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Will the Fed Balance Sheet Get Spent into Circulation Causing Inflation?

Some believe the Fed QE will get spent causing inflation. What's the real story?
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Fed's Balance Sheet, Bank Deposits, Bank Loans 2021-06

Balance Sheet Explosion

Fundamental Error

The above Tweet is a widely believed falsehood. 

The fact is: QE neither circulates nor gets spent nor does it represent money on deck waiting to get spent. 

"Quantitative Easing!" vs "Quantitative Easing" 

At the long end, QE acts to suppress rates. At the short end, with interest rates already at zero, QE does nothing at all except possibly change investor psychology. 

John Hussman discussed "Quantitative Easing!" vs "Quantitative Easing" in Counting the Chickens Twice

Quantitative easing does nothing more than replace interest-bearing government liabilities with zero-interest government liabilities.  ...  because Quantitative Easing! is purely a mental formation, the only thing that alters its effectiveness is investor psychology itself.

Negative real rates do encourage speculation in assets which was the point of Hussman's article. 

QE vs Monetary Stimulus

It's important to distinguish between monetary stimulus by Congress, which can and certainly does get spent, from QE which doesn't. 

From a business standpoint, the Fed certainly wants to encourage bank lending but on that score the Fed has failed.

Fed's Balance Sheet, Bank Deposits, Bank Loans

As shown in the first chart, the Fed's balance sheet has exploded and that in turn caused an explosion in deposits. 

But that money is going literally nowhere in contrast to Congressional stimulus which consumers will spend.

Fed's Balance Sheet, Bank Deposits, Bank Loans Detail 

Fed's Balance Sheet, Bank Deposits, Bank Loans Detail  2021-06

Since the beginning of the pandemic the Fed's balance sheet is up by $3.7 trillion. Bank loans and leases barely budged.

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Bank Deposits and Loans Percent Change

Bank Deposits and Loans Percent Change 2021-06

Thanks to Congressional guarantees and Federal programs there was a temporary bank lending increase in May of 2020. Since then, commercial loans, and loans and leases have both declined.

The Fed's balance sheet was running a hot 70+ percent year-over-year for a full year with commercial and industrial loans plunging 15%.

That's a chart that undoubtedly keeps the Fed sleepless. 

Sound and Fury Signifying Nothing

People portray QE as inflation or state that it will cause inflation or that it will get spent. None of that is true.

From Macbeth

QE's but a walking shadow, a poor player,
That struts and frets his hour upon the stage,
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

Holding real interest rates in negative territory certainly has boosted asset prices and mortgage lending but QE does not get spent and never will. 

QE hasn't even boosted demand for commercial loans which normally would get spent. 

The CPI Measures Inflation and Other Widely Believed Economic Nonsense

Economic nonsense abounds. 

To dissect another widely believed but false idea please see The CPI Measures Inflation and Other Widely Believed Economic Nonsense


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