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And, I’ll eventually do an article version of the that will at least be at my academic site, which will proceed through all claimed arbitrages in end records or appendices. So, the profit/loss that the federal government foists upon person z (or some mixture of citizens in the economy) is worth zero at time t.
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So person z can completely rid himself from it for free. It could be sold by him in the marketplaces for nothing at all. And, in fact, that’s just what he will do! How do i be so sure of that? Well, whatever his power function was, he was optimizing properly prior to the QE at the marketplace prices (and their state-dependent paths) that existed before the QE.
If those same condition prices still exist after the QE (as we’re presuming, and then viewing what goes on), then he’ll choose the same investment and consumption path as before. He won’t change anything. Give him some new investment, well worth zero, that noticeable changes his state-dependent intake and investment paths, and he will sell it. A good way to look at it is this: You can find perfect complete frictionless markets, and perfect people; one has an eternity path of exchanges and income net of taxes.
And in optimizing it, what he will is say essentially, what’s the web present value of all of this at birth. Folks are right out of the womb supermen! Or time t. Then, with this online present value lump of wealth, he programs out completely the usage and investments he’s going to buy during the period of his life, to optimize his expected utility function perfectly.
As long as the web present value lump he’s created with will probably be worth the same amount, and as long as the continuing state dependent price paths are the same, he’ll have the same probability set to choose from. Foisting on a citizen a profit/loss from a QE which has a world wide web present value of zero at the costs in a frictionless and complete market doesn’t change the possibility set at all for that resident.
So he will optimally find the same exact intake/investment route as before. And to get to that route he just offers this QE profit/loss for zero. In other words, he will engage in transactions to 100% undo it. Now, next question: How exactly does he undo it, and who will take the other side of those transactions if market prices stay the same as prior to the QE.
The answer is, he does the opposite of what the national federal government does in its QE transactions, so the government is taking the other side of the transactions. When the national government sells that extra dollar in its QE, person z buys it from his private storage of C’s. C’s, and his keeping in stored dollars rises by one dollar.