How the Fed Could Fix the Economy—and Why It Hasn’t

Quantitative easing (QE) is supposed to stimulate the economy by adding money to the money supply, increasing demand. But so far, it hasn’t been working. Why not? Because as practiced for the last two decades, QE does not actually increase the circulating money supply. It merely cleans up the toxic balance sheets of banks. A real “helicopter drop” that puts money into the pockets of consumers and businesses has not yet been tried. Why not?  Another good question . . . .

When Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was not yet chairman of the Federal Reserve.  He said then that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent),” he said, “that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Later in the speech he discussed “a money-financed tax cut,” which he said was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Deflation could be cured, said Professor Friedman, simply by dropping money from helicopters.

It seemed logical enough. If the money supply were insufficient for the needs of trade, the solution was to add money to it. Most of the circulating money supply consists of “bank credit” created by banks when they make loans. When old loans are paid off faster than new loans are taken out (as is happening today), the money supply shrinks. The purpose of QE is to reverse this contraction.

But if debt deflation is so easy to fix, then why have the Fed’s massive attempts to pull this maneuver off failed to revive the economy? And why is Japan still suffering from deflation after 20 years of quantitative easing?

On a technical level, the answer has to do with where the money goes. The widespread belief that QE is flooding the economy with money is a myth. Virtually all of the money it creates simply sits in the reserve accounts of banks.

That is the technical answer, but the motive behind it may be something deeper . . . .

An Asset Swap Is Not a Helicopter Drop

As QE is practiced today, the money created on a computer screen never makes it into the real, producing economy. It goes directly into bank reserve accounts, and it stays there.  Except for the small amount of “vault cash” available for withdrawal from commercial banks, bank reserves do not leave the doors of the central bank.

According to Peter Stella, former head of the Central Banking and Monetary and Foreign Exchange Operations Divisions at the International Monetary Fund:

[B]anks do not lend “reserves”. . . . Whether commercial banks let the reserves they have acquired through QE sit “idle” or lend them out in the internet bank market 10,000 times in one day among themselves, the aggregate reserves at the central bank at the end of that day will be the same.

This point is also stressed in Modern Monetary Theory.  As explained by Prof. Scott Fullwiler:

Banks can’t “do” anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any “fuel” to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its . . . interest rate target.

Reserves are used simply to clear checks between banks. They move from one reserve account to another, but the total money in bank reserve accounts remains unchanged.  Banks can lend their reserves to each other, but they cannot lend them to us.

QE as currently practiced is simply an asset swap. The central bank swaps newly-created dollars for toxic assets clogging the balance sheets of commercial banks. This ploy keeps the banks from going bankrupt, but it does nothing for the balance sheets of federal or local governments, consumers, or businesses.

Central Bank Ignorance or Intentional Sabotage?

Another Look at the Japanese Experience

That brings us to the motive.  Twenty years is a long time to repeat a policy that isn’t working.

UK Professor Richard Werner invented the term quantitative easing when he was advising the Japanese in the 1990s.  He says he had something quite different in mind from the current practice.  He intended for QE to increase the credit available to the real economy.  Today, he says:

[A]ll QE is doing is to help banks increase the liquidity of their portfolios by getting rid of longer-dated slightly less liquid assets and raising cash. . . . Reserve expansion is a standard monetarist policy and required no new label.

Werner contends that the Bank of Japan (BOJ) intentionally sabotaged his proposal, adopting his language but not his policy; and other central banks have taken the same approach since.

In his book Princes of the Yen (2003), Werner maintains that in the 1990s, the BOJ consistently foiled government attempts at creating a recovery. As summarized in a review of the book:

The post-war disappearance of the military triggered a power struggle between the Ministry of Finance and the Bank of Japan for control over the economy.  While the Ministry strove to maintain the controlled economic system that created Japan’s post-war economic miracle, the central bank plotted to break free from the Ministry by reverting to the free markets of the 1920s.

. . . They reckoned that the wartime economic system and the vast legal powers of the Ministry of Finance could only be overthrown if there was a large crisis – one that would be blamed on the ministry.  While observers assumed that all policy-makers have been trying their best to kick-start Japan’s economy over the past decade, the surprising truth is that one key institution did not try hard at all.

Werner contends that the Bank of Japan not only blocked the recovery but actually created the bubble that precipitated the downturn:

[T]hose central bankers who were in charge of the policies that prolonged the recession were the very same people who were responsible for the creation of the bubble. . . . [They] ordered the banks to expand their lending aggressively during the 1980s.  In 1989, [they] suddenly tightened their credit controls, thus bringing down the house of cards that they had built up before. . . .

With banks paralysed by bad debts, the central bank held the key to a recovery: only it could step in and create more credit.  It failed to do so, and hence the recession continued for years.  Thanks to the long recession, the Ministry of Finance was broken up and lost its powers. The Bank of Japan became independent and its power has now become legal.

In the US, too, the central bank holds the key to recovery. Only it can create more credit for the broad economy. But reversing recession has taken a backseat to resuscitating zombie banks, maintaining the feudal dominion of a private financial oligarchy.

In Japan, interestingly, all that may be changing with the election of a new administration. As reported in a January 2013 article in Business Week:

Shinzo Abe and the Liberal Democratic Party swept back into power in mid-December by promising a high-octane mix of monetary and fiscal policies to pull Japan out of its two-decade run of economic misery. To get there, Prime Minister Abe is threatening a hostile takeover of the Bank of Japan, the nation’s central bank. The terms of surrender may go something like this: Unless the BOJ agrees to a 2 percent inflation target and expands its current government bond-buying operation, the ruling LDP might push a new central bank charter through the Japanese Diet. That charter would greatly diminish the BOJ’s independence to set monetary policy and allow the prime minister to sack its governor.

