The deficit hawks are circling, hovering over QE2, calling it just another inflationary bank bailout. But unlike QE1, QE2 is not about saving the banks… 

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38 Responses

  1. Wow. That sounds like fairly good news. It’s not great, but not exactly the economic Armageddon that we’ve gotten used to hearing.
    Thanks for the explanation Ellen.

  2. So then, 600B x 0.004 = 2.4B in additional income per year for the FED for “producing” some more electronic money?

  3. Hi Ellen,

    When dollars borrowed from a US bank are invested overseas do they show up in m3 or any other measure of money supply? Is there a measure of dollars in circulation worldwide?

    Thanks, Jeff.

  4. Thanks for the great elicidations. On one point, I remain uncertain:

    “…the Fed rebates the interest to the government after deducting its costs. In 2008, the Fed reported that it rebated 85% of its profits to the government. The interest rate on the 10-year government bonds the Fed is planning to buy is now 2.66%. Fifteen percent of 2.66% is the equivalent of a 0.4% interest rate, the best deal in town on long-term bonds.”

    Why would the FED’s “costs” be proportional to the size of these transactions? Shouldn’t costs on a vastly increased sum be almost as vastly less, proportionately? Do the FEDs hire Goldsachs to bid for the the Treasuries, and give them a 15% take, or what?

    • That was in 2008, before QE. It’s just what it took to run the place. I’m sure they gave themselves ample salaries, but not the sorts of bonuses, commissions, etc. seen on Wall Street.

      • If the amount is just “what it took to run the place,” I think you’ve confirmed my suspicion that the interest on such an enlarged sum should be that much closer to zero, than 0.4%, and it might even become de minimus. Which makes the apparent deal apear to be even better for the public than you have estimated. Great!

        • I’ve researched how the FED will buy the treasuries, from its official publications. On Nov 2 it ordered its NY desk to buy well-defined amounts of treasuries, by annual duration per month, through June, 2011. The overall average duration is 5-6 years, the same as the duration of treasuries bought in QE 1. What’s new seems to be that all the the QE 1 treasuries were from mortgage repayments (to be confirmed), which will be continued, to comprise only a third of the new purchases.

          The treasuries are to be purchased from a short list of primary dealers, e.g. Goldsacks & Citi. This would seem to give these dealers vast sums — a percentage cut, per a buy-sell spread, I presume — for doing absolutely nothing. Equally breathtaking is a comment in the minutes of the Nov 2 FED meeting, recognizing that its purchases will necessarily be restricted to whatever packages of treasuries the primary dealers decide to offer for sale.

          For the Treasury has a web site — http://www.treasurydirect.gov/indiv/myaccount/myaccount.htm — via which someone like me (if I could afford it) can directly buy whatever sorts of treasuries are on offer. At the foot of the page it tersely notes, without advising it, that I could alternatively make purchases through a bank or broker-dealer.

          • Re the one point left open above — is QE 2 is really a cut above QE 1. The current FED balance sheet shows $873 billion in treasuries. Maybe these were all bought from mortgage repayment money (the mortgages being taken off bank books), I can’t tell. It’s 50% higher than I would have guessed, but if not, in any case I’d say that QE 2 represents a highly significant continuation of commitment beyond QE 1.

  5. Is this why I’ve noticed more conservative railing against the FED about smaller QE2 compared to QE1.

    Mnay pro Wall Street politiicans seem to be spewing anti-FED stuff.

    what of the results of QE2 per this article?:

    and it the fact the FEDis paying high interest on reserves meant to thwart carry trade or just enrich banks? see:


  6. I’m afraid you took your eye off the ball on this one.

  7. More from Gary North http://bit.ly/9933Nk

    • I haven’t changed horses. Anyone who has read my book knows I have a whole chapter on Ben Bernanke’s 2002 helicopter speech — a chapter I first published in 2007 — and how that is the right approach: the government DOES have the ability to issue the national currency, and that is what it should be doing. For the government to issue debt rolled over indefinitely, funded through the Fed, is the next best thing. Ireland has proved that the austerity approach doesn’t work. In fact the EU has proved that the gold approach wouldn’t work: a fixed currency of any sort won’t work, because it is inflexible and not expandable. Governments need to be able to issue the credit to fund their future projects. Money is only credit, and that’s what QE is (to the extent that it’s funding government debt, not cleaning up the toxic assets of the banks, as QE1 was): it’s the credit of the nation being used to fund the government of the nation. All money today except coins is only credit or debt, and private credit has collapsed. Public credit is therefore necessary to fill the breach.

