How Does Quantitative Easing Work?

Published on
December 21st, 2020
Duration
11 minutes

How Does Quantitative Easing Work?

Investor Tutorials ·
Featuring Jamie McDonald

Published on: December 21st, 2020 • Duration: 11 minutes

Investor Tutorials is a new educational series from Real Vision meant to help investors better understand the most important market concepts. From the unknown to the chronically misunderstood, we'll focus on the ideas that matter most to help you wrap your head around the complex world of finance, business, and the global economy. In this pilot episode we look at QE. Even after 10 years of QE, 2020 was still a record-breaking year for this brand of monetary policy. There was a time, however, when QE was considered to be an unconventional policy tool. Prior to the 2008 financial crisis, interest rates were used to stabilize and control economic growth. But once those rates reached zero, QE was used to fill the void. With QE now a cornerstone of economic policy in the world today, it’s become more important than ever to understand what QE is, how it works and how it has failed. To help guide you through this QE conundrum, Real Vision is joined by Jamie McDonald, a retired Hedge Fund Manager with 10 years' experience on Wall Street, who will outline QE's place in today’s financial landscape.

Comments

Transcript

  • PK
    Prafulla K.
    31 December 2020 @ 19:40
    one of the worst explanations I've seen...seemed like it was done in a hurry
    • CL
      Charles L.
      6 January 2021 @ 12:10
      | agree
  • AS
    Adrian S.
    31 December 2020 @ 19:58
    And I thought I already understood QE. Gonna have to watch this a few times for it sink in.
  • JS
    Jonathan S.
    31 December 2020 @ 08:00
    Just joined RV as I have really enjoyed the content and conversations I have seen online over the last few months. I am on a mission to educated myself about finance in 2021 and love the idea of these videos and the push to educate people about the fundamentals. I would echo many of the comments here mainly about slowing things down and breaking down concepts further. I saw the comment about building this sector of RV in public and think that is cool, so just giving some further feedback. Looking forward to more.
  • VA
    Vladimir A.
    30 December 2020 @ 08:21
    The missing piece is to explain how can the average investor use this information to inform their investment strategy. Without it, it's just a mini college economics class where you forget most of what you learned soon after.
  • VA
    Vladimir A.
    30 December 2020 @ 08:21
    The missing piece is to explain how can the average investor use this information to inform their investment strategy. Without it, it's just a mini college economics class where you forget most of what you learned soon after.
  • KS
    Kevin S.
    27 December 2020 @ 16:11
    Great content, especially for someone like me who is not professionally involved in financial markets. One thing I would want to understand more about is can QE ever be unwound? It seems like once started the spiral of QE has to continue unless the Fed is open to seeing asset prices pop (which then has real world economic impacts).
  • RK
    Robert K.
    27 December 2020 @ 12:38
    This was very helpful! I hope that you produce a lot more like this. Thanks!
  • RT
    Ryan T.
    26 December 2020 @ 08:21
    On further thoughts, I think this video is too distracting in terms of the graphics and the content too rushed. QE is not a topic that can discussed or imparted in a hurry. I am a lot more confused now about QE after this video.
  • RT
    Ryan T.
    25 December 2020 @ 15:25
    The video is fine with me but to be honest, Jamie sounds rather high-pitched which doesn't sound great. Perhaps the audio guys can take note and give his voice more bass.
  • jl
    johan l.
    25 December 2020 @ 11:57
    Thanks for a good video. It is a bit heavy on the dramatic effects, cut-scenes and transitions, which at times makes it more difficult (for me at least) to keep track. George Gammon has a YouTube channel were he uses a whiteboard to great effect. Would encourage you to do the same.
  • DA
    Dagart A.
    24 December 2020 @ 00:57
    This was amazing! Concise yet thorough and in plain English. Keep these coming!!
  • ar
    andrew r.
    22 December 2020 @ 15:55
    I appreciate the content, and the presenter did a good job. But we really have to break ourselves of the fallacy that the solution to government-intervention-induced problems is more intervention. [Homer]: There are three ways to do things, kids -- the right way, the wrong way, and the Max Power way. [Lisa]: Isn't that just the wrong way? [Homer]: Yeah. But faster!
