[Anonymous]

Hi all,

I’ve read a few article stating that the QEs will not cause inflation because the printed money is not going into circulation but instead is going directly into bank assets. Bank assets instead of bank accounts. Can someone please explain?

Thank you

[jmherbener]

The Fed has been buying Mortgage Backed Securities and other assets from commercial banks. It has paid with cash or by crediting checking accounts banks have at the Fed. Cash and checking account balances banks have at the Fed are reserves for banks against their issue of checking accounts held by their customers. Before the downturn, banks held less than 7 percent in reserves against the checkable accounts of their customers. Today they are holding 150 percent in reserves. Banks are holding excess reserves instead of making more loans by which they expand the money stock by placing the funds in their customers’ checking accounts.

Here is the monetary base, which reflects the Fed’s payment, (i.e., “printing money”) for its purchases:

http://research.stlouisfed.org/fred2/series/BASE?cid=124

Here are bank reserves (showing the banks’ holding of the “printed money”), which are Assets for banks:

http://research.stlouisfed.org/fred2/series/ADJRES?cid=123

[ronigafni]

Since the money being printed is just being held by banks, thereby stemming inflation, why has the stock market gone up so much?

[ronigafni]

Also, what was the benefit of giving so much to the banks? Once they got passed the point of being liquid enough to boost confidence and insure solvency, why was money continually pumped in? Was it just to buy more MBS and prop up the housing market?

[jmherbener]

The money stock has been expanding, just not at the rate it could potentially expand.

http://research.stlouisfed.org/fred2/series/MZM?cid=30

Also, the demand to hold money is relaxing somewhat. The result has been asset price inflation instead of broad price inflation throughout the economy. In addition to stocks, luxury housing prices have skyrocketed.

http://www.bloomberg.com/news/2013-05-17/ackman-said-among-buyers-of-penthouse-at-nyc-s-one57.html

If the Fed’s official rationale is to be believed, having saved the banking system, it’s further expansion of the monetary base has the aim of pushing the unemployment rate down below 6.5 percent.

http://www.stlouisfed.org/newsroom/displayNews.cfm?article=1751

[ronigafni]

What about the expansion of the money supply in our case would specifically put up the prices of stocks and luxury housing as opposed to other things?

[Author]

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