Visualizing The Fed's Clogged Plumbing

Tyler Durden's picture

In advance of ever louder demands for more, more, more NEWER QE-LTROs (as BofA's Michael Hanson says "If our forecast of a one-handle on H2 growth is realized, then we would expect the Fed to step in with additional easing, in the form of QE3") , it is an opportune time to demonstrate just what the traditional monetary "plumbing" mechanisms at the discretion of the Fed are, and more importantly, just how completely plugged they are. So without any further ado...

Keep in mind that this is a simplistic, pre-"$20 trillion in US Shadow Banking liabilities" perspective. When accounting for all pathways, including the ability to repo Federally "reserved" assets within the $45 trillion BoNY/State Street collateral "cloud", the above figure gets far more complex, and explains why every incremental dollar in monetary easing will likely go straight into massively overvalued paper investments, and shortly thereafter, into hard non-dilutable assets. Which in turn, when considering icnreasingly fewer Americans are spending on staples like mortgage, explains why the threat of runaway asset prices is higher now than ever before. Although we agree: aggregate demand will have long way before it ramps up to capacity, at least in the traditional monetarist sense. So for now, and looking solely at the traditional representation, here is why even more QE will likely have no actual favorable impact on aggregate demand, once again via BofA:

Credit channels: most severely cracked

Of the six channels listed in Figure 1, all are impaired in one way or another. The most disrupted arguably are the credit channels (left side of the figure). The narrow credit channel is largely impaired because banks are hoarding reserves (more than $1.5 trillion in excess reserves currently are on deposit at the Fed);loan growth remains quite soft. The broad credit channel is blocked as collateral values are still impaired in many sectors — most notably real estate.

The data reveal that aggregate lending is still depressed: historically, loans and leases of the US banking sector have grown around 7% annualized, and has averaged that pace for the past 50 years. But during the last recession, loan growth collapsed — a much larger decline than any period on record — and has only turned up in the past year. Most of this growth is due to commercial and industrial loans; both consumer and real estate lending are still  contracting.

The January Senior Loan Officers’ Survey revealed a significant decline in the net percent of banks willing to make consumer loans, suggesting that lending standards are starting to tighten again. This may reflect a desire by banks to further improve their capital positions. Meanwhile, loan demand  remains weak in a number of sectors. The exception has been large corporates, who have lots of cash on hand already and ready access to the capital markets. In effect, the rise in commercial and industrial lending is helping those least in need. To fully restore the flow of credit will likely take at least another year or two.

Interest rate and wealth channels: leaks continue

The interest rate channel typically works through cuts in the federal funds rate rippling through the term structure, lowering all rates. But with the funds rate pegged at 0 to 0.25% since late 2008, this channel has been completely cut off.  Similarly, the wealth channel, as illustrated in Figure 1, has also sprung a  large leak. Traditionally, cutting interest rates and expanding the money supply would be expected to boost asset prices. But now, despite the large increase in the monetary base, the “money multiplier” crashed and has remained low: for M2 it is less than half its pre-crisis value — and below one for M1 (Chart 3)! This drop is in large part a consequence of the weak lending environment noted above.

Portfolio balance channel: laying new pipes With these two channels — historically the most potent — backed up, the Fed has innovated, attempting to influence longer-term rates by removing duration risk from the market (asset purchases) and by reducing expectations for future short rates (forward guidance). In some regards, these new tools are more direct than the pre-crisis ones. The Fed arguably has been relatively successful in bringing down rates at the long end. This, in turn, has benefited capex investment and mortgage refinancing, thereby modestly stimulating demand.

Through its asset purchases, the Fed also is trying to boost asset price levels —another route to a wealth effect via a portfolio balance channel. Note that thischannel works not through the liabilities side of the Fed’s balance sheet (the traditional mechanism), but the asset side. (This also makes the portfolio balance channel the asset-side counterpart to the traditional monetarist channel of figure 1 on the liabilities side.) This approach has seen some success through higher equity prices (although we doubt the majority of the rise in stock prices can be pinned on the Fed, given the strength of US corporate fundamentals). But it has arguably not yet helped boost house prices, which remain the most significant asset for a majority of US households. Household net worth fell from 6.5 times personal disposable income pre-crisis to about 4.7 times thereafter, and remains less than 5 times income (Chart 4). The problems in the housing market have continued to undermine many transmission channels, including this one.

