I don’t know exactly what you think “financial assets” are. Usually they are loans, so it’s more or less the same as if the bank lent money to someone (except with a bias towards legibility). Sometimes I buy stuff, but then the person I bought something from now has an extra $1. It doesn’t really make sense to talk about money being “in” financial assets, in the way you are imagining.
You are right that the fed is significantly increasing total financial wealth. But not 20x the amount that’s “needed.” (Also, 5% would be way too high an estimate if this was how it worked.)
Derivatives, bonds, treasury notes, stocks, etc. I used the general case because there aren’t any rules about it, as distinct from the Savings and Loans model of banking. In that case, the central bank makes money available, the bank loans out all of it, and ~100% of the money loaned gets spent on things on the CPI.
I am skeptical that buying something like a tranche of repackaged loans is effectively the same as issuing loans. For example, consider the 2008 crises; bailout money was made available to financial institutions so that they would make it available as credit. Instead that money was spent short-term-gain investments (like stocks) and the shortage of credit extended longer than it needed to.
Do you know a good source where they actually trace the transaction chain and identify where the money is spent on the things the Fed wants it spent on? All I can find are cutesy videos and papers which only talk about one stage of the process.
Consider the set of bonds issued and held. The number issued is equal to the number held. If I increase the number held by 1, then I will bid up the price of bonds, both decreasing the # held by other people (since more expensive bonds are less attractive to hold) and increasing the # issued (since more expensive bonds are more attractive to issue). Those two effects must add up to 1.
If I increase the number of bonds issued, that means someone new has a loan.
If I decrease the number of bonds held, then that means someone else was going to buy a loan and instead they didn’t. That means they spent the money on something else, or perhaps left it under their mattress.
Either way, the money gets out of the financial system.
Temporarily setting aside the fact that “don’t save” is a perfectly valid way of getting money out of the financial system, that has a similar effect on inflation: your implicit position seems to be that if try to buy a bond, the effect will just be to stop someone else from holding a bond rather than from causing any new bonds to be issued. I.e., that if I decrease the interest rates on a bond by 0.01%, that has a much (>20x) larger effect on decreasing people’s willingness to hold bonds than on increasing their willingness to issue bonds. That’s true over the very short term, since taking out a loan takes longer than selling a loan, but an extremely strange view over the medium term. It also seems to contradict observed behaviors where people, and especially firms, consider interest rates before taking out a loan (in fact, that effect seems much stronger than the effect of interest rates on savings).
Also, note that the same substitution effect happens when I make a loan. If I hadn’t loaned Alice money, she would have taken out a loan from someone else. Does anything have any effect on the world?
This makes sense, but doesn’t address my concern. All loans are not equal in their effects on the consumer spending CPI tries to track, and therefore on inflation. Car loans are spent on cars. Home loans are spent on homes. Loans of different types are spent on different things, which may or may not be on the CPI. The problem is from the perspective of financial institutions they are all substitutes. To the extent that bonds which do not directly affect the CPI compete with bonds that do (say a loan for speculating on stocks vs. a loan for a car), I suspect more money is being injected than necessary. (I speculate) this leaves the surplus as asset inflation. This is what I was imagining when I said ‘stays in the financial system’.
Reflecting on the savings point, I also note that the overhead costs (the fees and such that make up the salaries of financial employees) go overwhelmingly to people who have a high savings rate, invest in financial instruments, and pay the most in taxes.
I note that there are plenty of reasons to think the current system is good apart from asset inflation. I also have no real sense how fast the transactions take place—as you point out, it is quite fast to sell a loan—so if it turns out that all money eventually hits stuff on the CPI and the money velocity is high enough, I would be persuaded this is not a problem. I could also be persuaded by seeing something which shows (or at least describes) the inflows/outflows of money with respect to the Fed and goods by which inflation is tracked. My google-fu has failed me to date.
Yup, that’s not how it works :)
I don’t know exactly what you think “financial assets” are. Usually they are loans, so it’s more or less the same as if the bank lent money to someone (except with a bias towards legibility). Sometimes I buy stuff, but then the person I bought something from now has an extra $1. It doesn’t really make sense to talk about money being “in” financial assets, in the way you are imagining.
You are right that the fed is significantly increasing total financial wealth. But not 20x the amount that’s “needed.” (Also, 5% would be way too high an estimate if this was how it worked.)
Derivatives, bonds, treasury notes, stocks, etc. I used the general case because there aren’t any rules about it, as distinct from the Savings and Loans model of banking. In that case, the central bank makes money available, the bank loans out all of it, and ~100% of the money loaned gets spent on things on the CPI.
I am skeptical that buying something like a tranche of repackaged loans is effectively the same as issuing loans. For example, consider the 2008 crises; bailout money was made available to financial institutions so that they would make it available as credit. Instead that money was spent short-term-gain investments (like stocks) and the shortage of credit extended longer than it needed to.
Do you know a good source where they actually trace the transaction chain and identify where the money is spent on the things the Fed wants it spent on? All I can find are cutesy videos and papers which only talk about one stage of the process.
Consider the set of bonds issued and held. The number issued is equal to the number held. If I increase the number held by 1, then I will bid up the price of bonds, both decreasing the # held by other people (since more expensive bonds are less attractive to hold) and increasing the # issued (since more expensive bonds are more attractive to issue). Those two effects must add up to 1.
If I increase the number of bonds issued, that means someone new has a loan.
If I decrease the number of bonds held, then that means someone else was going to buy a loan and instead they didn’t. That means they spent the money on something else, or perhaps left it under their mattress.
Either way, the money gets out of the financial system.
Temporarily setting aside the fact that “don’t save” is a perfectly valid way of getting money out of the financial system, that has a similar effect on inflation: your implicit position seems to be that if try to buy a bond, the effect will just be to stop someone else from holding a bond rather than from causing any new bonds to be issued. I.e., that if I decrease the interest rates on a bond by 0.01%, that has a much (>20x) larger effect on decreasing people’s willingness to hold bonds than on increasing their willingness to issue bonds. That’s true over the very short term, since taking out a loan takes longer than selling a loan, but an extremely strange view over the medium term. It also seems to contradict observed behaviors where people, and especially firms, consider interest rates before taking out a loan (in fact, that effect seems much stronger than the effect of interest rates on savings).
Also, note that the same substitution effect happens when I make a loan. If I hadn’t loaned Alice money, she would have taken out a loan from someone else. Does anything have any effect on the world?
This makes sense, but doesn’t address my concern. All loans are not equal in their effects on the consumer spending CPI tries to track, and therefore on inflation. Car loans are spent on cars. Home loans are spent on homes. Loans of different types are spent on different things, which may or may not be on the CPI. The problem is from the perspective of financial institutions they are all substitutes. To the extent that bonds which do not directly affect the CPI compete with bonds that do (say a loan for speculating on stocks vs. a loan for a car), I suspect more money is being injected than necessary. (I speculate) this leaves the surplus as asset inflation. This is what I was imagining when I said ‘stays in the financial system’.
Reflecting on the savings point, I also note that the overhead costs (the fees and such that make up the salaries of financial employees) go overwhelmingly to people who have a high savings rate, invest in financial instruments, and pay the most in taxes.
I note that there are plenty of reasons to think the current system is good apart from asset inflation. I also have no real sense how fast the transactions take place—as you point out, it is quite fast to sell a loan—so if it turns out that all money eventually hits stuff on the CPI and the money velocity is high enough, I would be persuaded this is not a problem. I could also be persuaded by seeing something which shows (or at least describes) the inflows/outflows of money with respect to the Fed and goods by which inflation is tracked. My google-fu has failed me to date.