QE…The Gift That Just Kept Giving…Is Now Taking
I know the Federal Reserve doesn’t effectively create money or directly monetize. I know this because then Fed chief, Ben Bernanke, told us so (HERE). But still, something has me wondering about that exchange, now almost a decade ago. The simplest of math.
The plan to utilize quantitative easing and avoid direct monetization went like this. The Fed would digitally conjure “money” to buy the US Treasury bonds and Mortgage Backed Securities (remove assets from the market) from the big banks. However, the Fed would force those banks to deposit the newly conjured “money” at the Federal Reserve. This would avoid the trillions of newly created dollars from going in search of the remaining assets (particularly levered from somewhere between 5x’s to 10x’s…turning a trillion into five to 10 trillion…or more).
The chart below shows the Federal Reserve balance sheet (red line) and the quantity of those newly created dollars that the recipients of those dollars, the banks, deposited at the Federal Reserve (blue line). But the green line is the quantity of newly created dollars that have “leaked” out…also known as “monetized”.
The interplay of QE and excess reserves resulted in the peak QE impact taking effect long after QE was tapered and had ceased (chart below). The trillions in assets remaining with the Fed, but the new cash no longer under lock and key at the Fed.
The impact of $800+ billion of pure monetization from late 2014 through year end 2016 was spectacular. In the hands of the largest banks (multiplied by “conservative” leverage somewhere between 5 to 10x’s) easily amounting to trillions in new cash looking for assets. A “bull market” beyond belief should not have been surprising.
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