# The Hawkish Free Cash - QT By [Co](https://paragraph.com/@co-2) · 2023-07-09 --- What if I say $1 trillion QT (Quantitative Tightening) could be mini-mini QE? QE & QT seems like economics 101, but we’ve been through a few really weird years and the economy is behaving anything but 101. Rates keep climbing higher, QT liquidity drain troops on, yet “Resilience” has become the new buzzword. Restaurants are popping, stocks are roaring, crypto’s steady, inflation’s sticky…recession what recession? We all know QE, it's the Fed buying treasury bonds and mortgage back securities – and when really desperate, some corp bonds too – from the public. Then, there's more cash in the system, yada yada… But mechanically, how does it really work? **QE & Me - single example:** I am a happy, normal, working person in the US economy that saves. :) I used to hold $1,000 face value US treasury bond, which I bought with cash I set aside. I happily earned some interest (coupon payments) on them. Then the Fed came in and started buying bonds. I sold my bond and now I have cash, say $1,005. Okay, but I don’t really need the cash (remember, that was money I set aside anyways), so what do I do with it?  1. I can sit on it for rainy days because I’m kinda pessimistic about the outlook. Then this $1,005 stays in my pocket or my bank account that yields nothing and the economy doesn’t get to enjoy my $1,005 magic. 2. I can invest in stuff and join the stock/crypto party. Then my $1,005 fuels asset price appreciation. 3. I can spend it and buy pretty dresses. Then a company out there gets a revenue boost from my $1,005. Scenario 3 = impressive economic rebound; scenario 2 = bubbly risky assets; scenario 1 = Fed expanded its balance sheet for nothing.  **Fed’s Boring Old Days Before QE:** What does the Fed do when there is no QE or QT? Here’S the basic relationship between the government (US Treasury) and the Fed. The Treasury issues new bonds and pays back old bonds every month.  The Fed holds a ton of treasuries with X amount maturing each month. So every month, the Fed receives $X in cash from the Treasury on maturing bonds, and uses that $X to buy new bonds issued by the Treasury. Balance sheet remains unchanged. Old bonds roll into new ones. That’s it! **What Happens in QT?** The Fed basically says: Aight, I’m gonna buy less from you, Treasury lady, so you need to sell more to the public. Now, the Fed buys $(X - 90bn) from the Treasury, and the public needs to take down that additional $90bn. Omg it’s draining all the cash from the system! **QT & Me - Single Example:** I am still a happy, normal, working person in the US economy that saves. I used to hold $1,000 in bonds and $1,000 in cash, and happily received interest on bonds. Now the Treasury sells more bonds, and at a whopping 5% annual interest rate – that’s higher than some fancy high yield savings account out there! So I bought another $1,000 bond with my $1,000 cash. Suddenly, I make $50 more each year. What do I do with it? 1. I save. Big saver. 2. I invest in stuff. Then my $50 fuels asset price appreciation. 3. I can spend it and buy pretty socks. Then a company out there gets a boost on revenue from my $50. Scenario 3 = economic resilience; Scenario 2 = asset prices resilience; Scenario 1 = nothing changes. I just swap my savings to different forms (cash -> US treasuries). No doubt, QT is a liquidity drain. Bonds are less liquid than cash. I can invest and spend cash whenever. The flip side is, however, **bonds are less liquid and help preserve my net wealth from consumption or losses. Plus, I get free cash instead of a pure 1:1 liquidity drain because rates are at 5% now, not 0%.** Of course who buys the bonds matter – for example, some bonds are bought by foreign governments. How bondholders behave also matters – to save, invest, or spend. However, higher rates + QT does generate an interesting dynamic of free cash on savings. An ignored mini buff to economic and market resilience.  **GPT feedback:** “It's worth noting that the impacts of QE and QT aren't just limited to individuals. They also have significant effects on businesses, financial institutions, and the overall state of the economy. They can affect borrowing costs, market confidence, asset prices, and more. These effects can then feed back into individual behaviors and decisions, creating a complex web of interactions that can be challenging to predict and manage.” Fully agree. I choose the perspective of an individual’s interaction with QE/QT because: 1. Consumer economy is a collective of individuals 2. Retail investors are growing as an equivalent force to institutional agents. 3. Same line of thinking can be applied to fund managers that manage savings - what to do with higher interest income (or carry) from their bond holdings.  4. It is fun. Of course there is more to discuss: company refinancing costs, jobs market, excess savings, fiscal stimulus, inflation expectations, the push and pull between the Fed and the market…tbc :) --- *Originally published on [Co](https://paragraph.com/@co-2/the-hawkish-free-cash-qt)*