What Would Happen If The Fed Announced $40 Trillion A Month In QE?

Let's conduct a QE "what if" thought experiment with the parameters I specify below.

QE Parameters

  • $40 trillion a month in QE for 24 months, no matter what, announced upfront.
  • 3-month bills at 0% rolling everything over each month while adding a new $40 trillion each month.
  • Zero percent interest paid to banks on excess reserves.

What Would Happen?

  1. Hyperinflationists and inflationists would come out of the woodwork on the announcement screaming inflation or worse.
  2. In two years, M1 would rise by $960 trillion dollars, nearly a quadrillion dollars.
  3. Since M1 is currently about $18.7 trillion, M1 would thus rise by about 5,000 percent. 

What About Inflation?

Q: What would a 5,000% increase in M1 over the course of two years under the parameters as outlined above do to inflation?
A: Not a thing

There is a stimulus impact of holding down short term rates, but the Fed was already committed to holding rates to zero indefinitely anyway. Other than what is needed to hold the short-term interest rates to zero, any additional amount does nothing at all.

I suppose there could be a temporary knock on psychological effect over the size of the announcement but that would be short-lived.

Today's question has the same answer as that of a thought experiment question I posed a decade ago.

Q: What would happen if someone invented a counterfeit machine so good the US Treasury could not tell the difference, then printed $100 trillion in bills, then buried the cash in the ground?
A: Nothing 

What About Lending?

A quadrillion in excess reserves or QE-induced deposits would not spur lending because banks do not lend from reserves or deposits.

A quadrillion in short-term bills would do nothing to long term rates and it would not put any money into anybody's hands to spend.

Loans and Leases vs Deposits 

Loans and Leases at Commercial Banks vs Deposits Detail 2021-03

Please note The Fed Wants to Stimulate Bank Lending, Charts Show the Fed Failed.

1 2 3 4
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.