To these points (for whatcha's sake)...
First off, we should probably qualify what QE actually is... it's a fed program to buy Long-term debt (where it usually plays in the short-term debt markets, and lets the long-term market float with expectations of its future rate-setting).
We probably should clarify the difference between these two statements, as they both could theoretically be true, and both get thrown around:
- The fed controls interest rates because it pulls financial assets out of the private sector.
- The fed controls interest rates by "giving banks more money to lend for cheap."
All I can say is that the former is true (but only within reason), and the latter is a false statement based on a misunderstanding of how the asset swap actually helps banks. The money multiplier simply works way, way different then it did before, and being awash in reserves doesn't really accomplish much.
It's also interesting to add that Austrians love to simultaneously say that "Americans are having their savings eroded" by inflation (caused by monetization), and that the government is "bidding
up (in real terms) the price of other long-term assets AND "adding artificial protection to our savings" via the FDIC and monetization. Quite the feat indeed to simultaneously destroy and build the same thing!
But if we're going to talk about QE, which is a specific program that uniquely has 1) targeted long-term debt, and 2) done so with a LOT of reserves, historically, maybe we should FIRST focus on Standard Operating Procedure... the fed buying short-term treasury debt...
Short-term treasury debt is almost like cash to a bank. It is super liquid and pays a tiny bit of interest. If short-term rates are at 0.1%, the fed really can't accomplish much by swapping those bonds out of the market for reserves (that they pay the bank .25% interest on, mind you). This literally accomplishes almost nothing.
Now traditionally, long-term treasury rates (as well as all non-treasury bond rates) are established based on the expectation of what the fed will set as future short rates at. There simply couldn't be any other way for the market to really set long-term bond rates... Why would anyone invest in a 10-year bond at 4% if they thought the average short-term bond rate over the next 10 years would be significantly higher? See what I mean?
But now the fed has enacted QE, in hopes that not just lots of reserves, but all those reserves targeting the LONG end of the rate curve will do some more leg-work. And certainly, when the fed is buying non-treasury assets, it's doing something it doesn't usually do so the market sees what it's trying to do and the mortgage bond market stays much safer... but the problem with the fed targeting the LONG end of the curve is that it's SO hard for the market to break its expectation pricing mechanism. The more the fed tries to stimulate, the more likely a recovery (and/or inflation) are, so this is going to have the effect of significantly raising long-term rate expectations, thereby being a Catch 22 from what the fed was initially trying to do (lower long-term rates to stimulate the economy).
So I think the fed does FAR MORE to lower long-term rate expectations by little statements like (we're thinking of doing a taper) or (we are thinking of raising target inflation) than it could ever do by bajillions of QE... so if you're asking me "moda, do you think QE significantly lowers long-term rates), I really don't, directly (though QE indicates that the fed is still wanting to keep rates low, which means they're more likely than they were yesterday to CONTINUE to want to keep rates low (does that make any sense).
For instance, if the fed were to simultaneously enact a whole new round of QE, but then say, "in 5 years we are going to enact a policy of a flat-7% rate on all treasury debt," rates would go UP on long-term debt... not down. Long-term bonds just have too many macroeconomic future predictions going into their pricing for it to work much of any other way.
But to go back to if, in-general, trading reserves into the economy for t-bills, does much for inflation? Well, not if rates aren't being pulled down much from where they otherwise would be, so I guess that's the real question...
What is a "natural" rate of interest WITHOUT QE?
I'll preface this by saying that it's a bit ridiculous to speak of a "natural" price that the goverment charge itself to borrow in a currency it issues. This ain't gold. It would have been like the "nuclear experimentation" department of the U.S. military trying to decide how much they were going to sell the world's first nuclear bomb.
However, there are still clues that the economy tries to tell us if things are out of wack. If people can borrow at "artificially low rates," you get inflation. I'd also say that long-term rates being so low are a pretty good clue that interest rates in general aren't manipulated to asininely low levels, but to agree with me here, you'd have to agree that 1) the fed manipulates long-rates only through expectations of short rates, and 2) the fed will raise rates if inflation kicks in.
