Tired (And Broke) From All The "QE Is Just An Asset Swap" Rhetoric? Then Read This

If you, like us, are tired of all the textbook pundits claiming over and over again that QE is nothing but an asset swap (odd how asset swaps get food prices to hit all time highs, not to mention M2, and to reverse what has formerly been a trillion dollar annualized drop in shadow banking - must be that latest outbreak of disinflation...), we urge you to read the following essay from Sean Corrigan. The Diapason Securities strategist as usual manages to cut through the academic drivel and hit at the core of the issue. The conclusion: "money does not have to be borrowed into existence, it can be spent into existence by the state for so long as that money's recipients show a willingness to accept it as a medium of exchange - and that is exactly what we have at work here...the government spends money it does not have into existence and disburses it through its welfare/patronage network; the associated debt is then taken up by a monetary institution (not least, the Fed itself, whether by its earlier process of debt substitution on private sector balance sheets when it was buying MBS, or in its current, direct uptake of Treasuries at the NYFRB) and the non-bank sector ends up with increased holdings of new MONEY as a result... The Fed has successfully placed a great deal of new money in the hands of those same banks' customers and this is patently exerting its expected influence on the prices of a whole range of non-money goods and assets, in a typically differentiated, Cantillon-effect fashion. How anyone can deny this is truly a mystery!" Indeed.

From Sean Corrigan's February 18 Material Evidence

Last week, we appended a graph which we felt showed that the Fed was clearly complicit in producing the current rise in commodity prices - a contention which we foolishly thought was unexceptional. One criticism which quickly emerged was that the graph did not show such a link; another was that this did not apply to commodity prices (obviously responding, therefore, to their 'fundamentals') since the Fed was 'only' creating excess bank reserves before locking them safely away from where they could influence the price of anything much at all. In order to address these two cavils, we unapologetically reproduce a more detailed version of the same graph, together with some extra supporting evidence of the crime and the following address to the jury.

As we maintain that this graph shows, not only has AMS been driven by the Fed, but the excess money has clearly had an impact on commodity prices - whether via simplistic quantity theory means (more paper per resource unit) or by boosting speculative expectations (with not a little cheerleading from Blackhawk Ben) and hence bringing about the near record long positioning evident in many contracts. (Let us not either forget the impact of all the similar programmes enacted everywhere else in the world)

Next, we must counter the casuistic Bernanke defence that all he has undertaken is an 'asset swap' and not a monetization and then deal with the widespread misperception that the build up of excess bank reserves has somehow 'sterilised' the associated money creation.

In the first place, we simply need to say that the 'swap' being made — whether, as now, through regular POMOs or via the initial alphabet soup of lending programmes — is irrefutably one of non-money for money, presumably the very definition of 'monetization', whatever semantic games the Fed and its partisans wish to play.

Furthermore, look at the other figures which show the influence the Federal budget is having on the supply of money at a time when, yes, much private borrowing has been curtailed and, so, when it has not been the primary means for money creation, as it is in more normal circumstances.

What all too many commentators overlook — each either eager to beat the deflationary drum and so justify even more interventionism, or else to deny that their own favoured asset class is in another bubble — is that, as Leland Yeager long ago wrote, money does not have to be borrowed into existence, it can be spent into existence by the state for so long as that money's recipients show a willingness to accept it as a medium of exchange - and that is exactly what we have at work here.

So, the government spends money it does not have into existence and disburses it through its welfare/patronage network; the associated debt is then taken up by a monetary institution (not least, the Fed itself, whether by its earlier process of debt substitution on private sector balance sheets when it was buying MBS, or in its current, direct uptake of Treasuries at the NYFRB) and the non-bank sector ends up with increased holdings of new MONEY as a result.

The fact that the banks - for whom most of this money represents a liability — now largely offset it on the asset side of their balance sheets by placing it with the Fed (in the form of excess reserves), rather than re-lending it to others, does NOT somehow cancel out the creation of this money, it simply suppresses the commercial banking sector's possibilities for further multiplying it via the traditional operation of the fractional reserve mechanism.

So, granted, the banks are not taking the first injection of newly created money and generating 10 times, 15 times - or whatever - more money from it, in addition. But the Fed has nonetheless successfully placed a great deal of new money in the hands of those same banks' customers and this is patently exerting its expected influence on the prices of a whole range of non-money goods and assets, in a typically differentiated, Cantillon-effect fashion.

How anyone can deny this is truly a mystery!