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Monday, November 29, 2010

Quantitative Easing And Money Creation

In the latest round of "quantitative easing", the Federal Reserve will create approximately $1 trillion of new bank reserves.

How much inflation will this cause? It's actually a lot more than just $1T. The Federal Reserve creates $1T of new bank reserves. Then, by the magic power of fractional reserve banking, the financial industry creates an additional $9T.

With a 10:1 reserve ratio, for each $1 that the Federal Reserve creates, private banks create an additional $9.

Normally, when the Federal Reserve "monetizes the debt", they purchase short-term Treasury debt with newly-created money. These purchases keep short-term interest rates far lower than the fair free market interest rate.

However, the Fed Funds Rate is currently 0%-0.25%. It can't be further lowered.

Normally, the Federal Reserve buys short-term Treasury debt. However, the Federal Reserve insiders can buy whatever they want. For this round of quantitative easing, the Federal Reserve plans on buying longer-term Treasury debt.

This causes the yield curve to flatten. Instead of buying only short-term debt, the Federal Reserve is also buying longer-term debt.

There's another loophole the Federal Reserve is using. They are paying banks interest on reserves. For example, a bank could borrow from the Federal Reserve at 0.1% and then deposit those newly created reserves for 0.25%.

This also is a stealth bailout for banks. Most Treasury debt is owned by US banks. They borrow at the Fed Funds Rate and buy Treasury debt, making a practically riskless profit. Foreign central banks own Treasury debt, but they have an unleveraged long position. Foreign central banks are actually losing purchasing power, because the Treasury interest rate is far less than true inflation.

Suppose a bank bought a 10 year Treasury bond at a yield of 4%. They sell to the Federal Reserve for 3%. That's a profit of 1%*10 =10%. (The change in bond price approximately equals change in yield times duration, with opposite sign.) If the bank has 100x leverage in its Treasury debt, then the actual profit is 10% * 100 = 1000%. Banks make huge profits speculating in Treasury debt, while taking on practically no risk. That's how banks make huge profits while the rest of the economy is stuck in a recession/depression.

The banksters make a lot of money via the State. They can always profitably lobby to block reform. However, they are stealing too large a percentage of productive work, and the whole system is collapsing.

Also, insiders profit by knowing which bonds the Federal Reserve is buying. Is the Federal Reserve buying a duration of 2-year, 5-year, 7-year, 13-year, etc? If an insider knew ahead of time, they could buy that specific bond and then sell to the Federal Reserve.

Via quantitative easing, the Federal Reserve literally prints new money and gives/lends it to the banksters. Lending someone money at 0% is like giving them money, because true inflation is much higher.

Does this mean banks are profitable? Does this mean bank stocks are a good investment? No. Most of the money goes to insiders, with the shareholders getting leftovers. The banksters can steal/waste money just as fast as the Federal Reserve can give it to them. With a rigged monetary system, why not steal as much as you can? The banksters can receive a $1T government subsidy, while stealing/wasting $1.5T or more. Then, the banks would be losing money even though they're receiving a humongous government subsidy. When you're "too big to fail", why not steal/waste money just as fast as the government gives it to you?

This is the problem with the US economy. It's easier to make money via financial tricks and State bailouts, than by actually working. The Federal Reserve is one huge money laundering operation. The banksters made the details complicated, so the slaves don't understand how they're being robbed.

The Federal Reserve's quantitative easing isn't free. Everyone else pays the cost via inflation. State comedians/economists make up fancy lies for why stealing/inflation actually helps people.

1 comment:

Maxie said...

The regime of floating exchange rates not tied up to any real money such as gold is the reason that the whole world is forced to participate in US inflation by lowering their currencies, which they do by printing notes and selling them.

Inflation being an instrument of wealth redistribution soaks the populations of the world nations and redistributes this removed wealth to the us. In us the wealth soaked from us residents is added and forwarded to the us bankers.

The whole system was described in the movie "The Matrix" using the battery analogy.

The current crisis is not a crisis of production, because there is more production today due to advancing technologies. It is a crisis of free enterprise, as US has been on the forefront of fighting against the free enterprise, and the crisis of overloading the productive members.
There is no more that can be had. But, the needs of those who lead parasitic existence can only grow.

The day that the world decides to risk "taking off the electrodes" by refusing to use US Notes, will be the day that all inflation ever created will return home at once.

Of course, with people being as dumb as they are, the failure of dollar would not mean freedom from extortion, but will merely hasten the introduction of new and improved substitution notes.

In the mean time, one should expect war, because this is the only way that the use of the dollar worldwide can be forcefully prolonged. The hint to how likely is the coming war is in the tests that US conducts by engineering a crisis to gauge the "safe heaven effect".

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