–Who says the Fed has no sense of humor? QE to end

Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

Mitchell’s laws:
Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
●The more federal budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening
<the gap between rich and poor.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●Everything in economics devolves to motive,
and the motive is the Gap.

As readers of this site know, Quantitative Easing (QE), is touted as a way to stimulate the economy by adding dollars to the economy.

It does no such thing. QE is a fake, a fraud, a flimflam. The purpose: To give the impression that the Fed is “doing something” to stimulate the economy, without federal deficits.

To a small degree, QE actually reduces the number of dollars entering the economy.

Here’s how QE works. First, there must be a Treasury Security:

1. From thin air, the Treasury creates on its books an entry: “Treasury Security.”

2. An investor (you, for instance) tells your bank to debit your checking account and to credit your Treasury Security account at the Federal Reserve Bank.

A Treasury Security account is very much like a bank savings account, so in essence, you have transferred dollars from your checking account to your savings account. No dollars created or destroyed.

Then, comes the QE process:

3. The Fed instructs the Federal Reserve Bank to transfer your dollars from your Treasury Security account back to your checking account, and to transfer ownership of the Treasury Security to the Fed.

Again, no dollars are created or destroyed. No stimulus. No nothing. Dollars moved from one of your bank accounts to another of your bank accounts.

Bottom line, the Treasury created a Treasury Security and gave it to the Fed. The Fed gave dollars to the Treasury, which being the original creator of those dollars, has no use for them. So they are destroyed.

This leaves unanswered the question: If adding dollars to the economy stimulates the economy, and if the Treasury can create Treasury Securities from thin air, why doesn’t the Treasury create dollars from thin air, send them into the economy and dispense with the shell game scam?

The answer: That is exactly what the Treasury does every day, when it pays government bills. It should do more. (See Ten Steps to Prosperity, below).

What QE does do is reduce long-term interest rates, by increasing the demand for Treasury Securities, which increases their price, which in turn, decreases rates. (Price and rates move inversely.)

And by reducing rates, QE reduces the interest paid to the economy by the Treasury. QE cuts the deficit, which probably is one of its purposes.

Here is where the Fed’s sense of humor comes into play:

The Fed’s $4 Trillion Bet
OCT 29, 2014

The U.S. Federal Reserve announced today that it will halt the bond-buying program known as quantitative easing — one of the biggest experiments in economic policy ever attempted. The policy was a gamble, and it’s too soon to be sure of the results.

See the humor. QE started in November 2008, a full six years ago. It is “one of the biggest experiments in economic policy ever attempted.” Yet, “it’s too soon to be sure of the results”!

What??! Six years of the biggest policy experiments ever, and it’s “too soon” to know the results?

That’s like saying, “For the past six years, we’ve been dropping atomic bombs on Peoria, IL, but it’s too soon to know what happened.”

This doesn’t mean the program is over. The Fed still holds more than $4 trillion in bonds, roughly a fifth of all U.S. Treasury and mortgage-backed securities outstanding.

Until they’re divested — a challenge in its own right — these vast holdings will continue to have an effect on markets.

These “vast holdings” are nothing more than a line on the Treasury’s books saying that X dollars worth of the Treasury Securities created from thin air, are owned by the Fed. The left pocket owes the right pocket.

To eliminate these “vast holdings,” one government agency needs only to debit and the other agency needs to credit, and Presto! The “vast holdings” disappear into the thin air from whence they came.

The whole process is an accounting embarrassment, a juggling of the books, in an attempt to obscure the fact that it is Congress, not the Fed, that has the power to stimulate the economy. Congress does it by deficit spending, which really adds dollars to the economy.

Exactly how much QE has helped the economy remains a matter of debate. Former Fed Chairman Ben Bernanke said in 2012 that the Fed’s first two rounds may have boosted output by 3 percent and added more than 2 million jobs.

Where did Bernanke get these numbers? From that same thin air that provided the Treasury Securities.

In a more recent paper, San Francisco Fed President John Williams said such estimates were uncertain.

Yes, the effects of the biggest policy experiment ever, are “uncertain.”

Some believe QE has gradually diminishing effects; others that it has no positive effect at all.

Well, that seems to settle it. The effects are huge, or uncertain, or diminishing, or none at all — or as I believe, negative.

The BBC reported that as a result of this grand experiment, the Fed has added $3.7 trillion worth of assets to its holdings, about an eightfold increase.

So where are those 3.7 trillion dollars? What became of them?

This year’s federal deficit is below $500 billion. That is how many dollars the federal government added to the economy. So you can imagine the effect of adding 3.7 trillion dollars to our economy.

It would have been gigantic. The debt-hawks would have been screaming “hyper-inflation.”

But, nothing. No hyper-inflation. Hardly even any inflation. The economy creeps along, rising slowly, slowly.