      • The only way to reply to this argument is “there is no such thing as a free lunch”.

      • As a matter of law, that the Congress has authority to issue paper money was settled in the civil war round of legal tender cases. In the 1930s, the gold cases settled further that Congress’ power to “regulate the value” of the national currency necessarily included virtually dictatorial powers over gold – such as the right to substantially define the dollar amounts to be paid in just compensation for taking it.
        In fact, both lines of cases are to this day vigorously contested by the right, as the tainted product of courts whose narrow majorities rested upon a politically coerced about-face. For instance, here is how a current trade magazine describes the civil war’s legal tender act, in a supposedly historical serialized account of the nation’s currency:

        “Part 57
        Federal Agent Dragged into Courtroom
        By Fred L. Reed III, Bank Note Reporter
        March 02, 2010

        During the U.S. Civil War, the federal government grabbed a monopoly on the money-issuing power within the United States issuing legal tender Treasury notes, which the U.S. Supreme Court initially found to be unconstitutional. Congress also grabbed control over bank circulation by establishing federally regulated national currency (National Bank Notes) and heavily taxed non-federal bank circulation. It also outlawed money issue by municipalities, corporations and individuals. When the Supremes danced on the head of a pin and changed their minds by finding room under the Constitution for the greenbacks, the central government had a headlock on the nation’s finances and a clear field to churn its money mills with impunity.”

      • Ellen, it may be best to simply ignore Gary North. I took a look at his site to see what the fuss is about, but I couldn’t honestly read more than a few pages. I didn’t learn anything from them other than that he’s bent on attacking your character and misrepresenting your ideas.

        The free flow of information, ideas and dialog is what first drew me to this site. Please keep it coming! This and other sites are useful outlets for me to understand what is happening to our economy and what we as individuals can do about it. Healthy disagreement is constructive. Hostility is not–and would seem to me to mask some deep-rooted fears.

        • Thanks Jeff! Yes I had decided to ignore him. I tried responding at first and he just twisted what I said, and I’m really so busy, I have to wonder if it isn’t an attempt to distract me from the real issues. He mentioned about being a tar baby and that he intended to destroy me, so there’s not going to be any meeting of the minds.

      • WOW! This is bizzarro world. First, Ellen Brown’s definition of money as “money is only credit” is definitely not true. Money is whatever individuals say it is. FED notes or any FIAT currency in which a government issues are simply money substitutes. That is we will use them as money until we decide to escape into real money or commodities(Real Value). That is why we see commodity prices rising everywhere. Everyone should understand that the ‘evil speculator’ is every individual in society who only wishes to make life better and protect our wealth. Just because the government decrees a piece of paper legal tender (by use of force) doesn’t make it so at least not forever. The individuals in a society ultimately decide what money is. I believe Ellen Brown needs to expand her economic theories a bit.

        • The mere act of requiring payment of taxes in some commodity will immediately make that commodity “money” so long as the government can enforce payment of taxes. No legal tender laws are required. No actual value is required in the substance of which the money is made.

          Failure to pay taxes leads to serious, negative penalties – so everyone who must pay taxes will do their best to get enough “money” to pay those taxes. In turn, others will desire this “money” because it enables them to trades for goods and services from those who have to pay taxes.

          Hopefully, the government has chosen as money, something that people can readily acquire – like paper with certain imprints, or perhaps a series of electronic blips in specified configurations…

          • What my argument is here is that government has very little to say about what money is whether they have power of coersion and compulsion or not. Look at Germany’s Weimar Republic and more recently Zimbabwe. Even though individuals could pay taxes to the state and did when it came to income tax, the direct and indirect exchanges by individuals which were made were more often than not paid in real goods(Commodities) because the government’s printing of money had deemed the value of their currencies worthless(not the speculators).

            What you are talking about with a FIAT currency is not money, it is in fact a money substitute. What this means is that these pieces of paper stamped ‘legal tender’ will freely be exchanged as money by individuals until the individuals involved in the transaction no longer feel that they can use the currency to exchange other goods and services. At this point individuals will use real money (commodities) to make exchanges in the society and ignore any government decree to use pieces of paper for money. At this point a government will have very little power to enforce its laws. That is why a FIAT currency can only be a money substitute. It can and will be used as money as long as the government does not cheapen it by increasing the supply to the extent that the people lose faith in the ‘notes’.

