What Was The Real Purpose Of QE?

Authored by Chris Hamilton via Econimica blog,

The story goes that quantitative easing was instituted to "bridge" the financial and economic systems across a "rough patch".  Via QE, the Federal Reserve conjured new "money" into existence (if we did this, its called forgery...not QE) & exchanged this new "money" to the largest banks for US Treasury bonds and financial assets (Mortgage backed securities).  Banks were left flush with cash, the Fed holding $4.5 trillion in Treasury's and MBS.  The suggested goal of this exercise was that QE would lower interest rates and this would settle the economic system and subsequently boost asset valuations.

How'd it work out?  As far as asset prices, generally they have soared 300% to 400% but the part about lowering interest rates...not so much.  The chart below shows the Federal Reserve holdings of over 5yr to 10yr US Treasury debt versus the yield on the 10yr Treasury.  The Fed increased its holdings of 5 to 10yr US debt from $100 billion in early 2009 to nearly $900 billion by early 2013...and then lowered it back to just $290 billion currently.  And the correlation on the 10 year yields...essentially zero.

#1 - January 2009
Fed held $97 B 5+ to 10 year US Treasury debt vs. 10 year debt yielding 2.36%

#2 - January '09 to March '10
Fed adds $120 billion, yields rise 160 basis points...wrong

#3 - March '10 to June '12
Fed adds $500 billion, yields fall 250 basis points...right

#4 - June '12 to May '13
Fed adds $160 billion, yields rise 23 basis points...wrong

#5 - May '13 to October '13
Fed ceases adding but maintains peak holdings of $890 billion, yields rise 122 basis points...wrong

#6 - October '13 to July '16
Fed rolls off $440 billion, yields fall 161 basis points to a modern day record low of 1.37%.  This is so contrary to the rationale offered by the Fed to initiate QE...wrong

#7 - July '16 to May '18
Fed rolls off $160 billion, yields rise 174 basis points...right

Which is to say, there seems to have been no correlation or even a negative correlation of the Fed conjuring nearly $4 trillion with which to buy (and sell) unprecedented quantities of Treasury's (particularly the 5 to 10 year variety), and the direction of interest rates. 

In fact, the lowest rates seen on the 10 year were while the Fed was systematically rolling off $450 billion in 5 to 10 year debt in mid 2016!  Which leaves a very uncomfortable question...is the Fed filled with the dumbest smart people in America who just haven't seemed to realize this...or did they have a different goal all along?

QE did have massive impacts, just not where it was "supposed to".  If the Fed's goal to was transfer power and wealth to an ever shrinking cohort, seems the Fed has achieved its goal.  My best guess of what QE was all about and who benefitted and continues to benefit...HERE and HERE.

As long as we are discussing the Fed, might as well take a look at the balance sheet.  Last week the Fed reduced its total balance sheet by $20 billion and the total reduction is about 2.8% since official "normalization" began.  But the real story continues to be the how.  Fed Treasury holdings fell by $8 billion last week in a convoluted process of rolling off $31 billion of 1yr to 10yr Treasury's while buying $10 billion in 10+ year debt and $12 billion in less than 1 year short term holdings.

As the chart below details, the Fed holdings of over 5yr to 10yr Treasury holdings continues declining, now down a massive 68% from peak holdings.

While the holdings of over 10 year Treasury's is down less than 6% from peak holdings and essentially unchanged since normalization began.

The change in the short term holdings is fascinating, the Fed fully round tripping, "normalizing" the short end to what it held pre-GFC (as of '07).  Since Operation Twist ended, the Fed has been on a tear purchasing over $400 billion of short term debt.  The massive short end bid coupled with the huge roll-off of 10yr debt should have been pushing the short end rates considerably higher and middle down...perhaps pushing toward an inverted yield curve?!?

The trend of fast shrinking 1 to 10 year Fed holdings, significant buying and growth in holdings of less than 1 year, and maintaining nearly all long bonds.

