Thursday, November 6, 2014

So, You Think QE Is Done? Guffaw!

Here is the asset side of the Fed's balance sheet as of July 30, 2014. The numbers would be slightly larger today. 

July 30, 2014
Change from
April 30, 2014
Change from
July 31, 2013
Total assets4,407+111+835
Selected assets
Securities held outright4,137+110+841
U.S. Treasury securities 12,420+70+438
Federal agency debt securities142-3-24
Mortgage-backed securities 21,674+42+427
Memo: Overnight securities lending 38-4+*
Memo: Net commitments to purchase mortgage-backed securities 462+12-27

Here is how the Fed's balance sheet has grown by leaps and bounds in the world of Obama and his big government, big banker friends.


Of today's approximately $4.5 trillion in assets, approximately $3.5 trillion is in long term government and mortgage backed securities that was purchased by the Fed as a result of QE I, QE II, QEII and Operation Twist. These assets, indeed all the Fed's assets, are purchased by the Fed printing/digitizing money out of thin air, money that is intended to and which actually does to some extent filter through the banking system, with the hope that it will make its way to you the individual consumer. 

QE is true trickle-down economics that benefits the upper middle class and the rich, while devaluing hard earned dollars that ordinary folk work for as well as the labor itself.

Now that QE is purportedly ended, the funny money is still out there, goosing the system for the upper crust. Let me borrow from Bloomberg Businessweek, because I see they have already written up the guts of what I want to say.
But quantitative easing is the gift that keeps on giving. Even after the purchases end, its effects will persist. How could that be? The Fed will still own all those bonds it bought, and according to the agency itself, it’s the level of its holdings that affects the bond market, not the rate of addition to those holdings. Having reduced the supply of bonds available on the market, the Fed has raised their price. Yields (i.e. market interest rates) go down when prices go up. So the effect of quantitative easing is to lower interest rates for things Americans actually care about, such as 30-year fixed-rate mortgages.
Imagine that the Federal Reserve wants to increase the price of suntan lotion. There are 10 bottles of Hawaiian Tropic for sale at the cabana. The Fed buys one per hour until it owns nine. Each time it acquires one, the price for the remaining bottles rises because people who don’t want to get sunburned are competing for the dwindling supply. Now that just one bottle is left, the Fed stops buying. Would you expect the price of the last bottle to fall suddenly? No—there’s still lots of demand and constricted supply. Same with bonds. The price of bonds should stay high—and yields stay low—as long as the Fed hangs onto its huge inventory.
To mix metaphors, ending QE isn’t putting on the brakes. It’s just easing off the accelerator. The Fed’s bond holdings will naturally shrink as bonds come due; as new debt comes onto the market, the Fed’s portfolio will have less impact. For now, the Fed will continue to reinvest the proceeds back into other bonds. It says it won’t allow the portfolio to start shrinking until after it starts raising the short-term interest rate it controls, the federal funds rate. That’s likely to happen sometime in 2015, most economists expect.

QE has ended? Don't believe it, not for one second. The wealth divide continues to grow. Party on!

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