  8. If deflation is the overall trend, then why did precious metals and bond yields go up after QE2 was announced? Shouldn’t they go down?

  9. Just how much of QE2 is going towards the federal debt and how much to provide further bail out for the banks so that they can meet the 8% reserve requirements of Basel III?


    Good assets go bad as housing deteriorates. Nearly 25% of American homes are underwater. (80% in Las Vegas!) Bank balance sheets are dynamic. They loose their balance over night.

    QE3 anyone?

  10. Dear Ellen

    Excellent article thank you. I’m worried about the mind set of this statement:

    “The government can then work on adding jobs.”

    Yet jobs are not added or created. Under free conditions people just start working, don’t they?

    Should we not be asking: if people are willing and able to work, and people have not stopped wanting things, what is stopping supply from meeting demand? And then dealing with that from the root. Anything else must be more triage or even palliative care? See here:


    This is not pedantry. It is essential for any concrete strategy. You have shown well how interest rates do not operate under free conditions. And then imply neither does labour. “jobs must be created”. So people are essentially slaves? What is not mentioned at all is that the thing that we all need before we can start work also is not free to market access. A location to do work. Labour must have it but cannot get it even in good times mostly, even when credit is available. But labour and capital must use credit to buy or rent it.

    Do you think this could be why supply cannot meet demand? I worry we focus on money and ignore other essentials. Ideas are then incomplete and incredible to the all knowing and the unknowing too. No idea on its own adds up.

    “and it is entirely due to the fact that they do not understand how the US monetary(RS economic) system works. … What’s unfortunate is that these are many of our best minds. These are the people driving the economic bus. ”

    Best regards

    Real Reform
    – Restoring natural economics
    – Politics for the 21st Century
    – A future for our descendants

    The SFR Group

    • Good point, Robin. Even with the monetary reforms Ellen is trying to make happen, wealth will stlil flow from the poor to the already rich. The monetary problem is just one facet of the deeper problem.

      As alluded to in your website, what ought to be common property is instead given over to private interests and what ought to be private property is instead stolen by the community. The right to create money ought to be common property, either made available to all — or done by the government to benefit all.

      But it is just the start. Land, natural resources, and community derived privileges must all belong to the community. While the products of individual labor must remain in the hands of those who produce it. Only by free exchange should these assets switch ownership. Anyone desiring exclusive claims on land ought to pay the full rent every year (no purchases allowed). And revenue from leasing land, leasing privileges and if appropriate selling natural resources or short term privileges should be the sole source of government revenue.

      I believe this would provide government with more wealth than it could spend, while vastly reducing the tax, rent, and interest burdens borne by individuals.

  11. Great article. The popular understanding of this issue is very different:

    (2.5 million views)

  12. You contend that the FED reimburses the interest received from the treasuries, and cite two private publications that report this as a practice without public notice, providing a speculative estimate of an 85% return of the interest paid in 2008. Do you contend that there is some sort of gentlemen’s understanding in play?
    Where’s the statute or regulation or policy statement? It’s been on my list to research a proper source since I saw the 2009 Treasury pay-back was reported. Federal Reserve Earned $45 billion in 2009, Washington Post, Jan. 12, 2010. http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html
    This simply reports that the FED gives the Treasury its annual profits, from all lines of business. Nothing specifically about interest on treasuries. Profit is of course very different. The interest on treasuries could conceivably be outweighed by losses; and the FED might have made more profits from buying (say) Chinese securities, which would render the treasury purchases less remunerative to the government.
    Do you suppose that there are two annual government pay-offs, first the interest on treasuries, and then, after this repayment, the FED’s overall earnings (if any). The FED promised full transparency on these transactions, so what’s the rule?
    The closest I’ve come to reconciling the two repayment concepts is from http://www.ny.frb.org/aboutthefed/fedpoint/fed27.html:
    • The Federal Reserve System Open Market Account (SOMA) is a portfolio of U.S. Treasury and Federal Agency securities1, foreign currency investments and reciprocal currency arrangements.
    • At the end of 2008, the domestic securities portfolio held $496 billion in securities outright and $80 billion in repurchase agreements.
    • The foreign currency portfolio held $25 billion in non-dollar assets denominated in euros and yen at the end of 2008.
    • Reciprocal currency arrangements with foreign institutions totaled $554 billion at the end of 2008.
    • Interest on the portfolio provides a large portion of the Fed’s income; nevertheless, the central bank buys and sells securities purely to implement monetary policy and not for profit.
    Other descriptions of SOMA give no support to your perception that QE 2 represents a qualitative change in monetary policy. A $300 billion increase in SOMA’s tresury holdings was part of QE 1, over and above the amount at the end of 2008. QE 2 adds a further $600 billion treasuries, of the same average duration (page 2 of Nov 2-3 minutes) as the existing securities. The Post article notes disappointment that the durations were not longer.
    Clearly, there is a huge wastage in not buying the securities on the (open to everyone else) direct market. It appears that both a commission to primary dealers is paid, plus interest on the money paid, which is de facto borrowed from banks, interest being paid to the banks on reserves created for the purchase. The account mechanics are not clear to me, but the purchasing procedures are fully explained. http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html.
    The statutory purpose of the fund was entirely directed to adjusting bank reserves, so as to adjust commercial lending, any governmental relief being incidental. That governmental relief is in no wise intended follows from the Fed Res Act section 14’s strict reqirement that purchases of US bonds with a duration over 6 months be on the open market.
    The touted purpose of the purchases in this instance is to reduce long-term bond yields, the easing of commercial loans being the goal. But in light of the framing rules, it is clear who primarily, and who only incidentally benefits. Once again, boosting bank reserves is the prime purpose, at rates of interest sufficient for their excess retention; and primary dealer (Goldsacks) accounts receive commisions per the pass-through.
    Yes, the Treasury will be crucially relieved also, and I wholly agree with you that this is very, very good news.
    But I think it falls short of what we both would passionately prefer: money, for the second time in US history, printed by and for the people.