A quick aside, showing the Fed Treasury holdings versus the 10yr minus 2yr spread.

Finally, just to round out the picture, last week the Fed's holdings of MBS was essentially unchanged while the Fed has sold just 2% of its MBS since peak holdings.

But interestingly, while the Fed has rolled off $60 billion in over 10yr MBS, it has simultaneously purchased $30 billion in 5 to 10yr holdings...for a net total decrease of $30 billion since peak holdings.

Make of all that what you will.

Comments

Thought Processor ejmoosa Mon, 05/21/2018 - 16:05 Permalink

 

The FED has simply been bridging the gap in order to get to the next iteration level in world wide monetary reserve currency vehicles.  

 

Without the bridge things would have become messy, in that the assets would have been at risk.  Because of the central bank interventions the real risks world wide have been contained and the assets have been safeguarded.  For now at least.  

As a result the central banks remain in control like never before.  And the coming 'crypto revolution' may play right into their plan.  

We shall see, and time will tell.

 

 

In reply to by ejmoosa

GreatUncle ejmoosa Mon, 05/21/2018 - 16:30 Permalink

In all this you have to smile if the reality is the economy cannot correct unless TBTF actually need to fail.

QE was to buy some time though ... in 2008 system was going to collapse so they step in and print.

After that they had to reposition themselves, 10 year contracts being the normal extended time frame.

Repositioned now, all monies safe and secure they economically pick up where they left off.

Now they have to reverse all that they did when they used QE to buy themselves some time.

in 2008 the only economic tool the banks ever had was to force inflate ... everything else is junk.

So rising interest rates and expect more QE at the same time.

If that policy fails then plan B with NIRP and the bailin.

It will fail also ... see my first line when TBTF own 100% of everything.

 

In reply to by ejmoosa

caconhma dark fiber Mon, 05/21/2018 - 16:42 Permalink

The FED strategy was simple:

  • Put zero-interest money in preferred to Fed hands so they can buy hard assets for free. Now, for all practical purposes, few selected banks own the entire economy and political establishment
  • Destroy savers by denying them earning interest-payments on their money. Savers are everybody who works for their paycheck.
  • Supporting/protecting/strengthening the US$ reserve currency

 

In reply to by dark fiber

Easyp Mon, 05/21/2018 - 15:45 Permalink

Soooo if the Federal Reserve can conjure money out of thin air to maintain liquidity for busted banks one assumes they can like all good magicians make this fake money disappear?  Problem solved? 

Or is this the kind of conjuring trick where all of the Banksters Bad Debts become the taxpayers problem?

tunetopper Easyp Mon, 05/21/2018 - 16:13 Permalink

The Fed can conjure money out of then air yes- and the City of London can make unlimited leverage (loans) at or near zero in a 5% market.  That's where AIG, Bear St, Lehman, and many others were borrowing their seed capital when the Crisis hit.  Remember the London Whale- he was only a trader for JPM.... the real client was Boaz Weinstein.  not makin this shitup

In reply to by Easyp

VideoEng_NC Mon, 05/21/2018 - 15:48 Permalink

While Mona Lisas and mad hatters
Sons of bankers, sons of lawyers
Turn around and say good morning to the night
For unless they see the sky
But they can't and that is why
They know not if it's dark outside or light

francis scott … Mon, 05/21/2018 - 15:48 Permalink

              What Was The Real Purpose Of QE?

 

That's like asking "What's the real purpose of those round

things with long ropes on ships called 'life preservers"?

 

lnardozi Mon, 05/21/2018 - 15:50 Permalink

All that to mean, we lowered interest rates so that everyone who saved made no interest and lost all their savings. We stole everything from everyone and destroyed the idea of time preference for money. We did that so people would forget what it was money did.

pizdowitz Mon, 05/21/2018 - 15:54 Permalink

To create asset bubbles, so that they could collect higher income taxes in order to recoup their 2008 losses, and, while at it, push up inflation. Both are at historical heights now.

