Comment: That's incorrect

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In reply to comment: Fed Out of Bullets? (see in situ)

That's incorrect

I am sure that many here at the Daily Paul see QE as inflationary, but I think not. In financial market jargon, QE is nothing more than an asset swap. The Fed gives currency reserves in exchange for Treasury notes and bonds.

1. Treasuries are not money! Buying treasuries with newly created federal reserve notes is not an "asset swap," it is monetization. Moreover, the Fed has bought many hundreds of billions of non-treasury securities.

2. The inflation is plain to see. Look at M1, it was $1368.2 billion at the start of 2008, and it is currently $2420.8 billion, that's an increase of $1052.6 billion, or 77% in just five years.

Those currency reserves do not circulate in the economy but rather find their way back to the Fed as EXCESS RESERVES earning a mere 0.25% as an over night deposit.

Suppose the Fed buys some securities from Joe Blow. Joe Blow deposits his proceeds in ABC Bank. ABC bank, not willing to lend in this economic environment, puts the money on deposit at the Fed to earn some interest. You're correct that the reserves on deposit at the Fed are not circulating, but you've forgotten about Joe Blow's money! He still has access to it, it's in his checking account, being spent regularly on goods and services he buys. The high level of excess reserves means that the money the Fed creates does not get multiplied through fractional reserve lending as it normally would, but the Fed is still creating money. Again, take a look at M1.

In fact, if anything QE is deflationary because interest income on Treasury debt that would otherwise have been earned by commercial banks instead is paid to the Fed which subsequently remitted back to the Treasury.

There's nothing deflationary about that. The money the Fed remits to Treasury doesn't get destroyed, it gets spent: on SS, and Medicare, and DoD contracts, and employee salaries, etc.

If the Fed had any meaningful monetary bullets in their gun holster, WHY would they not have already used them? In my opinion Fed QE is nothing more than the Fed doing a rain dance.

You seem to be under the mistaken impression that the Fed or federal government can spur economic growth. Without opening up that can of worms, I'll just explain what the Fed is really doing, and why. Basically, it has two goals: support the value of bank assets and finance the federal debt. That's it. To do this, it needs to monetize lots and lots of debt, especially treasuries and MBS, which it has been doing in earnest for several years. It's really a rather simple operation, though it gets muddled by the mountains of BS they create to maintain the illusion that they're working in the public interest.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."