    • Federal Reserve Act Sec 14(b) forbids the Fed from buying federal securities except on the open market (except for certain issues long past). It was instituted supposedly to slow the government up from tapping up the Fed too liberally.

      • I misread the 6 months allowance, you are right. We agree as to the purpose of the open market requirement. Also, in that SOMA’s stated purpose is to create a bank reserves fund for greater control of reserves level, it envisages that it be maintained at a more or less constant level, to be tweaked up or down as a control. (I seem to recollect some sort of proportional limit.)

        As to the profit/interest payments, a specialist law professor on C-SPAN today stated that there has long been a rule that the FED give the Treasury 90% of its profits. I now feel fairly confident that that there is no rule specific to reimbursing interest on treasuries. My best guess is that the confrontation you report probably was the original, sub silento motivator for this 90% profit rule. I think it suits the powers that be not to draw too close attention to what’s really going on here. You can help the government with it’s debt, but only indirectly, and not without giving the banks and brokers a bigger, direct boost.

        (The retention of 10% of profits isn’t exactly consistent with the FED’s disclaimer of concern with profits. It also now has assets greater than those of Exon, GE, and…I’ve forgotten the third one.)

        • Yes and the banker shareholders get a guaranteed annual 6% dividend on their stock. I suppose they count that in “fixed costs” rather than profits.

          • One more irony, re the statutorily compelled use of the “OPEN” market.
            Not only are direct treasury purchases actually open online to the likes of me, but the open market purchase procedure is in fact CLOSED to all but a few of the largest brokers (these are listed), and ONLY “big banks” (not listed) are consulted in the process (as detailed by the FED).

            Finally, I now recollect in full…The collaterizing, foreclosure-process-preserving assets of the FED are currently greater than those of Exon, G.E. and Goldsacks combined.

  13. Will fractional reserve lending by banks multiply QE2 and cause inflation?

  14. So, are cost of living increases in food, gas, energy, medicine, etc., due to speculation? Also, why aren’t wages increasing?

    • Commodity price increases due to speculation (people buying up commodities out of fear the dollar will lose value, causing a market bubble in commodities, and making their fear appear real)

      Wages staying low because all the money is going into commodities, not into labor. Also, off-shoring and a large pool of unemployed people helps corporations keep wages down. And hidden in salary negotiations, the law rent is working: landlords (big companies) charge as much for rent (offer lower salaries) as necessary to keep the workers after-rent wages (offered wages) equal to the after-rent income from working at the edge of cultivation (self-employment in adverse market conditions).

      That law of rent – or its modern equivalent – is a major reason why inflation adjusted wages have held nearly constant for the past 40 years, while worker productivity has steadily climbed.

  15. What happens to the ECBs accrued interest on bond purchases ? – as far as I know the interest gets redistributed to the various sister central banks and not the exchequers in the euro zone.

    Could you please confirm this.

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