Two lessons follow:

1) Never bet against the Fed

2) Sell the bubbles

wmbz Mon, 05/21/2018 - 15:56 Permalink

The "FED" AKA Banksters Inc. has always had "it's" interest as it's sole purpose. What's good for them, is good for them.

"Give me control of the money, and I care not who makes the laws"

Wonder who said that?

Hubbs Mon, 05/21/2018 - 15:56 Permalink

Is it what the FED wants to sell or what they can sell?

Stuck holding on to the longer term treasuries (10 yr)  which are going to get slaughtered by a short term increase in interest rates the most, and therefore less bid?

Or, does the FED think a deflationary depression is coming and therefore wants to hold on to the >10 year treasuries which might be more valuable?

Vimes Mon, 05/21/2018 - 15:58 Permalink

I always thought that, at least part of plan was to buy lots of bonds and stocks in order to keep the Chinese influence at bay. The other part, wealth transfer made the plan even easier to execute, no large bank or oligarch would protest against such a wonderful money making opportunity.

Pollygotacracker Mon, 05/21/2018 - 15:59 Permalink

The billionaires buy the Congress and the Senate. So, the Fed needs to continually prime the bribe pump. It really is that simple. That is why you never hear a peep out of anyone elected and sent to D.C. with regard to monetary policy. They pretend it doesn't exist. They are all in on it together.

tunetopper Mon, 05/21/2018 - 16:07 Permalink

We can only surmise that the effect of QE was to further socialism in the world and dependency on central authority.  Crowding out bonds was supposed to incentivize risk-taking.  Except because Keynesianism assumes a theory of Rational Expectations exists- which I think it does not- and folks decided to do all manner of things. Hold on to older vehicles- for one.  Invest in non-cyclical durable goods and high dividend paying stocks- for another (as bond proxys).  Move money into tax-havens using crypto currencies- a third.

Lastly, due to the uncertainty created by QE, the Wall St geniuses along with Swiss Banks created the VIX driven (short sold VIX) elevation of the FAANGT (T for Tesla)  stocks, and ChipoTle.  What a crock of ship we now have.  Money moved from Russia and Europe to Cyprus and Greece. Then it got sequestered there.  Then Cambridge Analytica was used to start the Brexit movement based on Muslim Immigration Fears- but in reality - it played right into the hands of the Crown Dependencies and Offshore Territories.   (CDOTs) which benefits the Royals and the Crown.  So... if you dont think Keyenes and Marx were educated at the London School of Economics, then look again. Why do you think it was dubbed QE I and QEII?

NuYawkFrankie Mon, 05/21/2018 - 16:26 Permalink

The Fed is the Asset-Stripping Mechanism of the "Usual Suspects".

All that follows from THAT is 'implementation detail'.... QE being one of those not-so-little "details".

And, the asset-stripping now done, The Fed can be replaced with an Enforcement System

the Dood Mon, 05/21/2018 - 16:45 Permalink

They need to balance the budget in time to finance the next war that will happen sooner than you think, all without cutting spending or increasing taxes. 3-card monte, musical chairs, etc. Somebody is gonna lose!

Consuelo Mon, 05/21/2018 - 16:45 Permalink

Whatever the purpose originally was, there can be no denying what the overall outcome for prudent savers was - and still is:

BOHICA.

 

 

Salmo trutta Mon, 05/21/2018 - 17:04 Permalink

Another fucking retarded article.  If people understood what happened they would line Bankrupt-u-Bernanke against a wall and execute him.  Hyperbole?  Not in the slightest.

No such phenomenon as Keynes’ liquidity trap. "Pushing on a string" (coined in the Great Depression, a “phrase introduced by Congressman T. Alan Goldsborough in 1935, supporting Federal Reserve chairman Marriner Eccles in Congressional hearings on the Banking Act of 1935”), only applied prior to the nominal legal adherence to the fallacious "Real Bills Doctrine" which terminated in 1932 - due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.

