10x the deposits as their liabilities compared to the amount of reserves they have. If a bank is at that 10% limit and wants to make a new loan it needs to get new reserves from somewhere.
@@seneca983 I highly reccomend you read: Sheard, P. (2013). Repeat After Me: Banks Cannot And Do Not “Lend Out” Reserves.
Specifically, pages 8-9 cover reserve requirements pre and post-QE.
For a more technical read, I recommend: Carpenter, S. B., & Demiralp, S. (2010). Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?
They conclude that: "Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected. Specifically, our results indicate that bank loan supply does not respond to changes in monetary policy through a bank lending channel, no matter how we group the banks. "
@@tiempo9855 The paragraph you quoted doesn't say lending isn't constrained by reserves and the amount of reserves clearly sets a hard upper limit on lending when there's a reserve requirement.
The reserves were created by the CB out of thin air. The banks can now lend 10x of those reserves. There is a psychological component as you point out. Market participants knowing the liquidity is now available purchase assets even if that liquidity is not utilized.
@@75pdubs Banks do not lend out reserves. See: Sheard, P. (2013). Repeat After Me: Banks Cannot And Do Not “Lend Out” Reserves.
If QT is unexplainable than why are you explaining it?. Slide to 9:30 time. Are we wasting our time here?
Im short term is impossible to predict…shouldn’t listen to doomsday sayer…whooops
What is QT? That's you plain bagle, you're a QT.