John Hussman putting QE into terms everyone should be able to understand:
Decker, Bessie, Joe and you
Consider a simple economy. You use wood from your back yard to produce lumber, which you sell to Decker for $100 of currency (which Decker holds as evidence of past saving he has done). At the same time, Bessie produces milk on her farm, which she sells to Joe. But Joe needs currency to pay Bessie, and instead has a few shares of stock (which embody past saving that Joe has done). At current prices, Joe can get $100 by selling one share of stock to you in exchange for your currency. He then pays Bessie for the milk, and drinks it. Bessie is a cash cow, and adds the $100 to her stack of currency that embodies her past saving. We can assume that there are many others in the economy who have currency, stocks, and bonds that embody their past saving, but we don’t need to name them for this example. On the securityside, you now own $100 of stock that used to be held by Joe, and Bessie has $100 of currency that used to be held by Decker.
On the real side, the economy has produced $200 of wood and milk, but only $100 of that output has been consumed. So there’s $100 of new saving in the economy. On balance, you and Bessie produced without consuming, and Joe consumed without producing, so you and Bessie are the savers, and Joe is the dissaver in the current period. Given $100 of overall saving, there must be $100 of new real investment. Who’s got it? Decker, in the form of unused wood inventory. Decker has neither produced nor consumed – he’s just traded his prior saving for current investment. Has there been any new security issuance? No, because neither you nor Bessie has intermediated your savings for someone’s use. The stock trade just represented existing securities changing hands.
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