Today with a $21 trillion federal debt, there is a surfeit of eligible paper.

Said “trap” (idled savings) is like a *superposition* in physics. The capacity of a single bank to create credit as a consequence of a given primary deposit is identical to a financial intermediary. L = S (1-s). The superposition is that all primary deposits are actually derivative deposits from the system’s belvedere.

Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously, the (2) banks loan out the savings that are placed with them (micro-economics).

See Steve Keen: "Banks don’t “intermediate loans”, they “originate loans”. (end of article)

http://bit.ly/2GXddnC

Ben Bernanke’s economic text book: “Monetary Policy and the Federal Reserve”, chapter 14, “Interest on Reserves”

“The rationale is that paying interest on reserves would encourage banks to hold additional reserves, instead of keeping reserves as low as possible…By raising the interest rate on reserves, the Fed can encourage banks to hold additional reserves, thus reducing the money multiplier and the money supply”.

Remunerating interbank demand deposits, IBDDs, emasculated the FRB-NY trading desks’ “open market power”, resulting in the belligerent bifurcation of the Fed’s trading counter-parties, contrary to targeting: *RPDs* using non-borrowed reserves as its operating method (predating Paul Volcker’s October 6, 1979 pronouncement on the *Saturday before Columbus Day*), as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974;

Bankrupt-u-Bernanke should be in Federal prison for bankrupting Americans. He thought that the GFC, the U.S. recession, was due to a “capital crunch”, and not a “credit crunch”.

Bankrupt-u-Bernanke counter-cyclically (against a deceleration in economic growth) injected > $1 trillion of additional bank capital, which destroyed a concomitant > $1 trillion of bank deposits.

Steve H. Hanke was the first I came across to know that the countercyclical increase in Basel bank capital cushions was contractionary. An increase in bank capital accounts destroys the money stock $ for $ (about a trillion dollars reduction in M1 during the GFC).

“Basel’s Capital Curse”

http://bit.ly/2mZChDl

Disintermediation, which Bankrupt-u-Bernanke mis-diagnosed as a “capital crunch” (a prelude to his policy response to counter the GFC or TARP [to issue equity warrants, to stabilize bank capital ratios], occurs because the inventory of outstanding loans is funded at levels which can no longer be supported by rolling over older funding: short-term, retail and wholesale funding.

This is Bankrupt-u-Bernanke on “credit crunches”, 1991:

https://www.brookings.edu/wp-content/uploads/1991/06/1991b_bpea_bernanke_lown_friedman.pdf

"However, we also argue that a shortage of equity capital has limited banks' ability to make loans, particularly in the most affected regions. Thus we agree with Richard Syron, president of the Boston Federal Reserve, that the credit crunch might better be called a "capital crunch." We present evidence for the capital crunch hypothesis using both state-level data and data on individual banks. The most difficult issue is whether the slowdown in bank lending has had a significant macroeconomic effect. Although it is likely that a bank credit crunch (or capital crunch) has occurred and has imposed costs on some borrowers, we are somewhat skeptical that the credit crunch played a major role in worsening the 1990 recession."

That explains TARP!

“Another important goal of TARP is to encourage banks to resume lending again at levels seen before the crisis, both to each other and to consumers and businesses. If TARP can stabilize bank capital ratios, it should theoretically allow them to increase lending instead of hoarding cash to cushion against future unforeseen losses from troubled assets”

LSAPs liquidity channel is non sequitur. Even so, the Federal Government is the largest credit worthy borrower.

Economic stagnation, and stagflation, are the result of depending upon proverbial helicopter drops of money, instead of relying upon a non-inflationary solution, upon putting existing voluntary savings back to work into real investment outlets (as Bruce Wilds’ entwines), instead of capitalism; financial perpetual motion, of completing the circuit income and transactions velocity of funds.

