The Fed announced a takeover of assets totaling $ 900 billion. This operation basically consists of quantitative easing to create monetary base from scratch to buy U.S. Treasury bonds. The announcement of a massive use of printing money as always awakens the greatest fantasies: the risk of inflation, devaluation attempts ... the vast majority of analysts are following error: confused issuance of central bank money and increase the money supply in circulation. Our monetary system is a fractional reserve system, not a system of wilderness areas such as the one defended here. When the Fed buys Treasury bills creating the monetary base for hundreds of billions of dollars, it does not increase one penny of money in circulation. The immediate effect is to increase bank reserves. Banks will have about 900 billion more reserves, that is to say, the amount deposited at the Fed through which they can cope with the withdrawals or payments from their customers.
A banking system with excess reserves of high inflation is a potential that a much stronger banking system with very little excess reserves. Basically, in the eurozone, with a reserve ratio of 2%, every dollar of excess reserves can be transformed between 0 and 50 € extra money into circulation by the money multiplier mechanism. Potential can be devastating but can never prove. During the history, political redemption of assets by central banks have very different impacts. Between 1921 and 1923, the Bundesbank largely finances the German war reparations by rotating the board ticket. The result was hyperinflation of the most famous economic history. In 2000, the Bank of Japan began a massive operation to purchase assets of the order of several hundreds of billions of euros to put an end to a decade of deflation. No significant results were recorded and the land of the rising sun remains mired in a quasi-long deflation over twenty years.
Why such different effects? We repeat once again, central banks have little control over the creation of money in circulation. It is the banking system which ultimately hold of this mechanism. As noted just the Nobel laureate economist Maurice Allais: "the creation of bank money depends on a desire on the willingness of banks to lend on demand and the willingness of economic agents to borrow. In times of prosperity, that will exists and the currency scriptural increases. In times of recession, this will double the bank money disappears and goes ".
The Fed will throw as many billions beautiful as she wants, if banks do not lend the money put into the banking system, the impact on money creation remain zero. However, increasing the excess reserves, the Fed is taking a risk, if the machine runaway credit, monetary creation can become uncontrollable in the image of what happened in Germany in the early 20s. Given the state of indebtedness of households, the State and the U.S. financial system, this seems unlikely but who knows-forever. In this case, the Fed would sell its treasury bonds and assets to recover the excess cash from banks and withdraw from the circuit. This will result in an increase in interest rates and therefore require a certain amount of political courage.
This system is uncontrollable. It can make us move overnight to a quasi-sustained deflation inflation to very large depending on the mood of market participants. Our economies are already highly dependent on the mood of his actors. This should not also be true of our currency.
This paradox of "quantitative easing" is not new. During the Great Depression, the U.S. suffered a terrible deflation. The Presidents Hoover and Roosevelt tried to redeem bonds by printing money to end it. Without success. Only when the U.S. government began to incur debts that the money machine is gone. Irving Fisher in 1935 described how massive operations to repurchase assets could be as ineffective.
"The superiority of the fourth combination is especially evident with respect to the initial correction (reflation), as illustrated by the current depression so well. The Federal Reserve has tried to engage in open market operations as a repurchase obligation from the perspective of a reflation but the only size effect was to "embarrass" the Federal Reserve Banks with the obligations of the United States and they do not wish to provide member banks of excess reserves or they did not want to use ( because they were afraid to lend) or they could not use (because companies did not borrow).
Accordingly, redemption of bonds of Presidents Hoover and Roosevelt in a 100% was effective immediately As regards the increase of means of payment in circulation, was found in the system 10% almost totally ineffective for long periods. For several years, everyone waited someone else go into debt that can be provided to the public the means of exchange which he needed. It is ultimately the government that took the lead and became heavily indebted to banks.
Until we have a system under which means of exchange in circulation are by-products of private debt, we will often go through difficult times. The time when nobody wants to go into debt is where we most need money and therefore we hope that the more someone will help us into debt. Few will, despite official exhortations and incentives, despite low interest rates.
is a situation similar to trying to drink a horse is not thirsty. Or, to return to our comparison automobile, the gap between the system 10% and 100% system of wilderness is the difference between a good drive and a faulty wheel . Under the system 10%, the first turn of the wheel has no effect on the car. So you turn harder until suddenly, the car changes direction too abruptly and then when you try to correct it, it changes too much in the opposite direction. A bad driving may be able to get the car out of the ditch of deflation, but only to land in the gap for inflation and then return later in the ditch of deflation and so on, the comings and goings of a "cycle".
Regarding the link between "quantitative easing" and attempted devaluation in the "war of currencies", I confess to find anything but obvious. The exchange rate depends on two distinct markets: the market for goods and services and the capital market. I do not see how the market for goods and services may be affected by an increase in banks' excess reserves. As regards the capital market, the rates are already extremely low in the U.S., I do not see how this policy could encourage more speculators to borrow in dollars to invest in another currency.
Again, a takeover of assets by a central bank that is effective directly on the internal kitchen banks, not the economy as a whole. It is the impact of rising excess reserves on the credit policy of banks that may change dramatically while the economy.
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