QE - The Gift That Just Kept Giving - Is Now Taking...

Authored by Chris Hamilton via Econimica blog,

I know the Federal Reserve doesn't effectively create money or directly monetize.  I know this because then Fed chief, Ben Bernanke, told us so (HERE).  But still, something has me wondering about that exchange, now almost a decade ago.  The simplest of math.

The plan to utilize quantitative easing and avoid direct monetization went like this.  The Fed would buy the Treasury debt and Mortgage Backed Securities (remove assets from the market) from the big banks.  However, the Fed would force those banks to deposit the new money at the Federal Reserve.  This would avoid the trillions of newly created dollars from going in search of the remaining assets (particularly levered from somewhere between 5x's to 10x's...turning a trillion into five to 10 trillion...or far more).

The chart below shows the Federal Reserve balance sheet (red line) and the quantity of those newly created dollars that the recipients of those dollars, the banks, deposited at the Federal Reserve (blue line).  But the green line is the quantity of newly created dollars that have "leaked" out...also known as "monetized".


What is so interesting is the interplay of QE and excess reserves...resulting in the peak QE impact taking effect long after QE was tapered and had ceased.  The trillions in assets remaining with the Fed, but the new cash went looking.


The impact of $800+ billion of pure monetization from late 2014 through year end 2016 was spectacular.  In the hands of the largest banks (multiplied by "conservative" leverage somewhere between 5 to 10x's) could easily amount to trillions in new cash looking for assets.  A "bull market" beyond belief should not have been surprising.

The chart below shows the Wilshire 5000 in red representing all US equities actively traded, national disposable personal income in blue (all forms of income after taxation), and the net monetization in yellow.  The "bubbles" of '01 and '08 pale in comparison to the present explosion.  However, the increase in income represented by DPI does not justify the increase.  However, when the unlevered quantity of monetization is added, the picture is more interesting.


And the same variables and chart below, but focused on '08 until '18.  The jogs in the monetization subsequently followed by the Wilshire are probably noteworthy...but the most recent decline in available monetization hasn't materialized in the Wilshire...at least not yet.


However, that change since 2017 should begin to effect the market in 2018.  The change in flow from the declining Federal Reserve balance sheet coupled with fast rising interest payments on Excess Reserves (billions for the banks for not taking any risk, not making any loans to keep the cash locked away) should help to hold the Excess Reserves from declining any faster than the Fed's balance sheet reduction.


This cessation of "leakage" of new money coupled with extreme lows in savings, extreme valuations in asset values vis-à-vis disposable incomes (detailed HERE), and decelerating deficits with rising interest rates (detailed HERE) does not likely add up to a positive outlook.


ZH Snob Thu, 02/01/2018 - 09:10 Permalink

they've only ever known the benevolent credit god who would support any dumb investment adventure, but now they will meet the gnarly, angry credit god who wants all his funding repaid in blood.

el buitre Cognitive Dissonance Thu, 02/01/2018 - 10:13 Permalink

The purported end of QE was not the end of the Fed and the ESF printing money.  They have been printing trillions off the books to buy up the treasuries that the world is dumping and to control rate derivative in order to keep debt rates low and stawks elevated.  They may be losing control which would lead to a yuuge debt and equities crash, or what is going on now may just be the dump, in order to buy back at a lower price before the next pump.  Only time will tell.  If Trump's attack on the Cabal is real, and that is a very big "if," then they may have decided that the public needs a major diversion such as destroying the financial markets more bigly than 2008.

In reply to by Cognitive Dissonance

Thought Processor JRobby Thu, 02/01/2018 - 09:34 Permalink



They can't unwind it.  It's a Gordian knot.


The Gordian Knot is a legend of Phrygian Gordium associated with Alexander the Great. It is often used as a metaphor for an intractable problem (disentangling an "impossible" knot) solved easily by finding a loophole or thinking creatively ("cutting the Gordian knot"):

Turn him to any cause of policy,
The Gordian Knot of it he will unloose,
Familiar as his garter

— ShakespeareHenry V, Act 1 Scene 1. 45–47


Lord Upjohn, speaking of the allocation of beneficial interests between the parties under a constructive trust in National Provincial Bank Ltd v Ainsworth,[18] said that the parties' affairs are sometimes so inextricably intermixed that "an equitable knife must be used to sever the Gordian Knot".


Now imagine that the knife is a reset of sorts, while the chances of it being 'equitable' are slim at best.  


In reply to by JRobby

el buitre asteroids Thu, 02/01/2018 - 10:24 Permalink

All that is true, but it doesn't take into account several factors.  First is that the Hidden Hand that engineered the coming crisis are not idiots and they realized that what they were doing would inevitably lead to a horrendous global collapse. 


Problem:  Global collapse and a freeze up of the credit markets leading to the death of tens of millions of sheeple.

Reaction:  The Sheeple cry out for help to the Cabal which engineered the collapse.

Solution:   Introduction of the NWO global fascist state.  The Hunger Games.  Mark of the Beast to be ruled by our satanic, child sacrificing overlords.

Not rocket science when you take the red pill.

In reply to by asteroids

GreatUncle ShorTed Thu, 02/01/2018 - 11:04 Permalink

Any attempt to restrict free money will create the recession ... actually all part of their plan.

If money ever became worthless then so does their power, the solution is boom/bust and hope you do not notice nobody is ever any better off. In this process the value of FIAT money is preserved and with it their power.

In reply to by ShorTed

luckylongshot ZH Snob Thu, 02/01/2018 - 09:33 Permalink

In 2008 when the public stopped spending because they were fully loaded with debt the central banks decided to keep spending on behalf of the public and QE was born. Now ten years later and far deeper into the debt hole, the CBs think they can stop spending without causing a destructive event. A good analogy is a  truck driving off a cliff, then having some idiot central bankers start digging  away the ground to prevent a crash and now claiming they can start filling in the hole and all will be well- except that the truck is falling much faster and raising the bottom of the hole will further increase the impact force when reality arrives. 

