Are open market operations contractionary when securities have a negative yield?

Just asking

Theory would seem to suggest yes the swap is contractionary (though see Evan Soltas), but so far European QE seems to have had a mildly stimulative effect, mostly through the exchange rate.

In any case someday you can tell your grand kids about this.


So economics professors are now asking themselves if printing money is DEFLATIONARY ???

You people are dumb as bricks. And that's putting it mildly.

Oddly enough, QE can have a deflationary impact.

If the newly printed money doesn't circulate, it is as if no new money was printed at all.

The impact of very low or negative rates is as follows:

1. Households find out their fixed-income portfolios yield nothing
2. Households will save more to maintain reasonable financial reserves
3. Households will thus spend less

Ask any financial adviser.

you're a moron.

though we already knew that

@TDD- don't mind the troll Daniel; you are right, I saw an article years ago that the Japanese save even more when there is deflation, in anticipation of needing even more money in the future since there's no yield to live off of.

Save, how? In gold or currency & allied instruments? Isn't that the crucial difference?

Considering it is Japan, probably postal savings accounts....

I would think the issue would be that whenpeople save they don't spend abd not the savings instrument.

I think (last econ course I sat through was in Spring semester 1972) negative rates mean that market participants are so firghtened about economic prospects that they are willing to pay the state to hold money and limit their losses. Also, that money is not invested in productive activities that may grow the economy.

I think that very little buying/spending takes place in such a fear-frought environment. Deflationary pressures may ensue as money is hiiden away, not invested or spent.

Regarding serial QE's: How much of that money/liquidity got somewhere economically productive? It sseems as if the Fed bought securities mainly from large banks and the large banks kept much of that liquidity as excess reserves which would be recycled to more QE securities deals. Ergo, Wall Street prospers and Main Street sucks hind tit.

OMOs are not by default "printing money" (which isn't even what QE is). QE is generally reserved for the buying of long-term assets, like bonds with far-off maturity dates.

Also, this question is not directly on inflation rates, it's about total economic growth. Which is why he using the words stimulative and contractionary.

Moreover, negative interest rates are very much uncharted territories; no one knows what the interest rate floor to holding currencies is either which makes figuring out the floor on nominal rates for loans difficult.

My suggestion: think twice before you call anyone an idiot because your comment, albeit short, is chock full of idiocy. ;)

oh look, another obfuscating moron

Who's obfuscating? If you knew anything about the subject and the people you were "critiquing", you wouldn't be the confused one here rambling about things you don't understand.

Just remember: some people are better left seen and not heard. Words for you to live by, yes?

go away, moron

We're better off if he's neither seen nor heard.

You truly are one of the dumbest people who have managed to successfully use a computer.

The main reason for encouraging numbers from the Eurozone is the oil price fall. Far more effective than the ECB's inadequate covered bond purchases and pointless negative rate.

Regarding the QE program that started yesterday, it is way too soon to tell, of course. Whether buying bonds with negative yields is contractionary depends on the behaviour of investors. I suspect they will adjust portfolio choices and it won't make much difference.

A good point. The mild EZ recovery may be explained by cheap oil alone.

Yes Frances its all about expectations. If the investors believe that at the first hint of inflation the brakes will be slammed on and interest rates hiked, then of course we can see continued contraction even if the QE program continues. If, on the other hand, the CB makes it very clear that, say, they will continue to print until NGDP growth is at 5%, then I suspect that QE will be very effective. But there is another blog that makes these points much more eloquently than me.

The stimulation from QE does not come from the swap of bank reserves for bonds. It is the bond sellers then have digitized cash, where before they had inert bonds. Now bond-sellers can reinvest their cash, or spend it. Both actions are stimulative. It is only in the case that bond-sellers park their cash in banks and banks do not lend the cash out that QE is not stimulative.

By the way, in the United States the Fed credits the commercial bank accounts of primary dealers by the exact amount of bond purchases. Ergo it is not buying seller's money that shows up as reserves but rather the accounts of the primary dealers. Little noticed, this Fed also created the primary dealers credit facility to extend money to the primary dealers, of which there are only 22, to buy bonds which they did and resold to the Fed.


Well, if anyone has some extra cash hanging around after all that deflation ....