    • WT
      William T.
      23 December 2020 @ 15:59
      Don't shoot the messenger
  • KT
    Keven T.
    23 December 2020 @ 12:29
    That was great thanks. Can we do one on understanding risk. Discuss what can go wrong, what needs to go right for 2021. Perhaps a 10 sec video from 10 different players, to show the variety of opinions out there. Im always amazed when someone in public has conviction on their opinion and they rarely summarise what can go wrong. Im (was) an airline pilot and I understand the mix of time pressure and risk management. Sometimes we have to make decisions and not understand totally whats going on. Crossing T's and dotting I's goes out the window sometimes. Ive long portfolio positions, but I spend 4 hrs per day trying to understand risk and I vary the size those positions depending on my understanding of things that may have changed the risk. So understanding risk to me is critical on a daily basis to determine my sizing and understanding the economy determines my positions.
  • BS
    Benjamin S.
    23 December 2020 @ 09:35
    Very cool. Hope to see many more of these.
  • st
    satheesh t.
    23 December 2020 @ 01:28
    watch this QE explainer video for some humor https://youtu.be/PTUY16CkS-k
  • MS
    Matthew S.
    22 December 2020 @ 18:57
    Love this! I've found it's so hard to explain QE to others even being fairly familiar with the concept for a few years. Would love to see more content like this from RV - almost like a next-gen investopedia to go alongside the interviews!
  • bb
    brian b.
    22 December 2020 @ 05:09
    I think this was good simple explanation. graphs i like. i have read a lot about and listened to many videos/podcasts of the issue of QE and how the increase in Money supply does not create inflation bc its all stuck in banks excess reserves at the Fed. Velocity is at all time low after all. One Q I cant figure out is this--QE works by Treasury selling new bonds, some entity like Chase buys and flips to Fed. Where does money Chase uses to buy come from? if they buy on credit then when they sell to fed they turn around and pay treasury and there is no increase in excess reserves. If they lay out their own money, are they taking it from their excess reserves? if so, then when they sell to fed it does not increase their excess reserves, it just replenishes what was taken out to start with to buy the new bond. Or is Chase using money that is on their balance sheet as a normal reserve? if so then the excess reserves go up after they sell to Fed but their non Fed reserves go down. sooner or later they get too low on their non fed excess reserves and have to draw down on them. but the net combined reserves for Chase would never go up. so all the new bonds end up on CB B/S and thats why their B/S is sky rocketing. but the banks won't see their total assets increasing despite having more excess reserves at Fed? am i missing something here?
    • BF
      Ben F.
      22 December 2020 @ 17:37
      i have had this question for a long time too. how to PD fund their initial UST purchases? ANYONE KNOW THIS ONE??
  • DP
    Duane P.
    22 December 2020 @ 06:52
    @ 6:40 He says the Fed replaces the bonds they buy with CASH. I'd like to see this substantiated instead of just this "drive by" supposition considering the number of people out there who say this isn't true. RV reeeeaaalllly needs to get someone on who works at the treasury department of a primary dealer bank and clear this up.
    • BF
      Ben F.
      22 December 2020 @ 17:35
      i think he means buying bonds from commerical banks vs USTs from primary dealers. He jumped from topic to topic too quickly i think.
  • RV
    Romeo V.
    22 December 2020 @ 17:35
    Great initiative. Difficult to watch with too many distracting effects. If the graphics were relevant, I didn't want to look. I listened with eyes closed. Simplistic is great, but I'd like a little more detail and slower please, so I can digest graphics and dialogue.
  • BF
    Ben F.
    22 December 2020 @ 17:33
    Great presenter but i feel the content could have been broken up better into a couple of parts: different parts of the world, fed buying bonds from commercial banks, buying UST from primary dealers. He covered it all but too fast for me! For example, would like more in depth on the mechanics, not just ramifications. e.g. if primary dealers have purchased USTs, and the fed buys them but only funds reserve accounts, aren't the primary dealers worse off given they have less available funds? or did they buy them using reserve funds? Also the graphics were a bit too much imo - charts popped up and disappeared too quickly to make way for unnecessary graphics. All that being said i think this was a great addition and look forward to more.
  • AP
    Alistair P.