Exchange rate channel: an interrupted flow

The exchange rate channel has arguably had some success, with the tradeweighted US dollar index dropping over 14% (5% annualized) from its early 2009 high. Cumulatively it is down 9% (2% annualized) from its August 2007 level, when the Fed began aggressively easing policy (Chart 5). The exchange rate impact of the Fed’s bond buying was largest after QE1 was extended. Conversely, Operation Twist has had no noticeable effect on the dollar. As the dollar fell from 2009 through 2011, US exports boomed, which added to growth and, to a lesser extent, employment. With the pace of depreciation having slowed, the marginal boost to trade should soften as well.

While this channel was relatively more effective than many others, it also is not especially large. It was, however, one of the least popular — at least globally. Emerging markets did not welcome the drag on their exports from stronger currencies, nor the “hot money” that led to capital inflows chasing higher returns. And to the extent that global investors also jumped strongly into commodities, the rise in these prices (especially food) could be inflationary in EM economies, while higher energy prices could squelch the recovery in developed markets. Small increases aren’t a big deal — but if the commodity markets become hypersensitive to Fed easing and overshoot, it then becomes a potential problem.

To date, most Fed officials have not given much credence to this concern, and Fed researchers have found little evidence to support a causal link between the Fed’s asset purchases and higher commodity prices. Rather, they point to adverse supply shocks and stronger demand, especially from faster growing EM economies themselves. We may never see the day that most Fed officials acknowledge their actions could have boosted global commodity prices.

Digging down: confidence and expected inflation channels As if Figure 1 is not potentially confusing enough, there are other potential channels for further bond buying to impact the economy. One is through inflation expectations. The various QE programs where implemented in the face of sharp declines in inflation expectations (Chart 6); Bernanke argued in his lectures this past week that asset purchases guarded against deflation risk. Restoring longterm inflation expectations to the Fed’s 2% target not only satisfies that part of the Fed’s dual mandate, it also eases financial conditions by making real interest rates more negative — reinforcing the interest rate channel for policy.

Also not represented in Figure 1 is a confidence channel. In times of elevated uncertainty or outright crisis, Fed easing can offset negative shocks to  sentiment that threaten to feed upon themselves. In effect, the Fed can potentially put a floor under market sentiment. As such, the Fed is likely to react to a sharp, broadbased sell-off in asset prices that foretells of a collapse in confidence. But as the crisis environment fades, we would expect the Fed to be more tolerant of regular volatility in asset markets. Indeed, the threshold for the Fed to react to stock prices — which is not a standard part of the Fed’s economic assessment, but surely is correlated with growth and sentiment — is likely higher today than during the prior few years. Investors should be cautious not to put too high of a strike price on the so-called “Bernanke put.”

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JaylP6's picture

Stock market bottom April 2012 -

GetZeeGold's picture



Equities to infinity.......and beyond!!!!


Amazing what you can do with a little hot QE cash.


Member for
1 week 5 hours


Have another glass of's free!


03/30/2012 - 08:26 2303059 JaylP6 Stock market bottom April 03/30/2012 - 08:23 2303055 JaylP6 Stock market bottom April 03/30/2012 - 08:23 2303054 JaylP6 Stock market bottom April 03/30/2012 - 08:23 2303053 JaylP6 Stock market bottom April 03/30/2012 - 08:22 2303050 JaylP6 Stock market bottom April 03/30/2012 - 08:21 2303048 JaylP6 Stock market bottom April 03/30/2012 - 08:21 2303045 JaylP6 Stock market bottom April 03/30/2012 - 08:20 2303044 JaylP6 Stock market bottom April 03/30/2012 - 08:19 2303042 JaylP6 Stock market bottom April 03/30/2012 - 08:19 2303040 JaylP6 Stock market bottom April 03/30/2012 - 08:18 2303038 JaylP6 Stock market bottom April 03/30/2012 - 08:17 2303037 JaylP6 Stock market bottom April 03/30/2012 - 08:16 2303035 JaylP6 Stock market bottom April 03/30/2012 - 08:16 2303032 JaylP6 Stock market bottom April 03/30/2012 - 08:15 2303031 JaylP6 Stock market bottom April 03/30/2012 - 08:14 2303021 JaylP6 Stock market bottom April