The Gurley-Shaw thesis is a totally unrecognized macro-accounting error of prodigious and calamitous proportions to the world’s economies.

Putting savings back to work produces higher and firmer *real* rates of interest, it increases both the prosperity of the commercial banks and the non-banks. It increases *real* gDp and overall incomes relative to RoC's in inflation (the exact opposite of secular strangulation and stagflation).

---- Michel de Nostredame (the best market timer in history bar no one)

 

Salmo trutta Mon, 05/21/2018 - 17:07 Permalink

It's political, not economic. It's the American Bankers Associations' fault (a true and unknown, clandestine conspiracy theory, a coldly calculated stagflation plot). The Ph.Ds. on the Fed’s technical staff have gone from Keynes’ Liquidity Preference Curve (that there is no difference between money and liquid assets) to today’s R *. Neither exists.

The money stock can never be properly managed by any attempt to control the cost of credit. We should have learned the falsity of that assumption from the 1951 Treasury-Federal Reserve Accord.

The Maginot Line was drawn in 1965, when the Banksters, jealous of the MSB’s, CU’s, and S&L’s growth since WWII, seeking to get a bigger piece of the “loan-pie”, forced, i.e., in legislative terms, literally lobbied and paid for, the BOG and FDIC to raise Reg. Q ceilings in December (the power to fix the maximum interest rates member banks can pay on time deposits at any level the BOG deemed appropriate), which created the first “credit crunch” (a lack of funds rather than the cost of funds).

Prior to July 20, 1966, the non-banking financial institutions, or thrifts, i.e., before the DIDMCA of March 31st 1980; who put savings back to work in real investment outlets, were entirely un-regulated (since the 1933 Glass-Steagall Act).

I.e., in December 1965, the American Bankers Association obliterated the U.S. Golden Era in economics.

Then on March 31st 1980 Congress, at the behest of Ron Chernow’s “Go-For-Broke Banksters” laid the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had, and in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation's S&Ls, MSBs and CUs. That legislation caused both (1) the S&L crisis, “the failure of 1,043 out of the 3,234 savings and loan associations in the United States from 1986 to 1995” and (2) the July 1990 - March 1991 recession (another “credit crunch”). This caused the RoC in bank debits, on the Fed’s G.6 Debit and Demand Deposit Turnover release, to contract (< zero) for the first time since the Great Depression.

Then Bankrupt-u-Bernanke, whose Ph.D. dissertation was on the causes of the Great Depression: “Long-Term Commitments, Dynamic Optimization, and the Business Cycle”, destroyed America (caused the Federal Deficit to double), by (1) contracting long-term monetary flows, volume X’s velocity for 29 contiguous months (< than zero), just like the contraction in monetary flows from period March 1930 -> April 1934, and (2) remunerating IBDDs (causing another credit crunch, where the size of the non-banks ).

This Romulan cloaking device vastly exceeded the level of short term interest rates which is still illegal.

See: "The 2006 Financial Services Regulatory Relief Act gives the Fed permission to pay interest on reserves. The IOR rate was always higher than "the general level of short-term interest rates" which is imposed in the Law. "A Legal Barrier to Higher Interest Rates," The Wall Street Journal, Sept. 28, p. A13.

The resultant dis-intermediation for the NBFIs (where the size of the NBFIs shrank by $6.2T), an outflow funds or negative cash flow, left the DFIs unaffected (the size of the DFIs grew by $3.6T), and thus exacerbated the depth and duration of the GFC.

I.e., since Roosevelt’s 1933 Banking Act, dis-intermediation is a term that only applies to the non-banks.

Salmo trutta Mon, 05/21/2018 - 17:09 Permalink

The end-game will be more like a galactic supernova red shift that will suck foreigners in, culminating in hot money suddenly selling, sparking hyperinflation, i.e., a flight from the $ and $ denominated assets, leading to a core collapse, fueled by not the transient money, but by the gravitational pull of a protracted trade gap of 14 trillion, and current account deficit of 4 trillion since 1985 (when the U.S. became a debtor nation), precipitating $ repudiation.