    22 December 2020 @ 14:31
    This was pretty good, save for the visuals of the presenter, words and charts moving all over the place all the time.
  • PG
    Philippe G.
    22 December 2020 @ 14:16
    Good initiative...I realize that beginner/introductory content isn't everyone's cup of tea, but RV has been crystal clear - investor education is the next step in terms of content Some suggestions for future videos - international trade & balance of payments, the petrodollar system Also, Steven Van Metre's summary/recap videos for the 60+ min macroeconomics deep-dives are great!
  • ed
    edwin d.
    22 December 2020 @ 12:05
    The material was good as was the presentation. But, all of the fancy art and visuals popping in and out reduced the value of the message. I found myself being distracted by all of the mechanics and movement going on to the detriment of the content. As someone who had a role as a major lecturer, one rule that was important was for the audience to be able to optimally understand and remember the content, it was important not to distract them with to many visuals. While visuals seem 'cool' for most people they are a distractor. So please limit the visuals so the message content is easier to follow and absorb. Thanks. Great program.
  • HE
    Hasan E.
    21 December 2020 @ 20:46
    Very good series. I’d like to see a video about the tools that you recommend in investing different assets (bonds, stocks, options, futures etc etc).
    • JS
      Justin S.
      22 December 2020 @ 11:30
      I very much agree with this suggestion.
  • JS
    Justin S.
    22 December 2020 @ 11:29
    This is just what we needed, a series to help people who are unfamiliar with certain areas, without dumbing down the main content. I have been asking this for a while, so am happy. I think a bit more work on the editing or style needs to be done for future episodes, as I was distracted by things moving back and forth and where Jamie was going to pop up next. This will be a great addition to RV. Thanks.
  • ly
    lena y.
    22 December 2020 @ 03:14
    Very welcome content and a lot to digest.
    • LH
      Luis H.
      22 December 2020 @ 09:30
      The idea of those informative videos is great. Now you need a good teacher to make it a success. Good teachers are hard to find.
  • JS
    Jon S.
    22 December 2020 @ 09:06
    Good idea these tutorials.
  • ST
    Steven T.
    22 December 2020 @ 08:23
    I think this series will become very popular, short + informative.. Reading the comments it seems there is a common theme for greater in depth discussion. Perhaps you could turn your topics of choice into parts 2,3,4 etc as this series evolves, elaborating on your first topic of choice in greater detail, combining it with current macro-economic policies in play and provide some critical analysis/insight... Regardless, keep up the good work. I look forward to watching more of those..
  • JM
    John M.
    21 December 2020 @ 21:26
    Good! Love this education series. couple of questions: 1) If banks have too much 'excess reserves' I don't think the money gets "trapped". Eventually the commercial bank will/could apply to the FED and justify a reduction to it's Reserve Account, so that these excess funds can be repatriated to the commercial bank and loaned out. This would depend I suppose on the bank's perception of loan growth opportunities and the state of the economy. Is this correct?? 2) Maybe US equity markets performed better due to FAANG? (Europe doesn't have a Silicon Valley). 3) QE, now discredited i.e., continued slow economic growth, huge income disparity & rates at zero lower bound, giving way to MMT.......right narrative?
    • BS
      Brian S.
      22 December 2020 @ 06:29
      1) Money only enters the system if a bank loans it out but access to that capital has been given only to the top creditors. The money is only trapped because the average Joe isn’t seen as credit worthy. 2) see 1) the average Joe doesn’t by stocks at least not directly. 3) MMT works if the money is directly used to create employment in say, infrastructure projects, thus paid directly to the wage earner /consumer and there is no interest due. This could only be done via a (crypto) currency directly distributed by the government, not the banks. Interest is the missing chair, someone has to loose unless we have consistent and continued growth, which we don’t, that’s the rub. The money for the loan is created by the bank and recorded as such but the interest is not, however it must come from somewhere. But money directly created by a government would undermine the banking system. As Dr. Lacey Hunt will tell you, MMT is not modern and not a theory.
  • RH
    Rick H.
    22 December 2020 @ 04:34
    Good start but, think more along the lines of Khan Academy
  • MO
    Master O.
    22 December 2020 @ 04:30
    Poorly constructed video to be honest. Didn't explain much about the mechanics of QE.
