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A Reminder, the Fed Is NOT Printing Money

Politics / Quantitative Easing May 17, 2013 - 09:59 AM GMT

By: Jesse

Politics

“So that the question is: Would there be any advantage, at this particular stage, in going back to the gold standard? And the answer is: I don't think so, because we're acting as though we were there.

So I think central banking, I believe, has learned the dangers of fiat money, and I think, as a consequence of that, we've behaved as though there are, indeed, real reserves underneath the system." Alan Greenspan, 20 July 2005


Yes that's right. The Fed is NOT printing money.

It is 'retiring Treasuries' and 'issuing Reserves.'

And everyone knows that Reserves are benign, if not almost meaningless accounting entities. 

Banks just like to collect them.  Like Pokémon cards.

So implies the AngryBear amongst others.

And Mark Dow shows that there is zero correlation between the Fed printing money and the money supply.  And so 'deal with it.'  Hey rube, you obviously don't understand the difference between 'liquidity' and 'credit.'

I thought it was cute that the study went back to 1986, long before the Fed had to resort to  Quantitative Easing, and expanding its Balance Sheet as they are doing today. 

And they are doing it on a continuing basis, and not as an unusual action with regard to secular and isolated liquidity problems.  Unless you want to count chronic insolvency as a liquidity problem.

And the Fed purchases of Treasury debt at non-market prices is just dandy as long as it passes through the hot little hands of the likes of a friendly bank like JPM, who take their vig and then some.

And this chart shown below, printed courtesy of the St. Louis Fed, is just an illusion, so don't look at it.  Seriously.  Don't look at it. Knowledge is bad.  As a reminder, there are two scales on that chart, and the Adjusted Monetary Base uses the lesser scale.

As a reminder:
"In economics, the monetary base (also base money, money base, high-powered money, reserve money), is defined as the sum of currency circulating in the public and commercial banks' reserves with the central bank."
Hey, the Monetary Base includes reserves that the Banks are keeping safe at the central bank.  And the monetary base is the foundation for that leveraged expansion of debt money that is characteristic of a fractional reserve banking system.   What's up with that.  Does the Fed need to get out the liquid paper and correct that?

Here is a link to 'Money Supply: A Primer."

I recall that not long ago, Alan Blinder suggested that the Fed might alter the interest it pays on Reserves in order to stimulate more lending.  But he is just being a party pooper and doesn't understand banking. Or the difference between liquidity and credit.

"The nation's biggest banks have been nursed by the Federal Reserve way too long, former Federal Reserve Vice Chairman Alan S. Blinder said Thursday as he kicked off the tour for his new book, After The Music Stopped: The Financial Crisis, The Response and the Work Ahead.

The Federal Reserve, says Blinder, should stop paying interest to banks for their overnight deposits and should move to charge them for parking money. He says if the Fed set negative interest rates for overnight deposits – in effect charging a fee – banks would have to figure out better ways to make money and one obvious alternative would be to lend more to customers."

Yes I understand these are not 'excess' reserves which is an 'accounting designation' created by the Fed.  It is the Fed that sets the level of reserve requirements, or the lack thereof, in its role of banking regulator.   And it has quite a bit to say about the quality of their collateral that be used as reserves.  Such as cash, aka liquidity to those ascending masters of finance.  And as I recall they used to set margin requirements on the equity markets.  But perhaps they no longer do that. 

But this statement by Blinder somewhat 'blows a big hole' in the arguments of those who occasionally come out and lecture us that when the Fed 'creates money' (or liquidity if you prefer) and buys Treasury and Agency Debt from the Banks at non-market rates, it is not really creating money.  It is a benignly useless action.  It simply gives the banks 'cheap liquidity' that they can choose to use as they wish.  I wish they would buy some useless paper from me at non-market rates.  I accept all major forms of payment.

The Banks sit on this liquidity, and use it to prop up their zombie Balance Sheets.  I don't think the virtual dollar sequentially numbered and marked.  So they may also use it to pay themselves bonuses. Or maybe leverage it to gamble in the markets with Other People's Money.  Oh I forgot, Dodd-Frank changed that  Except for 'hedging.' 

The Fed is engaged in simple acts of charity for the poor and unwashed Bankers of Wall Street.  Uh huh.

Normally the Fed does not have to print money.  The Federal Reserve Banks do that for them under their charters with the consent and oversight of the Fed.  But when the real economy, as typified in the recent collapse and the continuing plunge of the velocity of money indicators, the Fed picks up the ball and prints money for the benefit of the economy.  They use this to 'lower interest rates' except in a liquidity trap wherein that is like pushing a rope. 

I think what some of these helpful pundits are trying to say is that the Fed is not 'printing money' so that it is becoming an inflationary problem.  They are giving that 'money' to the Banks, and they hold it for safekeeping.  And for their gambling stash. And for credit cards and food stamp distributions and other fee generating activities.  And for loans to pay dividends, and fund share buybacks, and the occasional industrial activity.

That they are NOT getting that money to the real economy is another matter perhaps.  And among other things it involves the payments on excess reserves that they are paying to the Banks to sit on that money.  And the gaming of the financial markets to which they turn a blind eye.  And the enormous abuses in the financial system which have still not been reformed.

Click on the subject link 'Excess Reserves' below for more on these Tales from the Vienna Woods (the play, not the waltz) from our financial sophisticates, and sophists, who like to argue what the meaning of is, is. 

Or just start by clicking here.

By Jesse

http://jessescrossroadscafe.blogspot.com

Welcome to Jesse's Café Américain - These are personal observations about the economy and the markets. In plewis

roviding information, we hope this allows you to make your own decisions in an informed manner, even if it is from learning by our mistakes, which are many.

© 2013 Copyright  Jesse's Café Américain - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Jesse Archive

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