Where $1 Of QE Goes: The Untold Story

Tyler Durden's picture

Submitted by F.F.Wiley of Cyniconomics blog,

“We don’t understand fully how large-scale asset purchase programs work to ease financial market conditions.”
- New York Fed President Bill Dudley


“I don’t think there’s any doubt that quantitative easing enabled the rich and the quick. It was a massive gift… It was deliberate in the sense that we were hoping to create the wealth effect… I hope that we do indeed succeed in being able to say in the end the wealth effect was more evenly distributed. I doubt it.”
- Dallas Fed President Richard Fisher


“Just as I thought it was going alright, I find out I’m wrong when I thought I was right, it’s always the same it’s just a shame, that’s all.”
- Genesis front man Phil Collins

Sometimes the most interesting results are the ones you didn’t see coming.

We recently picked through financial flows data looking for clues about where a dollar of quantitative easing (QE) ends up.

For example, we wondered who parts with the bonds that find new homes on the Fed’s balance sheet. Dealers sometimes pass bonds straight from the Treasury to the Fed, but are they buying other QE-ready bonds mostly from households, pension funds, foreigners or other financial institutions? Also, can financial flows help us to guess at how much (if any) a dollar of QE adds to spending?

We didn’t expect clear answers and were surprised to stumble across this:


untold story

Needless to say, the chart raises a bunch of new questions, such as:

  • Didn’t the Fed expect QE to complement other types of bank credit?
  • What do they think of data suggesting it only displaced private sources of credit?
  • Do they have any other explanations for the results in the chart?

Unfortunately, our direct line to the Eccles Building isn’t working this week, which prevents us from answering these questions. We’re left to form our own conclusions.

What to make of the “argyle effect”?

Our main takeaway is that the extra reserves created by QE aren’t so much an addition to bank balance sheets as a substitution. The addition story is the one we normally hear. It often leads to confused commentary, such as the mistaken ideas that banks “multiply up” or can “lend out” reserves. (We discussed these fallacies here.) But even without the confused commentary, the addition story doesn’t, well, add up.

According to financial flows data, it’s more accurate to say that QE’s extra reserves merely replaced other forms of balance sheet expansion. That’s a substitution story. It’s consistent with the fact that banks can neutralize QE’s effects with derivatives overlays and other portfolio adjustments. They can rearrange exposures to mimic a balance sheet of equal size and risk that’s not stuffed with reserves. (See this related discussion by blogger Tyler Durden.)

Think of it this way:

Your banker already knows how many slices of meat he wants in his sandwich. When the Fed shows up with a thick package straight from the deli, it saves him a trip of his own. He still makes the same sized sandwich, but it’s filled mostly by central bankers, and he adjusts it to his liking by varying the condiments.

Now, the full picture is more complicated than that, mainly because reserves move from bank to bank. For example, data shows a large amount of QE reserves accumulating at U.S. offices of foreign banks, where they appear to be funded by foreign lenders. You can think of these reserves as a means of recycling America’s current account deficits back into U.S. dollar assets. In other words, QE seems to encourage foreigners to swap other types of dollar assets for reserves at the Fed, supporting the substitution story.

Moreover, reserves can migrate from stronger banks to highly levered banks that are trying to improve capital ratios by lowering risk-weighted assets. This, too, is likely to result in balance sheet substitutions rather than additions.

Other banking practices may also help to explain the argyle effect, but there’s only so much we can learn from available data. For example, it’s impossible to determine how much banks were front running QE by buying bonds just before the Fed’s asset purchases began (although we consider clues in the appendix, which is linked below).

Bottom line

Whatever the interpretation, our chart fits nicely alongside Dudley’s and Fisher’s comments above. It says there’s much the Fed doesn’t understand, while at the same time showing that QE may have little purpose beyond providing a massive gift to wealthy traders and investors.

Getting back to our question of where a dollar of QE goes, the answer is “not far.” Outside of pushing up asset prices and encouraging an occasional luxury purchase, it doesn’t seem to escape the financial sector. Liquidity that might otherwise be offered by private institutions is instead provided by the Fed, and – as Phil Collins might put it – that’s all.

(Click here for an appendix to this post. Also, don’t miss our related research, including “Is This What a Credit Bubble Looks Like” and “3 Underappreciated Indicators to Guide You Through a Debt-Saturated Economy.”)

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fauxhammer's picture

Hang 'em high!


...or hang 'em sober, I don't give a shit

dryam's picture

Off topic, but IMHO very revelant to everything economic.....

Latest Peak Cheap Oil talk by Chris Martenson....


Manthong's picture

C’mon now..

When you combine a shell game with a Three-card Monte game, Ponzi scheme and Kabuki theater, you get Fed Policy.

They know exactly what they are doing.


TheReplacement's picture

That needs to be on a bumper sticker.

fonzannoon's picture

 "It says there’s much the Fed doesn’t understand, while at the same time showing that QE may have little purpose beyond providing a massive gift to wealthy traders and investors."

Methinks there is one thing the author does not understand.

scraping_by's picture

You know, I rarely hear anyone defending trickle down economics, yet I never see anyone acting any other way.

If Laffer had copyrighted his crackpot idea, the royalties would have put him up in the top 0.01%

I Write Code's picture

Certainly wasn't Laffer's idea and not even sure he made up the name, wikipedia gives some priority to Will Rogers.  If Laffer could just get a nickel anytime anyone mentions that curve, he'd be doing well.