In answer to the question, there are no additional $3.7 trillion. They are dollars that moved from private checking accounts to private Treasury Security accounts and back again. Just a Three-card Monte shuffle.

And you probably thought the Fed had no sense of humor.

Rodger Malcolm Mitchell
Monetary Sovereignty

Ten Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually
8. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income. (Click here)
9. Federal ownership of all banks (Click here and here)

10. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)

The Ten Steps will add dollars to the economy, stimulate the economy, and narrow the income/wealth/power Gap between the rich and the rest.

10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
1. A growing economy requires a growing supply of dollars (GDP=Federal Spending + Non-federal Spending + Net Exports)
2. All deficit spending grows the supply of dollars
3. The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.
4. The limit to non-federal deficit spending is the ability to borrow.

Monetary Sovereignty

Monetary Sovereignty

Vertical gray bars mark recessions.

As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.


24 thoughts on “–Who says the Fed has no sense of humor? QE to end

  1. Roger, when i look at the graph from your source stlouisfed.org. There is no detail it’s just a line that stays flat until 1970 then steadily climbs. The gray recession bars are present but no dips in spending indicated.
    How did you get the fluctuations for your Recession Clock?



  2. “As readers of this site know, Quantitative Easing (QE), is touted as a way to stimulate the economy by adding dollars to the economy. ”


    If dollars in the economy equals bank balances plus notes and coins
    If a bank sells the Govt bonds then total dollars do not increase. Agree with this.The banks hold reserves rather than a treasury security.

    But if a non bank sells the treasury bonds (say a pension fund) then dollars do increase (the pension fund held Govt bonds now they hold dollars). So there will be more dollars. As well the bank will now hold more Fed reserves

    So whats I’m asking is is this really a half truth

    “A Treasury Security account is very much like a bank savings account, so in essence, you have transferred dollars from your checking account to your savings account. No dollars created or destroyed.”

    A treasury security is quite different to money. If QE was done for 2 trillion. Then another 2 trillion of bank credit will be chasing better returns . Rather than sitting in a bank account earning low interest. This would push up asset prices (it relates to a discussion I,m having on another site)

    Thanks for any clarity you can provide on this


    1. A T-bond merely is evidence that the owner has a T-bond account at the Federal Reserve Bank.

      This can be compared to a passbook for a savings account.

      To purchase a T-bond, the pension fund transfers dollars from its checking account (at a private bank) to its T-bond account (at the Federal Reserve Bank). No dollars created or destroyed.

      Then, to sell the T-bond, dollars are transferred from the T-bond account to the checking account. Again, no dollars are created or destroyed.


      1. Thanks for your response

        I might have mistakenly thought that a T bond is different to a Company bond. A Company bond sale results in money (bank credit) just changing from one bank account to another one (from the buyer to the company). A new asset is produced but money (and Fed reserves) stays the same. So a new liability and asset is created but bank deposits stay the same

        Whereas a T Bonds results in the money (bank credit) and Fed reserves actually disappearing from the banking system (unless and bank buys the T bond). And agree that the buyer now has an account at the Treasury. But one asset (money) is simple replaced by another one. So the non Govt sectors position stays the same. Whereas in the example above the non Govt sector creates a new asset and liability

        I need to go out for a walk and think about this. What you are saying is that a money held at the bank is no different to money held in T bonds

        To go to an extreme example. If the US treasury issued $8 trillion of bonds at 10%. If we exchanged bank deposits for T bonds. Would this not impact on share prices etc as less money would eb chasing the same number of shares.

        Its a really tricky subject. And I though my understanding was good.


        1. ” . . . money held at the bank is no different to money held in T bonds . . .”

          Dollars held in a private bank personal checking account are no different from dollars held in a Federal Reserve bank T-bond account.

          When you pay for a T-bond, your money goes from your checking account to your T-bond account. It’s just a transfer. No new money created.

          The T-bond merely is evidence of your T-bond account ownership, just as a savings passbook is evidence of your savings account ownership.

          The only new money is the interest the government pays on the T-bond.

          Sadly, QE diverts that interest from the private sector to the government, which is why QE is not stimulative. It is recessive.

          But what can you expect from a government that claims reduced deficits are stimulative? It’s all part of the plan to widen the gap between the rich and the rest.


    2. One problem you have is here:

      :If QE was done for 2 trillion. Then another 2 trillion of bank credit will be chasing better returns . Rather than sitting in a bank account earning low interest.”

      That extra $2 Trillion in private bank deposits IS sitting in bank accounts earning low interest. You are confusing the micro from the macro here. Those bank deposits are always there (unless acted on by an “outside force” RE: Govt sector interactions or changes in NET private bank loans), they are just exchanging hands.