In reply to by ZH Snob

Iconoclast421 Thu, 02/01/2018 - 09:11 Permalink

Just wait till AAPL reports some bullshit earnings beat and the entire market rips to new highs in an instant and a bunch of bears crawl back into their hiberholes.

Chupacabra-322 Thu, 02/01/2018 - 09:14 Permalink


"This cessation of "leakage" of new money coupled with extreme lows in savings, extreme valuations in asset values vis-à-vis disposable incomes, and decelerating deficits with rising interest rates and inflation does not likely add up to a positive outlook."


Fixed it for you.

LawsofPhysics Thu, 02/01/2018 - 09:23 Permalink

Taking?  From whom exactly?  I call BULLSHIT.  Look at the increasing wealth/ownership gap you stupid fuck.

Has any of the bad debt cleared yet? Have any of the BAD actors gone to fucking prison yet?

Fuck you hambone, you are way off on this one.  QE is ongoing and the transfer of real wealth/ownership is continuing!!!!

givadam Thu, 02/01/2018 - 09:25 Permalink

"that change since 2017 should begin to effect the market in 2018"

Wrong.  Should be affect.

I can effect change.  That change affects others.

goldinpenguin Thu, 02/01/2018 - 09:34 Permalink

Time for Trump to ask Fed board members, "whose team are you on"?

Call the Plunge Protection Team "do you like your job"?

Make America Great Again, reflate.

I'm sure he'll stop referring to the stock market in his braggadocios outbursts and start tweeting about links between Clinton and Fed members sabotaging him.

Jareds overextended and in over his head in all respects. 

MEFOBILLS Thu, 02/01/2018 - 10:20 Permalink

The plan to utilize quantitative easing and avoid direct monetization went like this.  The Fed would buy the Treasury debt and Mortgage Backed Securities (remove assets from the market) from the big banks

Private banks already have accounts at the FED.  The FED swaps out TBills and other debt instruments for new CASH.  These TBill's then leave reserve loops of said banks, while cash is swapped in place.  NET reserve position of the banks doesn't change, but the composition of bank "assets" did.  Government then does bidding of big banks, and changes law to allow CASH held in reserves, to then accrue interest.

Think about that whopper.  Cash, which is a non-interest bearing instrument is now allowed to gain interest, but only if you are a bank and are holding it as reserves.  

FED then tells its TBTF dealer banks to make ready new MBS and other paper FED wants to target.  FED can only buy on overnight market meaning through the special banking "market" evolved where only banks buy and sell with each other.

The real question is how TBTF primary dealer banks are sweeping market instruments (MBS, TBills and the like) into their reserve loops, to then be monetized by the FED.  

My personal belief, and I cannot prove it, is that primary dealer banks (FED agents) are making loans to themselves to then buy market paper knowing FED will monetize it.   There has to be slight of hand to move these new instruments into bank reserve loops to then be available for FED to swap. 

Double entry mechanics at the FED level is the FED creating cash on their keyboard, to "Buy" paper financial instruments, also euphemistically called assets.  So, FED double entry balance sheet expands with both new liabilities and new assets simultaneously.   FED's liability is having to pay interest on cash it created for banks to swap for its new "asset"  i.e. TBills and MBS.

Banks then have a new asset "cash" that got swapped for TBills... a swap of unlike kinds that was sweetened by the FED to make them like kinds (both interest bearing).

When overall reserve position of a bank increases dramatically, then next question should be what is capital position of this bank - did said bank make a lot of new loans to justify it's increase in reserves?

Hamilton owes an explanation on how his "monetization" figures were derived.  There is obviously leakage, and if high crime is allowed to pay, then "rule of law" and consensual civilization is not possible.



Pliskin Thu, 02/01/2018 - 10:53 Permalink

The u.s. doesn't need QE, its economy is booming, more people in work than ever before, businesses booming, tax cuts for everyone, energy (oil&gas) independent...I don't understand!!  trump said everything was coolio! 

america has pulled all its troops from foreign entanglements, boosted its trade with emerging economies, cut its trade defecit with China,, forced Russia back behind its 'lines' and ousted the democratically elected president of Syria 'Assad'.

The wall is nearly finished and Hillary is in jail!

I'm confused!?!  Maybe some of the forever trumpers on here can help me out??

Oh, and just to piss off the forever trumpers, NO, I'm not a hillary supporter, i think the slimy, filthy, HIV infected bitch should be hung, drawn and quartered...same for obama, same for Mccain, same for Lindsey (faggot boy) Graham, same for EVERY single u.s. of gay politician...

'Exceptional' Obama said?  'Exceptional' at what?.....

anyone, anyone, anyone??


Subhuman filth!

GreatUncle Pliskin Thu, 02/01/2018 - 11:11 Permalink

QE does not solve the problem it is only a play and extend the current situation of all the debt out there.

There may be more people in employment = jobs but if they are minimum wage jobs the debt will require QE to support it.

So they can argue more jobs, low unemployment and QE will be required at the same time.


In reply to by Pliskin

fearnot Thu, 02/01/2018 - 11:29 Permalink

Here is a simple way for Fed to prevent Excess Reserves from falling faster than the reduction in QE or increase in QT. Just stop QT. But with a falling dollar and higher bond yields the FED will quickly turn upside down as their assets decline in value. Problem solved - Treasury imposes yield ceiling on its debt capping rates.

happened before a number of times. 

Can you spell relief? "Inflation"