While so many people claimed that Quantitative Easing (QE) would produce inflation since it was the creation of money, the truth is very far from this simplistic idea. The theory used by the central banks is seriously flawed and a throwback to ancient times before 1971. There used to be a difference between debt and cash where you could not use debt as cash to borrow on. Then it was less inflationary to borrow than to print, but that changed post-1971. If you want to trade today, you post T-bills as cash. The REPO market has emerged where AAA securities can be borrowed against for the night.
Therefore, buying in bonds to inject cash into the system under the old way of running the monetary system pre-1971 made sense. Today, it is proving to be a fool’s game. Why? This is merely swapping debt for cash; the REAL money supply has not increased when the true definition of the base in money supply is debt + cash. Then you add the leverage from banking.
So what does this new reality mean? Under QE, the central banks are the bidders supporting the market in the same stupid manner as attempting to peg a currency. The ECB under Draghai has lost its mind. They keep increasing the percentage of bonds they buy in hopes of creating inflation, but nothing is working. The bonds will not crash without a free market, but instead, they could become extinct. In order for a crash to materialize, there has to be a free market where the private sector bids. But what happens when the private sector has no interest? Oops! Extinction.
Little known to most analysts, during World War II, Congress ordered the Federal Reserve to do something similar to QE.
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Ready, aim, fire! Draghi reminds everybody that there is no limit to how much fiat weaponry and ammunition he can deploy
