US M2 Money Supply & QE Inflationary or Not?
#MMT Told you that QE is not inflationary. It is simply "Reserves in the banking system".
Then they told you "In an #MMT world...."
Unfortunately, the self-evident data you see in the chart completely destroys their silly little theories and models.
I want to be clear, QE does not increase the public debt. However, it does change the form of money from a bond to $. Dollars in the banking system are called reserves. But if you remove all the jargon Treasurys, T bills, reserves, bonds, high powered money, horizontal money, repos, reverse repos etc.. and simply understand all money is money then it becomes much much easier to figure out what is going on.
QE uses $ to buy Bonds in the open market. If those $ go into the banking system we will call them reserves if they are not invested in bonds. FED cannot buy bonds in the open market with reserves. Only with $. Reserves are used only for interbanking. They are still $ but WITHIN the banking system. Reserves are the most liquid form of money in the banking system. Think of them like a checking account. Bonds should be thought of as a savings account. It is still all money, $. Bonds simply have a coupon attached to them.
When money is withdrawn using your ATM or go into a bank to withdraw cash the amount of reserves for that bank reduces. When you deposit the reverse. We used to have minimum requirements for all banks to maintain sufficient reserves so as to prevent bank runs and blow up the banks. That rule went away early on during covid. But thx to QE FED buying bonds and in exchange giving $ at market prices, the amount $ flooded the banking system with reserves $ far exceeding the minimum requirements the FED once required. So everyone thought it was all good. Bank runs could not occur.
Well as we found out the hard way while the banking system as a whole had more than enough reserves to meet all demands for cash. Some banks *cough* SVB did not have sufficient reserves $ to meet withdrawal demands and blew up! As did other banks.
Back to my point. While #MMT theorist and other experts were running around saying QE is simply an asset swap it's not inflationary the money supply is not an issue bc the $ are in the form of reserves don't worry about it.
The reality is that reserves are still $ and in the most liquid form there is in the banking system. Meaning at any given moment those reserves could be easily converted to $ (Cash). Thus increasing the M2 money supply quickly can cause inflation. Which it DID!
Not only it caused inflation but it caught a lot of people off guard and when the tide went out everyone could see who was naked.
In other words, QE is not inflationary until it is. This is true throughout economics which is why models do not work, political economic theories do not work, and why gurus always seem smart at first and then blow up.
Then they told you "In an #MMT world...."
Unfortunately, the self-evident data you see in the chart completely destroys their silly little theories and models.
I want to be clear, QE does not increase the public debt. However, it does change the form of money from a bond to $. Dollars in the banking system are called reserves. But if you remove all the jargon Treasurys, T bills, reserves, bonds, high powered money, horizontal money, repos, reverse repos etc.. and simply understand all money is money then it becomes much much easier to figure out what is going on.
QE uses $ to buy Bonds in the open market. If those $ go into the banking system we will call them reserves if they are not invested in bonds. FED cannot buy bonds in the open market with reserves. Only with $. Reserves are used only for interbanking. They are still $ but WITHIN the banking system. Reserves are the most liquid form of money in the banking system. Think of them like a checking account. Bonds should be thought of as a savings account. It is still all money, $. Bonds simply have a coupon attached to them.
When money is withdrawn using your ATM or go into a bank to withdraw cash the amount of reserves for that bank reduces. When you deposit the reverse. We used to have minimum requirements for all banks to maintain sufficient reserves so as to prevent bank runs and blow up the banks. That rule went away early on during covid. But thx to QE FED buying bonds and in exchange giving $ at market prices, the amount $ flooded the banking system with reserves $ far exceeding the minimum requirements the FED once required. So everyone thought it was all good. Bank runs could not occur.
Well as we found out the hard way while the banking system as a whole had more than enough reserves to meet all demands for cash. Some banks *cough* SVB did not have sufficient reserves $ to meet withdrawal demands and blew up! As did other banks.
Back to my point. While #MMT theorist and other experts were running around saying QE is simply an asset swap it's not inflationary the money supply is not an issue bc the $ are in the form of reserves don't worry about it.
The reality is that reserves are still $ and in the most liquid form there is in the banking system. Meaning at any given moment those reserves could be easily converted to $ (Cash). Thus increasing the M2 money supply quickly can cause inflation. Which it DID!
Not only it caused inflation but it caught a lot of people off guard and when the tide went out everyone could see who was naked.
In other words, QE is not inflationary until it is. This is true throughout economics which is why models do not work, political economic theories do not work, and why gurus always seem smart at first and then blow up.
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www.federalreserve.g...es/meyer20110228.pdf
"You may wonder how the Fed pays for the
bonds and other securities it buys. The Fed does not pay with paper money, instead the Fed pays the
sellers bank using newly created electronic funds and the bank adds those funds to the sellers account.
The seller can spend the funds or can simply leave them in the bank. If the funds stay in the bank then
the bank can increase its lending, purchase more assets or build up the reserves it holds on deposit at the
Fed. More broadly, the Feds securities purchases increase the total amount of reserves that the banking
system keeps at the Fed. Whether the Feds purchases lead to an increase of the amount of money
circulating in the economy depends on what banks do with the new reserves and on what sellers do with
the funds they receive. As it happens the money supply has not grown unusually rapidly since the Fed
began its first round of asset purchases, if anything the money supply has been growing more slowly
than normal and as I noted earlier inflation declined while the Fed was conducting its first round of
purchase and is now quite low. Still if the Fed were to continue buying securities even as banks
eventually expand their lending then the money supply could increase too rapidly and inflation could
become too high, Fed policy makers are determined to avoid that outcome. The Fed will not keep
buying large amounts of securities on and ongoing basis."
it is important to understand just bc the FED pays banks with reserves to credit sellers accounts
DOES NOT MEAN the banks sold the bonds nor that banks MUST hold those reserves for themselves. It is up to the
SELLER (the owner of the bond who sold it to the FED) to do what they wish with those dollars.
Banks are simply intermediate between FED and the Seller