Tuesday, September 28, 2010

Check this out analysis, that says that the USA is not printing money

See my previous BLOGS that raise that question did the USA print the money?

Aivars Lode, thanks Bill for the contribution.

The Myth and Mistake of Quantitative Easing
Last week, the Federal Reserve said that it was “prepared to
provide additional accommodation if needed to support the
economic recovery.” This was a signal about the potential for
more Quantitative Easing (QE).
The original QE took place between September 2008 and
mid-2009, when the Fed’s balance sheet ballooned from $900
billion to roughly $2.4 trillion. Now, some are calling for QE-
2, with a few market participants calling for another trillion
dollars. This would be a colossal mistake.
Quantitative Easing does not boost real economic activity
or inflation – it is not an injection of new money, like
traditional monetary easing. Quantitative Easing is a wrongheaded
approach to monetary policy that was born in the midst
of a panic. It was only necessary because strict mark-to-market
accounting rules made it difficult or impossible for private
companies to hold risky assets. Now that these fair value
accounting rules have been corrected, there is no further
justification for QE.
So far this year, the Federal Reserve has earned $68 billion
in profits from its portfolio. More than half of this should have
been earned by the private sector. These profits, which rightly
belong to the private financial system, could help explain why
the economy is having a difficult time recovering.
At its root, the Fed’s balance sheet is really no different
than any other balance sheet. It has liabilities and assets and it
can expand in one of two ways – through growth or by using
debt. In the private sector, growth equals profits or income.
For the Fed, growth means printing money. Currency is an
organic liability, created by the Fed, which is then used to
purchase assets. This is the traditional means of money
expansion – the creation (or printing) of new money.
So-called quantitative easing uses borrowed money –
which is not the creation of new money. The two largest
sources of borrowed funds for the Fed are bank reserves and
Treasury cash. Banks now earn interest on reserve balances
and hold roughly $1 trillion at the Fed. At the same time, the
Fed is borrowing $277 billion from the Treasury. It uses these
funds to buy mortgages or Treasury bonds.
So, the Fed is borrowing money from banks and the
Treasury to buy assets. All this does is shift what would have
been held in the private sector onto the Fed’s books. This is not
the creation of new money and therefore does not create
inflation or lift aggregate demand.
To understand how foolish some of this is, follow this link
to see a chart of Fed liabilities on our blog which shows that
bank reserves peaked in February 2010, at $1.2 trillion, and
have since fallen by $252 billion. Banks seem to be taking
back these funds to make loans or buy bonds. The Fed should
let this process shrink its balance sheet, but instead has
increased its Treasury borrowing by $239 in the past seven
months, in order to keep the balance sheet size the same.
In other words, the Fed is borrowing money from the
Treasury Department to buy Treasury bonds. This makes
absolutely no sense and it is a myth that somehow this is
providing a lift to economic activity. Milton Friedman is
spinning in his grave.
Quantitative easing is not the reason the economy has
returned to growth. Its efficacy is a myth and its use was a
mistake. Zero percent interest rates are enough. The Fed
grabbed power during the crisis and should give it back.
Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous
9-28 / 9:00 am Consumer Confidence - Sep 52.3 51.8 53.5
9-30 / 7:30 am Q2 GDP Third Report +1.6% +1.5% +1.6%
7:30 am Q2 GDP Chain Price Index +1.9% +1.9% +1.9%
7:30 am Initial Claims - Sep 25 460 459K 465K
8:45 am Chicago PMI - Sep 56.0 54.9 56.7
10-1 / 7:30 am Personal Income - Aug +0.3% +0.2% +0.2%
7:30 am Personal Spending - Aug +0.4% +0.5% +0.4%
8:45 am U. Mich. Consumer Sentiment 67.0 67.0 66.6
9:00 am ISM Index - Sep 54.5 54.9 56.3
9:00 am Construction Spending - Aug -0.4% +0.3% -1.0%
sometime Domestic Auto Sales - Sep 3.7 Mil 3.7 Mil 3.7 Mil
during the day Domestic Truck Sales - Sep 4.8 Mil 5.0 Mil 4.8 Mil

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