Salmo trutta Mon, 05/21/2018 - 17:32 Permalink

Steve Keen knows a credit from a debit.

http://bit.ly/2GXddnC (at end of article)

"Banks don’t “intermediate loans”, they “originate loans”.

"The fallacy in their thinking is easily demonstrated by looking at the two types of lending – from one non-bank agent to another (Loanable Funds or LF) and by a bank to a non-bank (Bank Originated Money or BOM as an accountant might call it)."

Keen: "A 'Loanable Funds' loan simply shuffles existing money from one person’s bank account to another: no new money is created (row 1 in Table 2). A “Bank Originated Money” loan creates a new asset for the Bank, and creates new money as well – which the recipient then spends."

Lending by the commercial banks is inflationary (increases both the volume and turnover of new money). Lending by the non-banks is non-inflationary, other things equal (results in the transfer of title to existing bank deposits within the payment’s system, a velocity, Vt, relationship).

From the standpoint of the payment’s system, the source of time/savings accounts is demand deposits, directly or indirectly via the currency route (never more than a short-run situation), or through the DFI’s undivided profits accounts. Consequently the expansion of savings-investment accounts, per se, adds nothing to total bank liabilities, assets, or earnings assets. Therefore the expansion of monetary savings, bank-held savings, adds nothing to N- gDp.

See Philip George: “The riddle of money, finally solved”

http://bit.ly/2u3xiBV

Commercial banks pay for their new earning assets with new money.

A theoretical explanation was advanced in 1961 to support this conclusion. It was based upon the following assumptions:

(1) That monetary policy has as an objective a certain level of spending for N-gDp (sound familiar?, viz., N-gDp targeting?), and that a growth in time/savings deposit classifications will not, per se, alter this objective. And that a shift from demand to time deposits will also not, per se, alter this objective;
(2) That a shift from demand to time deposits involves a decrease in the demand for money balances and that this shift will be reflected in an offsetting increase in the velocity of money.
(3) To prevent the increase in Vt from altering the desired level of spending for N-gDp, it is necessary for the FRB-NY trading desk to prevent the diminished money supply brought about by the shift from demand to time deposits from being replenished through an expansion of bank credit;
(4) To prevent the expansion of bank credit requires that the trading desk “mop up” al excess reserves created by the shift from demand to time deposit classifications.

As hypothesized: It seems quite probable that the growth of time deposits shrinks aggregate demand and therefore produces adverse effects on N-gDp. I.e., it seems highly improbable, and in contradiction to Professor Chandler’s theoretical analysis: that the stoppage in the flow of these funds is entirely compensated for by an increased velocity of the remaining demand deposits.

I.e., all monetary savings, commercial bank-held savings, are from a macro-accounting perspective, un-used and un-spent, lost to both consumption and investment, indeed to any type of payment or expenditure.

Take the “Marshmallow Test”: (1) banks create new money (macro-economics), and incongruously (2) banks loan out the savings that are placed with them (micro-economics).

As professor Lester V. Chandler originally theorized back in 1961, viz., that in the beginning: “a shift from demand to time/savings accounts involves a decrease in the demand for money balances, and that this shift will be reflected in an offsetting increase in the velocity of money”.

His conjecture was correct up until 1981 – up until the saturation of financial innovation for commercial bank deposit accounts I.e., the saturation of DD Vt according to Marshall D. Ketchum (Professor at the Chicago School):

"It seems to be quite obvious that over time the “demand for money” cannot continue to shift to the left as people buildup their savings deposits; if it did, the time would come when there would be no demand for money at all”

Thus, as Dr. Leland J. Pritchard, Ph.D. Chicago - Economics, M.S Statistics, Syracuse predicted after the passage of (1) the DIDMCA of March 31st 1980, i.e., coinciding with his prediction of the (2) "time bomb", the widespread introduction of ATS, NOW, & MMDA accounts, that money velocity had reached a permanently high plateau.