  • AW
    Andrew W.
    22 December 2020 @ 03:16
    Important points: QE alone -> asset inflation QE used to monetize debt for Fiscal (functionally indifferent from money printing) -> asset inflation + CPI inflation Why QE causes inflation of all financial assets (including equities): -Bucket overflow concept. Don't worry about the inflows and outflows, just realize fluid in one inlet means fluid has to come out elsewhere if the size of the bucket (Treasuries market cap) is kept the same. -Opportunity cost of holding low yield Treasuries rises, so capital is forced to overflow into something else. -The 'something else' could be corporate bonds, for example. In turn, capital that would have gone into corporate bonds is now forced to flow into equities. Ignore asset inflation due to QE at your own peril. The evidence is empirically there, even if we don't have proven reasoning of the mechanics.
  • CS
    Carol S.
    21 December 2020 @ 18:56
    Great introduction. Would like further explanation of the "hot potato effect." Specifically what kind of assets do the banks buy with the "hot cash" that they get from the Fed? How does the "recycled" hot cash ultimately end up in the stock market to inflate the price of stocks? Does the hot cash go directly from the banks into the equities market, or does it make its way into the equities market through a more extensive chain of different kinds of market participants?
    • EB
      Ethan B.
      21 December 2020 @ 23:59
      I would like more information on this as well. I don’t believe the “hot cash” ends up in risk assets as easily as the market or this video suggests. It was a very rushed explanation and these are important details.
    • JM
      Jackson M.
      22 December 2020 @ 01:34
      Second this, otherwise great video
    • PG
      Preet G.
      22 December 2020 @ 01:47
      Yes i also have the same request. More detail on the hotato potato effect would be helpful.
  • SS
    Sheldon S.
    22 December 2020 @ 00:44
    I thought this would be an explanation . . . WHAT THE HELL IS THIS GUY TALKING ABOUT??????
  • LH
    Luis H.
    22 December 2020 @ 00:41
    This is a great idea. Congratulations
  • SV
    Sam V.
    21 December 2020 @ 23:51
    Great initiative once again guys. Wonder if at some stage you can get the content from the festival of learning imbedded into the investor tutorials part of the platform for easier access ... Real Vision has always been a learning platform but now it's starting to feel like the content is more accessible and hence better curated - keep up the great work guys.
  • KZ
    Konrad Z.
    21 December 2020 @ 22:40
    3:33 Can banks really use the money from QE to buy equities? I read that the FED credits banks with "bank reserves" when it acquires their bonds. And those "bank reserves" cannot be moved from the banks balance sheets. They only allow a bigger credit action, provided banks want to risk their hard cash and increase loans
    • KZ
      Konrad Z.
      21 December 2020 @ 22:44
      OK, now I see he kinda explained that in 2:23, but the part in 3:33 remains unclear to me still
    • JR
      Joseph R.
      21 December 2020 @ 23:23
      No, they can't. The dollars from QE treasury purchases sits in a bank's reserve account at the Fed.
  • MJ
    Marc J.
    21 December 2020 @ 16:59
    I love the idea of explainer videos but I now feel more confused, not less. Perhaps less focus on 'cool' backgrounds and more focus on content?
    • GS
      George S.
      21 December 2020 @ 17:22
      Hey Marc, thanks for the feedback. I am spearheading the big education project at RV so I'd love your feedback. I was determined to start "building in public" so this pilot serves as a way to gather as much feedback as possible. Drop me an email at george@realvision.com to tell me what confused you and how you would make this better. Thank you and I really appreciate it. George
    • RG
      Rahul G.
      21 December 2020 @ 22:49
      I would have to second what is said here. I've studied this topic quite a bit (having read Lyn Alden's essay, and somehow I found myself more confused than enlightened watching this. When showing a graph, while talking, one has to spend some time figuring out what the graph illustrates. If it's not being explained by the audio, then one gets a bit lost, i.e. listening to the audio, while trying to figure out the visuals. It would be helpful, when showing a graph, that there are animated arrows pointing to what you're trying to highlight, so that you reinforce the audio.
  • SL
    Scott L.