BigJim's picture

You have to remember that when Laffer told some Reagan appatchik his idea, he just drew the curve roughly on a napkin to illustrate the self-evident truth that if a government imposes 0%, or 100%, income tax, their revenue will drop to zero, and therefore the optimum amount was somewhere between those two points. He never gave a detailed study of what he thought the optimum percentage of income tax would be; the Reaganites did that all by themselves.

Mercury's picture

So, in 2014 why exactly is the Fed paying interest on excess reserves?

TheReplacement's picture

Is the Fed really paying interest on excess reserves or are we?

ptoemmes's picture

I just balanced my checking account as I do each month and have since before 2008.  Still no $QE.00 there.

Sudden Debt's picture

did you press F5 already?

Gaius Frakkin' Baltar's picture

Blah, blah, blah... the Proletariat have to work for money while the Elite get to print it... blah, blah, blah...

That's all I hear and see whenever QEfinity or a central bank is under discussion.

andy_pandy's picture

er the minions are still here in spite of the elite not because of them; we are part of the accident thats already happened, namely globonomics

fonzannoon's picture

2.59 10yr. well played bernak.

Dr. Engali's picture

I thought you were out enjoying the day.

fonzannoon's picture

I actually am. stupid phone makes it way too easy to see whats going on. 

NoDecaf's picture

I nominate Phil Collins for fed chairman.

I Write Code's picture

But we already have Ms. Gomer Pyle, "Surprize, surprize, surprize!"



Relentless101's picture

"It says there’s much the Fed doesn’t understand, while at the same time showing that QE may have little purpose beyond providing a massive gift to wealthy traders and investors."

No shit.

SmittyinLA's picture

How is QE a gift to the wealthy? 

Prices and taxes go up, income & profits go down, inflation makes it harder for everybody particularly the wealthy who pick up the tab on everything, taxes & insurance and up course their employees, most companies eat up a chunk of their profits every year with inflation or the tailwind of QE. 

Who benefits from America's massive currency debasement?

Poor immigrants and aliens and broke boomers, nobody else.

Ya your building went up $1 million last year, but so did your taxes and insurance and other expenses, and guess what they all trail inflation and you only get that increase in QE "value" if you sell and pay a vig, the rise was only fictional in notational dollars and in reality you may even own less property with more liabilities, lots more liabilities.

The income of the wealthy doesn't keep up with inflation either, their wealth is being looted the most, everytime a family member dies the state comes in and raids like pirates.

Dr. Engali's picture

Please, cry me a fucking river. Let me know when they can't put food on the table or have to worry about how they are going to cover their medical expenses. The wealthy are just fine, the poor are taken care of, and the middle class is getting crushed in between the both of them.

max2205's picture

You have to remember that the FSA consists of 150 million people.

sharonsj's picture

My first reaction to your comments: You're crazy.  The rich own the most stock, CEOs are given stock, the bankers get money at no interest and then loan it out at 6%, the banks get our savings accounts and pay us half a percent interest, and the dollor is practically worthless.  The rich are so rich they cn afford to pay higher prices but the average person can barely pay the bills and the Middle Class is disappearing.  The poor, aliens, and boomers are already in the gutter.  Other people have said, "Cry me a river."  I say fold it four ways and put it where the sun don't shine.

Bemused Observer's picture

Oh, cue the violins!
How did you manage to type all that without puking all over your keyboard?

RaceToTheBottom's picture

Consider yourself projectile diarrheaed upon.

TheReplacement's picture

What taxes go up?  Income?  Yeah, once you are rich you don't really need so much income.  Property taxes?  Buy outside the US like everyone else - diversify. 

Prices go up, so what?  You are rich and have no debt.  You own everything you need already. 

Wrapping back around to taxes, lose a bit of money in the right place and viola, you don't owe taxes and probably qualify for a bailout, if you are rich enough.


My advice to you:  Tear up the .gov check you just earned, turn to the light and repent.  I feel sorry for anyone who would do what you do.


NAP's picture

Would love to hear David Stockman's take on this article...

TrustbutVerify's picture

I was OK with the opening quotes until I saw one by Phill Collins. 

JRobby's picture

“I don’t think there’s any doubt that quantitative easing enabled the rich and the quick. It was a massive gift… It was deliberate in the sense that we were hoping to create the wealth effect… I hope that we do indeed succeed in being able to say in the end the wealth effect was more evenly distributed. I doubt it.”

- Dallas Fed President Richard Fisher


He should shoot himself in the face.



RaceToTheBottom's picture

Argyles are back in style.

I feel the same about them as I did about pink camo.

world_debt_slave's picture

Since 2004 I have had a "Fed Up" sticker on the back of my vehicles bumper.

Sorry_about_Dresden's picture

Still driving the 2004. Say no more. I'm still changing the oil every 3000 miles in my 2000 4-Runner because the baby boomers won't retire which means I won't get promoted, won't pay my debt down. 


They won't retire because they like working. I'll  never retire because I'll be poor because they don't know  what to do with the million  in their 401k.

Do us a favor and retire as soon as you can and make way for the gen-x. Or send me the money  "you don't know how to spend"

Clycntct's picture

By what authority does this take place.  " providing a massive gift to wealthy traders and investors."

Get out the rope for the easy cure.