But let's peel back the onion to just what an "interest rate" is.... it's a price... no different than anything else in some ways (except it's a price representing lending of money, which itself (money) is simultaneously causes amazing efficiency and self-fulfilling recessions). Any price is a function of supply and demand... now the supply side is kind of goofy because it's a function of an equation that the fed calculates looking at price-level and employment, but for now let's at least assume that it is fixed. However, because we were in a recession after the financial crisis, DEMAND for loanable funds went WAY down.
So if Supply stays constant, but Demand goes way down, what happens to Price?
Now the fed did, in one measure (an incomplete one IMO), raise supply as well, but it didn't have to for the function to still yield a REDUCTION in price... by the very simple definition of supply and demand, lowered Demand for Loanable Funds alone would result in a significant decrease in interest rates.
But none of this matters (final onion layer, I promise), if we don't understand the true nature of business cycles and recessions and one very, very important piece to them... that a MONETIZED economy, while extremely efficient in some ways, has certain rigidities built into it that exacerbate "mistakes" into other areas. When only one, unproductive, quasi-intangible item acts as medium of exchange and you develop a system of debts around that medium, you're going to have problems... and to prove that, let's remove money from the equation altogether.
----- Barter Economy Example-----
Let's say an economy exists that is purely barter. Some things act as an efficient medium of exchange at times, but for the most part, people are trading goods and services for other goods and services, as well as IOU's for goods and services. Some people are going to come to a point where they malinvest, or certain systems breakdown, or the economy misprices some stuff, but, luckily, they can just work harder to pay of people they owe. If my debt is denominated in hours of production of my skill, while I might run the risk of having to work my butt off to make up for a malinvestment, I have very reasonable opportunity to do so.
What is initially thought of as a disadvantage to a barter economy (services and goods acting a messy form of medium of exchange) actually serves as a pretty robust correction mechanism for those who make mistakes.
----- Monetized economy Examle ------
Now if you have an economy where everything is denominated (and owed) in currency rather than skills, things are probably much more efficient on the surface, but you can get in a situation where you have DEBTS to pay someone, but have to earn the money from someone else with your skill. Now if enough people in an economy make some economic mistakes, or we suffer from a financial crisis, people will be very reluctant to give up the thing that pays their bills. But this results in tons of human capital going to waste, as an accountant can't afford to hire a plumber because nobody wants their taxes done, a plumber can't afford to have his shoddy deck rebuilt because nobody is calling him to get plumbing done, and the handy-man can't afford to get his taxes done because nobody can afford his help.
They all have skills and could create wealth for each other, and oddly enough, if they're comfortable with barter they just might. But they are "tightening their belts" so they can all pay their mortgage with dollars.
The economy is simply not very easily able to adjust its level of debts in a healthy way. Everyone ends up in a Mexican Standoff because there is only ONE THING they can pay others for their services (or their debts) with in any reasonable manner.
This is how we can have an economy with "excess capacity," where even low interest rates and deficit spending don't induce inflation. Businesses completely outside the realm of the infected area may be bankrupted because everyone is "tightening their belts." This is what creates the seemingly impossible phenomenon of "unemployment" in many cases. Someone who has skills and wants to work literally can't find it... this can only exist if the economy is living under some kind of artificial constraint... and while some people think it's just "minimum wage," I think "monetization" is the main contributor.
And if you look at history, money, even in gold form, was a very state-backed enterprise. So "free money" is kind of an oxymoron historically... it COULD work going forward, but still would likely require our government (unless it abolishes itself) to "pick the winner" of the currency game by dictating what gets to be used to pay taxes. Debts were a common socio-economic tool, but usually in much looser terms of repayment, and for a long time without the terms of that repayment HAVING to be little chunks of yellow metal or green pieces of paper... If I could give you half a cow or fix your roof that was good enough
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And, Scene!
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Leave it to KShartle to instantly turn this conversation from Monetary Policy to the "problems of government" spiel.