SheepDog-One's picture

Problem is, the 'made money' is ever more worthless.

TruthInSunshine's picture

I sometimes post the same thing in 2 or 3 threads, but it's always my original thought or my original thought as it pertains to a relevant article or link that I have attached and I put time into the analysis and detail of what I'm writing (whether I'm correct or not), and I don't post the same thing to multiple threads often.

The first post above is just the opposite. It's a one sentence post with a link attached, that's now been posted in at least 3 different threads, being so general that it's not even related to the article it's being posted in response to.

IOW, it's pure spam.

I'm an advocate of ZH remaining uncensored, but the "My aunt makes $3800 a minute blah blah blah" and the type of comment that is the first one above should be barred as they add nothing of value, and actually subtract, from any pretense of intelligent discourse.

smlbizman's picture

im with you on being about when we reach an amount of down arrows they consider these "freinds" for removal....or heavens forbid we go back to the "death captcha" ....or just ignore completly and move on...

SimpleandConfused's picture

Don't know about that.  I have been simple and just keep to the original Principal of Ben:


I swear this will be a doctoral thesis some day.  So far, the Principal of Ben has simply made me money.  Hell, look at NFLX and RIMM.  No matter what the news or earnings or anything else;


SheepDog-One's picture

Yea in 2013 it will be a doctoral thesis course while theyre holding classes in a cave chiseling pictures in rock.

Vincent Vega's picture

I needed a good laugh this morning, Sheep. Thanks!

mayhem_korner's picture

So far, the Principal of Ben has simply made me money. 


...and taken away the purchasing power of that "made money" at the same time.  It's that old right hand-left hand thing.

SheepDog-One's picture

'So far, it has made me money'

Lets look at that dubious statement more closely. He's implying he SOLD all pops and bought all dips, and then cashed those out? Yea well I dont believe it. Then lets look at the 'money made' part...he's making dollars which are declining? I think these guys are all full of shit, bottom line. All paper trades.

slaughterer's picture

"BTFD; Or, The Principle of Ben's Depression Market," by Prof. Keynes (Princeton UP, 1st Ed. 2009, 2nd Ed. 2010, 3rd Ed. 2011, 4th Ed.2012). 

G-R-U-N-T's picture

"So without any further ado..."

Adee Doo!!!!!

The Feds way of "pinching a loaf" causing a foul obstruction in their potty of monetary policy that only a skilled plumber can remove!

orca's picture

Agree with Simple. It's really easy, really. F*ck purchase power etc, I only need more fiat in order to buy tangible. When this thing im/explodes (Japan or Zimbabwe, or both, whatever, doctoral theses can sort that out later) you want to be as much as possible in you-know-what, you know the stuff you can't eat but which also can't be printed. Therefore I salute uncle Ben.

slaughterer's picture

Lacker, Plosser--they are like the hair balls blocking up the QE sink. 

Bernanke, Dudley, Hatzius--they are the plungers trying to push through QE liquidity. 

citta vritti's picture

speaking of clogged plumbing, check out the informative thread on TP and variants,


i-dog's picture

Is he still whingeing about the "white shoe boys" having stolen his speculative paper profits in the gold derivatives market?

I'm tired of his same clichés being repeated over and over and over. If you've heard one Celente interview, you've heard them all.

Dr. Engali's picture

I'm with you on that. He has some pretty good insights but it gets old listening to him.