      Think about it for a second. You can only get rid of your bank deposits through some transaction, which means trading your bank deposits to someone else for something else, which means that now the exchangeur has those deposits, and they can only get rid of them through exchange and then someone else has them and so on. This process continues forever unless acted on by some “outside force”

      This process is the same and is much more explicit in the reserve economy. The number of reserves on the CB’s balance sheet cannot change unless the Govt changes it RE: deficits\surpluses or Open market operations = QE (excluding cash withdrawals), banks can trade this same number of reserves amongst themselves on the Fed’s balance sheet until kingdom come, but the banks cannot change the level of reserves.


        1. You missed my point. Remember we are ONLY talking about BANK deposits here, if we include financial assets, the rules change.

          On one hand those PRIVATE bank deposits are new, but you lose your PUBLIC bank deposits. No new TOTAL bank deposits created.

          There are essentially 3 levels of bank deposits

          ALL bank deposits (Govt and private)
          Private bank deposits
          Public bank deposits (accounts at the Fed)

          WITHIN any one level, this rule holds: “the number of bank deposits cannot change unless acted upon by an “outside force”.

          For Level ALL “outside force is defined as”: only Govt NET lending, spending, & cash changes , or NET private bank lending changes

          For PRIVATE: “outside force is defined as”: Same

          For PUBLIC “outside force is defined as”: only Govt NET lending, spending, & cash changes as intra-private sector transactions cannot and do not lead to changes on the Public balance sheet.

          Notice what none of these rules includes, micro aka individual transactions. Which is why your previous comment was inaccurate:

          “bank credit will be chasing better returns . Rather than sitting in a bank account earning low interest.”

          Once those bank deposits are there, there can be no “rather” in the way you are employing the term. Different people can possess the bank deposits but their overall level cannot change.


  3. Thanks for your responses.

    But I’m still not convinced that a balance at the treasury is the same as a balance at a bank. (this relates to a discussion I had on another site about QE)
    Example. The US Govt pays everyone $100,000. (To be invested in a pension savings account) So initially the Fed reserves and Money (bank credit) increases by $35 trillion.
    Option 1. The Govt issues T Bonds. The public have to invest the $100,000 in these bonds. So the public buy these bonds and drains both the reserves and bank credit.
    Option 2. No new T bonds are issued. The public have to invest this money in a pension fund. So in effect $35 trillion of new money is now in circulation. Surely this would have a different impact compared to option 1

    Or maybe not?


    1. Apparently you think lending is the same as giving.

      Here are two examples

      1 You pay taxes (which is a gift).
      2. You buy a T-bond (which is a loan)

      In which example do you lose dollars? In which example do your dollars merely move from one of your accounts to another of your accounts?

      Think of a T-bond as similar to a bank CD. When you buy a bank CD, does your money disappear?

      No, it goes from your checking account into your CD account at your bank.

      To pay you off, your bank merely transfers your dollars from your CD account to your checking account.

      Now compare that to a situation in which you owe a bank money. Those dollars would go from your checking account, never to be seen, again.

      Here is the definitive question about which you should think very closely, before you answer:


      When you understand all the implications of that question, you will understand Monetary Sovereignty


      1. Thanks. I still don’t get it though. Re your bank CD example. I agree 100% if the banks issued $35 trillion of new bank CD’s. Then it would have the same impact. But why would a bank do this. So the extra money is still left chasing investments. I guess though this is the key. Banks would have to to an extent to hold onto reserves. So if one bank issued new CD of £35 trillion. At say 4% and attracted huge amounts of investments of this money. Then the other banks could not settle as they would lose all their reserves. So would have to buy reserves from this bank. Maybe

        I thought I understood this fairly well


      2. Re this

        I guess as many as they want. As they are created by the Fed as and when the Federal Govt require them.


    2. Dont take our word for it RJ, here it is from the horse’s mouth:

      “The Commercial Book-Entry System (CBES) is a multitiered automated system for purchasing, holding, and transferring marketable securities. CBES exists as a delivery versus payment system that provides for the simultaneous transfer of securities against the settlement of funds.

      At the top tier of CBES is the National Book-Entry System (NBES), which is operated by the Federal Reserve Banks. For Treasury securities, the Federal Reserve operates NBES in their capacity as the fiscal agent of the U.S. Treasury. The Federal Reserve Banks maintain book-entry accounts for depository institutions, the U.S. Treasury, foreign central banks, and most government sponsored enterprises (GSEs)”

      So there you go. When you buy a T-security, you lose you bank deposit, but what do you get? You get an electronic entry in a digital ledger at the Fed.

      What is a checking account at a private bank? An electronic entry in a digital ledger at the private bank.



    3. “Example. The US Govt pays everyone $100,000. (To be invested in a pension savings account) So initially the Fed reserves and Money (bank credit) increases by $35 trillion.”

      So far, so good.

      “Option 1. The Govt issues T Bonds. The public have to invest the $100,000 in these bonds. So the public buy these bonds and drains both the reserves and bank credit.”

