With QE, The Fed Digitized $12,539 For Every U.S. Resident

A Benjamin Cole post

Of late, certain economists and observers have described central bank quantitative easing as, and only as, “a swap of bank reserves for bonds.”

Thus we have University of Chicago light John Cochrane expressly delimiting his description of the Federal Reserves $4 trillion QE program to a “swap,” and George Mason scholar and blogger-titan Tyler Cowen calling the European Central Bank’s QE efforts “an asset swap.”

In the old days, when central banks conducted conventional open market operations, this limited definition may have been mostly true. Before 2008, the Fed tried to stimulate the economy by buying bonds, and then automatically placing an equal amount of reserves into the commercial bank accounts of the 22 primary dealers—the Morgan Stanleys, the Cantor Fitzgeralds, the Nomura securities—the only entities from which the Fed buys bonds.

As commercial banks can lend vast multiples of reserves—from 10 to 30 times—the Fed boost of commercial bank reserves helped allow bank new lending, and added much more money to circulation.

After 2008

But the world has changed. As we know, banks are sitting on reserves. So, from the old perspective, post-2008 QE was inert. Some scholars insist so today.

But the scope and scale of QE after 2008 dwarfed any open market operations the Fed had ever attempted pre-2008, when the Fed might buy or sell in the tens of billions of dollars from time to time.

With QE, the Fed bought $4 trillion in bonds, in a space of five years.

Post-2008, the stimulus comes from the fact that bond sellers have been given $4 trillion in cash, where before they had $4 trillion in inert bonds. A bond-owner cannot spend or re-invest the cash locked-up in a bond.

By the way, $4 trillion means about $12,539 in new digitized cash for every U.S. resident, under QE. Bank reserves swelled by an equal amount. And the Fed had $4 trillion in bonds.

(To understand QE please read this Fed-approved  QE CHART)

The Unanswered Questions

In a remarkable riddle, no one seems to really know what the bond-sellers did with their $4 trillion, and I have queried Fed representatives on this point. (If any readers have a clue, tell us!)

No doubt, some who sold bonds to the primary dealers (who sold to the Fed) deposited their share of the $4 trillion of newly digitized cash into commercial banks, where it might be considered inert. Other bond-sellers re-invested into other bonds, stocks or property, a process the Fed describes in the most ascetic, neutral terms possible, as “portfolio rebalancing.” The U.S. did have stock, bond and property rallies alongside QE—you think $4 trillion of new demand might have played a role?

Some bond-sellers might have simply spent their money.

Another riddle is that since QE, about $500 billion in paper U.S. cash has entered circulation, bringing the paper-cash total to $1.34 trillion, as I addressed in my last post. No one knows how much of this cash circulates domestically, or in the overseas underworld briefcases that figure in so many celluloid storylines. The serious cash-scholar Edgar Feige, University of Wisconsin prof, says 75% of U.S. cash stays onshore, probably in U.S. grey markets.

This topic of cash is resolutely ignored by most economists—an ostrich-pose that becomes increasingly untenable. With $4,200 in paper money circulating per U.S. resident, the role of cash must be growing, not shrinking. The fact that there is a huge schism between the lives of sinecured academics and grey marketeers in the U.S. does not mean there are no grey markets.


The Fed’s QE program was modestly successful, limited only by its scale—too small—and the Fed’s penchant for obscurantism, and possibly its political instinct to avoid any description of QE as “printing money.”

But the Fed did print (digitize) $4 trillion, and they even monetized U.S. debt, when they bought U.S. Treasuries. Heresy, upon heresy. I mean, printing $12,539 for every U.S. resident is some serious money printing (digitizing).

Would that the Fed had printed up a few trillion dollars more.

3 thoughts on “With QE, The Fed Digitized $12,539 For Every U.S. Resident

  1. Great blogging. As you point out, there appears to be some suggestive evidence something happened as a result of QE besides the claim that QE is a swap between reserves and bonds. And also, as you pointed out, 2008-12 QE’s were not the same creatures as OMP’s in the past, in terms of quantity, but with the important distinction of the circumstance of IoER and an impaired credit channel. If banks are paid to “sit on reserves,” and are not interested in risk, it doesn’t seem like moves in natural interest rates would have the same relative impact on economic outcomes as might be expected. Though, I digress (sorry).

    Rao Aiyagari in his 1990 paper, Deflating the case for Zero Inflation, cited a Federal Reserve study, Avery et.al 1987, for his data on the percentage of dollar cash holding per adult in the US of between 14-17%. That study is rather dated. I looked for an update, as there must be one somewhere, but have so far come up empty handed.

    I did, however, find this study from May 2014 on consumer use of cash from which some deductions might be drawn.

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