    21 December 2020 @ 22:16
    Truly appreciated! Would love to see a video on how not BTC crypto assets get priced. (I.e., as ETHE. Not supply constrained, and not a “store of value,” what drives price higher?)
  • SB
    Simon B.
    21 December 2020 @ 20:03
    I really want to understand this and think your idea is good but it is very rushed. The bond king does a good job of explaining it it a slower more detailed manner which i found easier to understand. You can find it here if you're interested. https://www.youtube.com/watch?v=zbSvNO4wD9U Skip to the 7th minute and he explains it.
    • DS
      David S.
      21 December 2020 @ 21:27
      We do need input from several sources. Mr. Van Metre delivery just seems to confuse me. It is my problem. I am glad that it helped your understanding. Monetary policy certainly is an enigma. The Unified Field Theory may be an easier project. At least it is science and not human psychology. DLS
  • DS
    David S.
    21 December 2020 @ 19:53
    Excellent presentation. Keep up the good work on financial education.. Please forward a copy to everyone at the Federal Reserve. They still do not acknowledge that QE inflated the stock market and hard assets. DLS
    • DS
      David S.
      21 December 2020 @ 21:02
      Fed lower interest rates and QE have both reached the end of their usefulness in a slowing economy exacerbated by the pandemic and disruptive economic/trade policies. It is up to Congress to take back its responsibility for monetary policy and maybe trade policy. The Fed has been used for plausible deniability for too long. Working with the Administration, Congress must resurrect the economy or get voted out of office. Fear of election defeat must motivate working for the common good not just their bases. DLS
  • RL
    Remmelt L.
    21 December 2020 @ 21:02
    Why is it not on the normal site, education part?
  • EO
    Erk O.
    21 December 2020 @ 20:59
    Fantastic!
  • HD
    Henry D.
    21 December 2020 @ 20:58
    Great intro. Thanks For those that want to go a bit deeper they might find Jeff and Emil's Eurodollar University series worth watching as well. Then, of course, watch the Princes of Yen and listen to some of Richard Werner's more recent work.
  • DS
    David S.
    21 December 2020 @ 20:41
    Best of luck on the Investor Tutorial Series. Mr. McDonald has a clear delivery and upbeat presentation. In addition, he has a market understanding which allows credibility. This is a great beginning for Real Vision University. DLS
  • AF
    Alan F.
    21 December 2020 @ 20:21
    love this new series. It's always helpful to review fundamentals. Thanks.
  • AT
    ALAN T.
    21 December 2020 @ 20:02
    Very good.
  • NZ
    Nathan Z.
    21 December 2020 @ 19:35
    Great video, thanks! I am seconding a few comments here: whiteboard videos are better to communicatie intuition visually, and probably less complicated to produce. I'd personnally prefer to have more of less sophisticated videos
  • BJ
    Brian J.
    21 December 2020 @ 19:25
    Thanks, for this presentation. In future, is there a way to include a Captioning feature if there is not an transcript? Looking forward to more like this.
  • BE
    Bruce E.
    21 December 2020 @ 19:08
    Very informative and quite interesting Very dense information, i.e., complicated subject matter presented very quickly, so, I'll just watch it again and again. The graphics were a bit distracting although interesting visually, but this did not help me comprehend any faster. This 11 minute presentation could serve very well as an introduction to an expanded presentation of QE.
  • MC
    Mark C.
    21 December 2020 @ 18:55
    Great start thanks. My feedback is to take a look at George Gammons whiteboard videos. I think the power of George is that he’s already figured out the map and as he walks through it, you see how the actors and subject matter interact. Pictures are worth many many words!
  • GB
    Gary B.
    21 December 2020 @ 16:36
    This was great. More of these definitely would be helpful for me, a new comber to the financial markets.
    • WV
      Walter V.
      21 December 2020 @ 18:31
      Hi, first tks for the video. Two comments: 1) It gives by default some concept like Central Bank Balance Sheet which not necessary is 100% clear to listener (this is my case). From where the Central Bank take the money to buy asset under QE? They print new money? How this is connected with Central Bank Balance Sheet? 2) For non native english (at least in my case) the "Velocity" on which concept is given is to fast. Could be an idea to re-expain topic concept for that people can digest them? Tks for you attention. Walter