      Thats right

      “Option 2. No new T bonds are issued. The public have to invest this money in a pension fund. So in effect $35 trillion of new money is now in circulation. Surely this would have a different impact compared to option 1”

      Here’s where it goes wrong. There is not $35 T more in circulation. There are simply fewer places to put the money now that we no longer have the T-securities accounts option. So of course there would be a different impact. The same way as if you took away any other financial vehicle.

      Here’s an example. Say there is $100 in the economy. There are 5 places to put the money, and its evenly distributed:

      1) $20 in stocks
      2) $20 in Bonds
      3) $20 in private checking accounts
      4) $20 in private savings accounts
      5) $20 in TSY savings accounts

      If you eliminate #5 as an option, you dont add or reduce the amount of money, that $20 simply has to go somewhere else, and if the disbursement is done evenly, we would now get $25 in the 4 remaining account types.

      Now do you see the difference?


      1. Thanks for this

        But that’s exactly the reason why I believe QE does make a difference. It is the equivalent to eliminating option 5 (but Govt T bonds is eliminated).

        Option 2 has the same impact as QE. (But maybe only if a non bank sells the T bonds).

        Although if the Fed pays interest on reserves … On second thoughts this will no replace the lost T bonds. As shown in the option 2 example.


  4. Probably for simplicity you don’t mention state money (reserves). If i buy $1,000 T-bill, my banks reduces my bank account by $1,000 and sends instructions to the Fed. The Fed reduces the reserves (that is, it changes a number) at my bank by $1,000 and adds the number to the Treasury’s account at the Fed. Of course the $1,000 I used to buy the Treasury is money i could also use to by beer or something else. The reserves paid to the fed are not money any person or firm can use that does not have a account at the Fed. Banks use reserves to buy cash they order from Treasury, buy government debt, loan to other banks, and settle transactions between banks. Except for cash and coins, reserves are nothing but electronic numbers as are the numbers in my bank account.

    Of course, as Rodger points out, QE was nothing but a swap of reserves for Assets. Thus the total assets on bank balance sheets did not change. Only the composition changed (more reserves, less bonds and other assets). So, no new financial assets were created. Only about 10% of the total QE went into non-bank hands.

    The other implication is that the Fed began paying interest on excess reserves on October 2008. The reason the government sells debt is not to borrow money for spending but to reduce reserves in the banking system. The reason they need to do that is because banks seek a return on reserves and try to lend them to other banks. Competition between banks would drive the overnight interest rat toward zero, eliminating the ability for the Fed to maintain a positive, overnight interest rate target. Paying interest of reserves eliminated this problem and is why banks have so many excess reserves. By paying interest on reserves the Fed can maintain an interest rate without draining reserves and eliminating the operational need to sell debt. The still must sell debt by law and the politicians will never change this because it would largely show they are irrelevant.

    One question Rodger. Why is it, IYO, that many people on CNBC and other places always disparage and fear the huge fed balance sheet. No one ever asks them why they don’t like it. Can you think of any reason that a large balance sheet is a problem?


    1. John-
      let me first complement you on an excellent and very clearly written description, thats a bang up job of explaining the processes.

      to answer your question at the end.

      They truly fear out of ignorance
      They sell fear because thats what they are paid to do.

      You must remember that the banks and financial institutions make hundreds of billions of dollars by replacing Govt money creation with private debt. If the cat gets out of the bag, maybe the public will demand that we not have $45 trillion in private debt (largely held as interest bearing assets by the wealthy). I’ve seen estimates that 25% of all national income goes towards paying interest, and that interest sure isnt getting paid to the lower and middle classes. Not to mention that understanding MMT\MS demolishes the intellectual basis for having large pools of unemployed to keep labor bargaining power and wages down. The plutocrats dont like workers with leverage, they want desperate serfs willing to do anything to survive.

      In other words, as Rodger always says, the wealthy care about the Gap.


    2. I realize I never answered your question. Sorry.

      The media (and the politicians) seem afraid of everything large: Deficits, debt, the Fed, the government, spending. I truly am not sure why.

      They fear federal “debt” and “deficits” because they equate monetarily non-sovereign debt to Monetarily Sovereign debt, and as “everyone knows” debt is bad. Pure ignorance.

      They probably also equate the FRB with private banks, and because the large private banks actually are evil, they may assume the FRB must be evil, too.

      Aside from those few who understand MMT and MS — and I mean FEW — you never will see any understanding of federal finance in the popular media. The media are 100% clueless about economics.


  5. Uhmm! Not quite right. About 90% of the $3.7 trillion were swapped for bank assets like bonds and now sit in their bank reserve accounts at the Fed. These reserves can only be used by entities with reserve accounts at the Fed. Nothing has moved “back” yet. About 90% was swapped with other private entities for their bonds. They got actual dollars for their bonds.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s