Professor emeritus Pritchard never minced his words, and in May 1980 pontificated that:

“The Depository Institutions Monetary Control Act will have a pronounced effect in reducing money velocity”.

This is the direct and sole cause of both secular strangulation and stagflation (business stagnation accompanied by inflation).

All savings originate within the payment’s system. Saver-holders never transfer their funds outside the payment’s system, unless they hoard currency, or convert to other national currencies, e.g., DFI, direct foreign investment. The source of commercial bank time/savings deposit accounts, is other bank accounts, originally non-interest-bearing demand deposits, directly or indirectly via the currency route (never more than a short-run situation), or through the DFI's undivided profits accounts.

The DFI’s time / savings deposits, e.g., negotiable CDs, rather than being a source of loan funds for the payment’s system, are the indirect consequence of prior bank credit creation. And the source of bank deposits (loans + investments = deposits, not the other way around), can be largely accounted for by the expansion of Reserve bank credit. That there is a close connection between aggregate bank credit and the aggregate volume of bank deposits can be verified by comparing the net changes in commercial bank credit to the net changes in total deposits for any given time period (R. Alton Gilbert was dimensionally confused).

When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially paying for them, by the creation, simultaneously and ex-nihilo, of an equal volume of new money - demand deposits -- somewhere in the payment’s system. For the payment’s system, the whole is not the sum of its parts in the money creating process.

Net changes in Reserve Bank Credit since the Treasury-Reserve Accord of March 1951 are determined by the FOMC.

Critically, the only way to activate voluntary savings (income not spent), is for the saver-holder to invest directly or indirectly, intermediated through, a non-bank conduit.

*Intermediated through* means that funds exchange counter parties, within the payment’s system, as no funds are ever extracted.

“Crunch time” is simply a macro-accounting error. The NBFIs are not in competition with the DFIs. The NBFIs are the DFI’s customers. Savings flowing through the non-banks never leaves the payment’s system (where all savings originate). There is simply an exchange, a transfer of title between counter-parties, to existing DFI liabilities, a money velocity relationship occurring within the payment’s system.

Paradoxically, this is somewhat like the physics principle of SUPERPOSITION:

“The general principle of superposition of quantum mechanics applies to the states [that are theoretically possible without mutual interference or contradiction] ... of any one dynamical system…”that every quantum state can be represented as a sum of two or more other distinct states.”

The capacity of a single bank to create credit as a consequence of a given primary deposit is identical to a financial intermediary. L = S (1-s). The superposition is that all primary deposits are actually derivative deposits from the system’s belvedere.

In other words, there is an increase in the supply of loan-funds, but no change in the money stock, a velocity relationship, where savings are matched with investments (a non-inflationary relationship). This process is the exact opposite of stagflation.

Unless savings are activated, put back to work, a dampening economic impact, a deceleration in money velocity, is engendered and metastases, resulting in secular strangulation. This is the source of the pervasive error that characterizes all developed countries slower growth rates.

The expiration of the FDIC's unlimited transaction deposit insurance in December 2012 is prima facie evidence, i.e., created the infamous "taper tantrum". Hence my “market zinger” forecast, a "predictive success”.

As Leland J. Pritchard, Ph.D., Economics, Chicago 1933, MS, Statistics Syracuse, predicted:

(1) “Savings require prompt utilization if the circuit flow of funds is to be maintained and deflationary effects avoided”…

(2) ”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…

(3) ”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods.” Circa 1960

journal Mon, 05/21/2018 - 18:23 Permalink

If the government had to pay normal interest rates on the funds they need to borrow, wouldn't they have to find another way to steal from the middle class, bail ins, nationalization of 401k's etc,