Dr. Engali's picture

Take your crap to the yahoo boards. They might be stupid enough to bite.

battle axe's picture

More money flushed down the crapper....

GeneMarchbanks's picture

There has to be a financial equivalent to laxatives though?

mayhem_korner's picture

Also not represented in Figure 1 is a confidence channel. In times of elevated uncertainty or outright crisis, Fed easing can offset negative shocks to  sentiment that threaten to feed upon themselves.


Until light dawns on a critical mass.  Then further easing reinforces uncertainty and the death spiral that is a certainty to all who follow reality will take hold.

SheepDog-One's picture

OH I see, so this today is 'clogged pipes'? Gee well what happens when the QE is flowing smoothly, DOW 72,000, dollar = 0? 

SheepDog-One's picture

Projected inflation? 1.2%

But thats of course with prices already record high...$5 gas, insane food prices.

If I turned in this paper in an Econ101 class it would have been marked 'F'


slaughterer's picture

We need SD-1 around here 24/7 to "keep it real."

JohnKozac's picture

The data help explain the results of this plumbing:

ekm's picture

Wow. This is exactly what I've been thinking recently.

In my mind, visualizing the Fed/Treasury as Manufacturers and the US$ as the product, customers (world) may choose and probably have chosen not to use the product. Hence, the manufacturer has to stop producing, hence deflation.

Inflation assumes that the world is eager to absorb all debt-dollars printed. However, the schematic makes it clear it's not the case, IMO.

GMadScientist's picture

I am positive this toilet will stop overflowing, if I can just keep pissing.

And what's that sexy quantity at the bottom at which all the arrows appear to be pointing?

slaughterer's picture

Toilets...  Anyone care to continue the "how to wipe your ass" discussion from last night? Perhaps another attempt to unravel the eternal conundrum "why do women use more toilet paper than men?"

Monedas's picture

The approach is wider and the hands are smaller and they have to get back to the kitchen and stir the oat meal ?   Monedas  2012  Comedy Jihad Bathroom Etiquette

GMadScientist's picture

By way of answer: "In the Navy, they taught us to wash our hands, son."

"Oh yeah? Well in the Air Force, they taught us not to piss on ourselves."


ArkansasAngie's picture

Dancing with the stars?

Till the music stops

I'll be going to the races and betting on the gray horse that just pissed ... at least there I'll be having fun


GetZeeGold's picture



I think I'm in trouble....cause that post has made the most sense to me so far this morning.


alfred b.'s picture


   Fed's plumbing???....figure 1 looks more like my wife's family tree!!

 Seriously though, QE3 would be a start....yeah that's it more like a new beginning, turning over a new leaf....time to get all yr ducks in a row!

  Buy physical gold and silver...if u still can.



stocktivity's picture

Don't forget more guns and ammo

Catullus's picture

The Federal Funds Rate?  Uh... no one has cared about that archaic measure since Greenspan claimed that the free market doesn't work. (I'm still fucking pissed off he said that.)

Apparently, central planning doesn't work either assbags.

Mercury's picture

But as the crisis environment fades, we would expect the Fed to be more tolerant of regular volatility in asset markets. Indeed, the threshold for the Fed to react to stock prices…is likely higher today than during the prior few years.

I disagree. The Fed can’t indefinitely repress some parts of the financial ecosystem/plumbing (ZIRP & various life-supports) and then not react when diverted pressure finds another weak point.  Band-aids and bail-outs have been more or less the program so far but remember that all this has been done to keep the big red carpet clear for the much hoped for macro-organic turnaround (which, I suppose could theoretically still happen to some extent).  The next time the stock market swoons enough to scare the crap out of everyone they'll still be in we-can't-let-this-happen mode.

Something will eventually give that can't be re-buttressed (and it might not even be a domestic something).  Then.... a critical amount of dry tinder builds up in the forest, the levee breaks...kaboom.

