The money base is expanding by 1/3 a year, but m2 (money) is basically only growing at a modest 6%. Therefore, CPI is not increasing. The money base is expanding through an increase in excess reserves. But the old "too many dollars chasing too few goods" scenario isn't unfolding.
Points of confusion: The multiplier has gone from about 9 to approx. 3. SO banks are not lending. Reason given is that there is a basic shortage of acceptable risk loan applications and money lending is independent of the size of reserves.
But I thought the Fed, through QE, was buying bonds (treasuries and MBS's) from primary dealers (eg. Goldman Sachs, Merrill Lynch, etc), not traditional banks. If so, isn't it true that QE can't be increasing excess reserves at Bank of America, Citi, Wells, etc.
In my mind, I see the printed money stuck in excess reserves so to speak. That is why the lack of inflation. But if Bonds are being bought from Goldman, it goes into Goldman's accounts or customer investment accounts. It should flow into the markets and the real economy world wide. This would explain the "stock market bubble", which has been connected to FED actions and which would explain the disconnect between the market and the sluggish economy.
I have also read that the primary dealers are reinvesting most of this back into new issue treasuries at the auction. But if they solicit one of their investment account holders to sell a treasury to the Fed (which they do), then those proceeds do enter the economy. Further, it is my understanding that excess reserves cannot be invested in equities, and for the most part are parked at the FED at .25%.
Increasing my confusion is that not only am I confused as to the origin of the excess reserves, I don't even know if this money base statistic is even inclusive of the Investment Bankers( i.e.. Authorized Treasury Dealers). Technically, they are now banks.
But where are excess bank reserves coming from? Are these two separate issues. Does QE have nothing to do with excess reserves? I don't think this is the case.
What I am grappling with is the $80,000,000,000 per month money flow. If banks are not lending, money is not being created. Which explains the pull back in precious medals.
Someone who has figured all this out, please help me with some of the details. If I could figure all this out I could understand a bit better what might happen to m2 down the road, and it follows, inflation and the price movement of precious metals.
In summary, if excess reserves are swelling due to QE, then in effect, the FED is trying to "print" money, but not really succeeding. They are manipulating rates down, which would raise asset prices (or prevent further deflation), but they are not adding to the money supply, which requires lending.
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