Is QE3 Already Underway?

Posted on January 17, 2012

Much ink is being spilled on when/if the Fed will move to the next iteration of its quantitative easing program. That’s the wrong question. The Fed and the world’s other major monetary authorities have effectively been captured by national treasuries running historically high budgetary deficits and their chief function has become the funding of governmental expenditures that cannot or will not be funded through taxes. Continued pressure to monetize the debt is a foregone conclusion so long as the deficits continue at their current levels.

A year ago we explored Chairman Bernanke’s position that “QE II (the purchase of long term Treasury Bonds by the Federal Reserve) is not inflationary and has not created an explosion of the money supply.”

How could it be the case that rapid monetary expansion could be accomplished without an inflationary impact? Keynes, though much maligned and misused, provided a clear explanation for this one with his description of a “liquidity trap”. In normal credit environments new reserves added to the banking system are magically multiple through the working of fractional banking, creating a significant multiplier effect on business activity throughout the economy.

In a liquidity trap this no longer works; reserves just sit at the banks and the money multiplier sinks. That’s where we are today as recently outlined by Paul McCulley, Chairman of the Society of Fellows of the Global Interdependence Center and former PIMCO trader, in a recent CNBC interview. As a result the Fed has been able to create in excess of $1.5 Trillion of excess bank reserves since the 2008 crash

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Looked at globally, the trend is even more dramatic.

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Source: Zero Hedge

The size of the combined Federal Reserve, European Central Bank and Bank of Japan balance sheets has grown from a historical norm of … read the rest

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