(Sorry about the analogy train wreck, I'm only on my second coffee)


glenlloyd's picture

eventually all their meddling will have to come out in the wash....said another way, they can't intervene in perpetuity without consequences...but they believe they can.

disabledvet's picture

It is a Bernanke CALL option...not a put option. And here's what it looks (and sounds) like:
but look! "you get to play again!" not only that...THERE'S A Ms. Pac Man!:
btw this guy is REALLY GOOD. how come this isn't in the Olympics? "You can get a free Slurpie at the podium." Lot more economical than a gold medal that's fer sure...

Monedas's picture

Sign of the times anecdote ! Just got an urgent Email from ex-wife's daughter ! She needs to ask me a big favor ? Haven't heard from her in years !  She gave a phone number....but I responded by Email ! I told her I was so so !  You know she wants a "loan" !  I'm going to lay low for awhile ! Where were they when I was on my soap box preaching metals during the housing bubble ? Laughing at me ! Divorcing me !    Monedas  2012   Comedy Jihad Laugh Back Moment

Dr. Engali's picture


"The exchange rate impact of the Fed’s bond buying was largest after QE1 was extended. Conversely, Operation Twist has had no noticeable effect on the dollar"


Maybe it had no noticeable effect against another basket of central bank over printing worthless fiat paper, but measure it against things that matter and there is a very noticeable effect.

LawsofPhysics's picture

yes, it's the only way I can explain the recent move by many of my colleagues to install and fill additional diesel storage tanks.

CvlDobd's picture

I'm really tempted to up vote that last post of mine.

Dr. Engali's picture

Yeah you're probably better off not doing so. :->

LawsofPhysics's picture

So you can't print demand either?  classical eCONomics=FAIL

dexter_morgan's picture

hmmmm, I did not know that was behind this stuff:

"call out the 1% who refuse to pay their fair share." Wow, didn't know you could refuse to pay your taxes, I want to get in on that!



You could be a part of a huge wave of progressive direct action this spring. Learn how to practice nonviolence in the spirit of Gandhi and Martin Luther King Jr. at a 99% Spring action training in ???????? on Sunday, Apr. 15, 2012, at 10:00 AM. Click here to join in:

Attend a Training

Dear MoveOn member,

I'm putting together an amazing event here in ???????? on Sunday, Apr. 15, 2012, at 10:00 AM and I want you to come! I'm one of more than 800 people across the country who have stepped up to plan a 99% Spring action training.

We're going to prepare ourselves to join a huge wave of progressive direct action nationwide this spring. All over America, the 99% movement is getting ready for 60 days of protests, sit-ins, rallies, marches, and more this spring—all aimed and confronting the power, greed, and influence of the 1%.

It's exciting and I hope you can be part of it! The training is filling up fast but there's still room for more folks.

I jumped in to do this because I want to see the 99% Spring take off in a big way, and I want all of us in Frankfort to help make it happen. The training is on Sunday, Apr. 15, 2012, at 10:00 AM. Will you join in?

Yes, count me in!

Our movement will be holding huge rallies in every major city on Tax Day to call out the 1% who refuse to pay their fair share. We'll be gathering massive crowds to confront CEOs and top executives at annual shareholder meetings of Wall Street banks, dirty energy polluters, and corporations that refuse to treat workers fairly. And we'll be doing everything we can to call out the corrupting influence of corporate money on our elections.

At the training I'm putting together here in ????????, we'll be preparing ourselves to take part in these bold actions and to build connections with other progressives who want to see a 99% Spring in America.

We'll practice telling the story of what happened to our economy and what a different future could look like, we'll learn the history of nonviolent direct action, and we'll train and plan to take direct action ourselves—in the footsteps of Gandhi and Martin Luther King Jr.—to win change.

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Yes, I'll be at your training!

Thanks for all you do.

–sue m.

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Launch your own MoveOn-style campaign - and sign up other members to get involved. Start a petition on

GCT's picture

Dexter I hope that is sarc/  if not your posting on the wrong frigging site. 

dexter_morgan's picture

Yes. I guess the irony of an orginazion founded by one of the wealthiest men in the world 'calling out' the 1% was lost there.