A Benjamin Cole post
Okay, in my last post we saw that “QE only ends up as bank excess reserves, and is thus a largely inert Treasuries-for-bank-reserves asset-swap” narrative get crushed.
We showed how the Fed printed (digitized) cash and bought $4 trillion in Treasuries and MBS bonds from the 22 authorized primary bond dealers (Cantor Fitzgerald, Nomura Securities et al), who in turn bought bonds on the open market. Primary dealers are mere intermediaries.
After re-selling the bonds to the Fed, the primary dealers get credited with $4 trillion in reserves at depositary institutions (commercial banks)–not the real sellers of the bonds. See this from NY Fed: “So when the Fed sends and receives funds from the [primary] dealer’s account at its clearing bank [depositary institution, or commercial bank], this action adds or drains reserves to the banking system.”
During QE, the Fed credited the primary bond dealers with $4 trillion in reserves. So what? It is unimportant.
The $64K Q
The $64,000 Question: What did the actual bond sellers—those who sold their bonds to the primary dealers, who are mere intermediaries—do with their money?
Some say the real bond sellers only put their $4 trillion in freshly printed cash into commercial bank deposits, where it is inert, as banks are not lending out enough.
But the record suggests otherwise. See chart below.
Obviously, commercial bank deposits stayed on their growth path, no $4 trillion bulge in the QE years. And just as obviously, anybody can make deposits in U.S. commercial banks, from cash-hoarding corporations, to households tightening belts, to foreign flight-capital refugees. So, not just bond sellers but others are making bank deposits through the QE years.
It is worth nothing that since the Fed adopted QE in 2008 (running on and off through 2014), the Dow Jones Industrial Average has risen from about 8,800 to about 18,100, or more than doubled. Property values recovered as well. The economy has grown, if slowly. All that suggests QE freshly printed cash went…into other asset classes, or was spent. Which makes a lot of common sense.
To be sure, much of the recent feeble recovery was normal economic forces at work. And the Krugmanites must be writhing at the fact the annual U.S. annual federal deficits shrank through the period, while the recovery gained speed.
Equally baseless are the right-wing nostrums that QQ would cause hyperinflation, and if not that, it must be inert, locked up in bank reserves.
It sure looks like QE worked, monetary expansionism worked, and just should have been bigger, harder and longer. Like the new Bank of Japan Governor Yutaka Harada says, “We have to print more money.” We can make the language fancy, cloth ourselves in sophisticated obscurantisms, but it comes down to the Fed printing money.
Put the money-printing (digitizing) presses on “Red Hot High” and take a long, long vacation.