What we have learned, or should have learned, is that monetary stimulus works up to a point (or is it down to a point), beyond which it's more hope than promise. With falling rates of return on capital, what are the options for owners of capital? For a time, globalization provided an outlet, but that outlet is fraught with risk, political and economic. The beauty of capitalism is that it self-corrects for excesses. Unfortunately, central banks and governments respond to their constituents (i.e., those with capital) with remedies that, if anything, add to the excesses. So here we are debating whether further monetary stimulus is contractionary. You think? The brain has a left side and a right side, each with a different function, which work in harmony as long as neither side dominates the other. Our collective brains aren't working in harmony.

Which theory are we talking about?

The theory that economists actually understand anything.

QE essentially sets the price of the targeted securities, and depending on the reliability of the central bank increases the value of those securities for the purpose of collateralized leverage. Inflation is created where that leverage is applied, with the us qe it was elsewhere and in commodities. A different world now, so who knows. Maybe Spain will be able to go on a housing tear again.

What this tells me is that European Central banks are still nervous about the health of their banking system, maybe explaining some of the intransigence in dealing with Greece.

The central bank loses no matter what. If they hold the bonds, they lose money. If interest rates increase, the bonds depreciate. We are playing a game of coin flips, one flip a day. Here are the odds and payouts: 99.98% of the time, the govt/central bank wins. The payout is 1 more day. 0.02% of the time, the govt/central bank loses everything.

I'd add that with each "success," the central bank makes its future losses that much steeper.

Why should the central bank care about profits? And how would it lose "everything"?

It doesn't lose everything if rates go up, it takes a haircut, just like any other investor.

And the haircut is offset by a gain to the Treasury that borrowed the money in the first place.

I'm struggling to see how this could be contractionary. If the sellers of the bonds simply hold cash instead, the policy will have no impact. If they instead buy other securities or use the cash for consumption, it's expansionary. Those are the only possibilities I see, expansion or no impact. (Personally I expect very little impact.) Under what scenario does QE *reduce* output?

See US oil development. Lots of money for investment, successfully applied drops price of commodity below cost.

But still the investment happened, which boosted output at the time. And even if that investment winds up wasted on idle equipment, post-investment there's no reason to think output would *decrease*, it would just be the same as before.

Consider a retired couple with $100,000 in savings. Prior to QE they could have bought government bonds that paid, say 3%, which they would have consumed. Instead the Fed bought up all the bonds. Stocks are not a suitable substitute for them, so the couple elects to hold cash and reduce their consumption. That's pretty much my parents' scenario. Rates would have to go really, really negative before they would elect to spend down their savings.

That scenario has no impact on GDP, does it? If the government pays less interest to the public, it will in turn borrow less from the public, and so the interest the government would have paid still will wind up as either (private-sector) investment or consumption.

As for the couple, if they respond to the lower yields by increasing their cash bank balances, the bank has more deposits available that it could use to lend, so that should still wind up going into investment. (Granted this is undermined in the US by interest on reserves, but the ECB does actually charge banks for holding excess reserves.)

Also, why don't they buy, if not stocks, corporate bonds or ABS?

Sure, we can think up scenarios about how the lost income that would have been consumed by retirees and other savers would will show up elsewhere in the economy. I'm just a guy who reads econ blogs, I don't know. But FWIW, Here is a link to a 2011 article co-authored by a former Fed governor estimating the lost income effects of QE:

Why don’t they just buy gold instead of debt for at least a portion of the QE? I believe gold purchases would be more politically popular, at least in Germany than the purchase of Greek, Spanish or Italian bonds. A QE program that was somewhat more palatable to the German public would be easier to sustain in the long run and, therefore, more credible. Of course, large purchases of gold will likely increase the price but increases in the price of gold are often held to be evidence of inflationary expectations which, in part, is what the ECB is attempting to achieve. It certainly seems less dangerous and counter-productive than pushing Bund yields negative.

Even without considering the effects of QE when rates are negative, given current demographics zirp may no longer be effective. Dr. Schiller recently pointed out that lower interest rates mean that savers must save more to achieve the same level of income from savings. A famously large demographic cohort is contemplating retirement right now and expectations concerning future interest rates are very low. If zirp forces these savers to save more, low interest rates may cause disinflation rather than cure it. I note that recent data show an “unexpected” increase in the savings rate in the US. It seems to me that zirp may have already become ineffective or even counter-productive. Certainly, zirp has proven to be ineffective in Japan under similar demographic constraints (although there may be disagreements about the reasons for that).

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