Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

QE Forever: The Fed's Dramatic About-face

Interest-Rates / Quantitative Easing Feb 21, 2019 - 09:10 AM GMT

By: Ellen_Brown

Interest-Rates

“Quantitative easing” was supposed to be an emergency measure, but the Federal Reserve is now taking a surprising new approach toward the policy. The Fed “eased” shrinkage in the money supply due to the 2008-09 credit crisis by pumping out trillions of dollars in new bank reserves. After the crisis, the presumption was the Fed would “normalize” conditions by sopping up the excess reserves through “quantitative tightening” (QT)—raising interest rates and selling the securities it had bought with new reserves back into the market.


The Fed relentlessly pushed on with quantitative tightening through 2018, despite a severe market correction in the fall. In December, Fed Chairman Jerome Powell said QT would be on “autopilot,” meaning the Fed would continue to raise interest rates and sell $50 billion monthly in securities until it hit its target. But the market protested loudly to this move, with the Nasdaq composite index dropping 22 percent from its late-summer high.

Worse, defaults on consumer loans were rising. December 2018 was the first time in two years that all loan types and all major metropolitan statistical areas showed a higher default rate month over month. Consumer debt—including auto, student and credit card debt—is typically bundled and sold as asset-backed securities similar to the risky mortgage-backed securities that brought down the market in 2008 after the Fed had progressively raised interest rates.

Powell evidently got the memo. In January, he abruptly changed course and announced QT would be halted if needed. On Feb. 4, Mary Daly, president of the Federal Reserve Bank of San Francisco, said it was considering going much further. “You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, one that you would use more readily,” she said. QE and QT would no longer be emergency measures but would be routine tools for managing the money supply. In an article on Seeking Alpha titled “Quantitative Easing on Demand,” Mark Grant writes:

If the Fed does decide to pursue this strategy it will be a wholesale change in the way the financial system in the United States operates and I think that very few institutions or people appreciate what is taking place or what it will mean to the markets, all of the markets.

The Problem of Debt Deflation

The Fed is realizing that it cannot bring its balance sheet back to “normal.” It must keep pumping new money into the banking system to avoid a recession. This naturally alarms Fed watchers worried about hyperinflation. But QE need not create unwanted inflation if directed properly. The money spigots just need to be aimed at the debtors rather than the creditor banks. In fact, regular injections of new money directly into the economy may be just what the economy needs to escape the boom and bust cycle that has characterized it for two centuries. Grant concludes his article by quoting Abraham Lincoln:

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.

The quote is apparently apocryphal, but the principle still holds: new money needs to be regularly added to the money supply to avoid an overwhelming debt burden and allow the economy to reach its true productive potential. Regular injections of new money are necessary to avoid something economists fear even more than inflation—the sort of “debt deflation” that took down the economy in the 1930s.

Most money today is created by banks when they make loans. When overextended borrowers pay down old loans without taking out new ones, the money supply “deflates” or shrinks. Demand shrinks with it, and businesses lacking customers close their doors, in the sort of self-feeding death spiral seen in the Great Depression.

As Australian economist Steve Keen observes, today the level of private debt is way too high, and that is why so little lending is occurring. But mainstream economists consider the rate of growth of debt to be irrelevant to macroeconomic policy, because lending is thought to simply redistribute spending power from savers to investors. Conventional economic theory says that banks are merely intermediaries, recirculating existing money rather than creating spending power in their own right. But this is not true, Keen said. Banks actually create new money when they make loans. He cites the Bank of England, which said in its 2014 quarterly report:

[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits …

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

Loans create deposits, and deposits make up the bulk of the money supply. Money today is created by banks as a debt on their balance sheets, and more is always owed back than was created, since the interest claimed by the banks is not created in the original loan. Debt thus grows faster than the money supply. When overextended borrowers quit taking out the new loans needed to repay old loans, the gap widens even further. The result is debt deflation—a debt-induced reduction in the new money needed to stimulate economic activity and growth. Thus comes the need for injections of new money to fill the gap between debt and the money available to repay it.

However, the money created through QE to date has not gone to the consuming public, where it must go to fill this gap. Rather, it has gone to the banks, which have funneled it into the speculative financialized markets. Nomi Prins calls this “dark money”—the trillions of dollars flowing yearly in and around global stock, bond and derivatives markets generated by central banks when they electronically fabricate money by buying bonds and stocks. She writes, “These dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups.” In a piece for Daily Reckoning, she shows graphically that the rise in dark money is directly correlated with the rise in financial markets.

QE has worked to reverse the debts of the banks and prop up the stock market, but it has not relieved the debts of consumers, businesses or governments; and it is these debts that will trigger the sort of debt deflation that can take the economy down. Keen concludes that “no amount of exhorting banks to ‘Intermediate’ will end the drought in credit growth that is the real cause of The Great Malaise.” The only way to reduce the private debt burden without causing a depression, he says, is a Modern Debt Jubilee or People’s Quantitative Easing.

QE-Funded Debt Relief

In antiquity, as professor Michael Hudson observes, debts were routinely forgiven when a new ruler took the throne. The rulers and their advisers knew that debt at interest grew faster than the money supply, and that debt relief was necessary to avoid economic collapse from an overwhelming debt overhang. Economic growth is arithmetic and can’t keep up with the exponential growth of debt growing at compound interest.

Consumers need that sort of debt relief today, but simply voiding out their debts as was done in antiquity will not work, because the debts are not owed to the government. They are owed to banks and private investors who would have to bear the loss. The alternative suggested by Keen and others is to fill the debt gap with a form of QE dropped not into bank reserve accounts but digitally into the bank accounts of the general public. Debtors could then use the money to pay down their debts and non-debtors would receive a cash injection.

Properly managed, these injections need not create inflation. (See my earlier article here.) Money is created as loans and extinguished when they are paid off, so the money used to pay down debt would be extinguished along with the debt. Cash injections not used to pay down debt would just help fill the gap between real and potential productivity, allowing demand and supply to rise together, keeping prices stable.

A regular injection of money into personal bank accounts has been called a “universal basic income,” but it would be better to call it a “national dividend”—something all citizens are entitled to equally, without regard to economic status or ability to work. It would serve as a safety net for people living paycheck to paycheck, but the larger purpose would be as economic policy to stimulate demand and productivity to keep the wheels of industry turning.

Money might then indeed become a servant of humanity, transformed from a tool of oppression into a means of securing common prosperity. But first the central bank needs to be made a public utility, responsive to the needs of the people and the economy.  In other words, it needs to become a public servant once and for all.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com and http://PublicBankingInstitute.org

© Copyright Ellen Brown 2019

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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in