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?

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.

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.

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