QE, Liquidity Removal, and the Alchemy of Money
I’ve been watching @MetreSteven say stuff like “QE removes liquidity” on here for a while after which people sort of stare blankly or roll their eyes.
Let’s give it one more go, via a traditionally quirky explainer.
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At the heart of every monetary system is an act of alchemy.
Let us start by describing this act: the act of monetary creation.
At the center of alchemy lies the Philosopher's Stone - the prime reagent for money creation.
For a long time this was gold.
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For if you had gold, you could lend against it.
From the Philosopher's stone of gold, we could spawn two things:
1. Circulating money
2. Debt
Money and debt are twins, both born of the philosopher's stone and their fates forever linked.
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For you see, there are rules which govern alchemy.
An alchemist is only allowed to create a certain amount of money for each philosopher's stone.
And the Debt was greater than the Money (due to interest), making the system inherently deflationary.
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And this deflationary nature drove the people to want more money in circulation.
So the rules of alchemy were evolved to allow each stone to create more money (fractional reserve banking).
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