From Bankers’ Bank to Government Bank

Making the central bank serve the interests of the government and the people is not a new idea. Prof. Tim Canova points out that central banks have only recently been declared independent of government:

[I]ndependence has really come to mean a central bank that has been captured by Wall Street interests, very large banking interests.  It might be independent of the politicians, but it doesn’t mean it is a neutral arbiter.  During the Great Depression and coming out of it, the Fed took its cues from Congress.  Throughout the entire 1940s, the Federal Reserve as a practical matter was not independent. It took its marching orders from the White House and the Treasury—and it was the most successful decade in American economic history.

To free the central bank from Wall Street capture, Congress or the president could follow the lead of Shinzo Abe and threaten a hostile takeover of the Fed unless it directs its credit firehose into the real economy. The unlimited, near-zero-interest credit line made available to banks needs to be made available to federal and local governments.

When a similar suggestion was made to Ben Bernanke in January 2011, however, he said he lacked the authority to comply. If that was what Congress wanted, he said, it would have to change the Federal Reserve Act.

And that is what may need to be done—rewrite the Federal Reserve Act to serve the interests of the economy and the people.

Webster Tarpley observes that the Fed advanced $27 trillion to financial institutions through the TAF (Term Asset Facility), the TALF (Term Asset-backed Securities Loan Facility), and similar facilities. He proposes an Infrastructure Facility extending credit on the same terms to state and local governments. It might offer to buy $3 trillion in 100-year, zero-coupon bonds, the minimum currently needed to rebuild the nation’s infrastructure. The collateral backing these bonds would be sounder than the commercial paper of zombie banks, since it would consist of the roads, bridges, and other tangible infrastructure built with the loans. If the bond issuers defaulted, the Fed would get the infrastructure.

Quantitative easing as practiced today is not designed to serve the real economy. It is designed to serve bankers who create money as debt and rent it out for a fee. The money power needs to be restored to the people and the government, but we need an executive and legislature willing to stand up to the banks. A popular movement could give them the backbone.  In the meantime, states could set up their own banks, which could leverage the state’s massive capital and revenue base into credit for the local economy.

______________

Ellen Brown is an attorney and president of the Public Banking Institute.  In Web of Debt, her latest of eleven books, she shows how a private, privileged banking oligarchy has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.  The Public Banking Institute is hosting a conference June 2-4, 2013, in San Rafael, CA; details here.

57 Responses

  1. […] Ellen Brown Web of Debt […]

  2. On target once again, Ellen. All this ‘money’ was just to save the banks (& put the country deeper in debt to the money-lenders).
    It also gives the Big Banks ‘funds’ to fuel speculation in the stock market & derivative speculation to make their ‘income’ look great so the bankers can ‘justify’ awarding themselves more big bonuses.
    Time for a real national bank to put money into the real economy – at NO interest.

  3. “The money power needs to be restored to the people and the government, but we need an executive and legislature willing to stand up to the banks.”
    Being as the executive and legislative machinery have been “capitalized” by Wall Street banks it’s hard to imagine why they would be motivated to stand against “the hand that feeds them”.

    The only thing I can see moving elected officials in that direction would be a greater fear of the People. As it is, The People are totally neutered because they’re being mis-informed by (you guessed it) the same Wall Street interests that corrupt the government.

    Until the conflicts of interest between public and private bureaucracies is resolved, how can state banks compete?

    What would prevent state banks being equally corrupted by money-power?

    In other words; how can you keep the money out of politics and the politicians out of the banks without a firewall making it a felony to play footsie with each other?

    Ultimately; what gives states the legal authority to force private central banks out the greater economy? ( “Corporatioons are people too my friend”. )

    There will be challenges, and I think they can only be overcome with an amendment to the US Constitution.

  4. Ellen Brown, you say that “the widespread belief that QE is flooding the economy with money is a myth. Virtually all the money it creates simply sits in the reserve accounts of the Banks” (at the Fed?)
    Presumably, this is the only reason that the Banks are still able to function.(ie daily settlements)
    I had assumed that the $85Billion per month would be used to gradually eliminate the Banks bad debts, which must be at a horrendous level, given the “meltdown of 2008”. You say “reserves are used simply to clear checks between banks”. If that is the case why is QE 3 referred to as QE infinity? (How long will this be kept going?)

    At some time in the future the Banks are going to have to deal with their Bad Debts problem. Where will the money come from to do so?
    I understand that normal accounting practices have been ‘suspended’ regarding the Banking industry. Does anyone know what the Banks REAL situation is?
    Finally, if the Banks financial position is so precarious (Insolvent?) wouldn’t this be the perfect time for the government to take the Banking system back from the Fed, and return it to Treasury?

  5. JUSTALUCKYFOOL– “QE 4 The People” and even “QE 4 Disaster Relief” No change is needed for the feds TO PURCHASE assets, that would be STATE 36 Year Bonds for as much as needed with a rate of 0.25%. If $1 trillion per state were available that would be a stimulus of $50 trillion with NO DEFICIT SPENDING and the money being returned at a profit to the US Treasury at @ $1.5 trillion a year.
    MAY GOD CONTINUE TO BLESS UNINTENDED CONSEQUENCES, THEY MAY REALLY JUST BE MANKIND’S INNOVATIONS.

    Read more: http://bit.ly/MlQWNs

    And please, please Ellen Brown keep on trying to lead us all to help our government “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,”

  6. […] How the Fed Could Fix the Economy—and Why It Hasn’t | WEB OF DEBT BLOG. […]

  7. If I were President, I would simply stop the Treasury from rolling over the securities at the Fed. I would pay the 6% of the interest transaction fee on every security bought by the Fed–it’s in the law. But by stopping rolling over each security held by the Fed (some $2+ Trillion worth), I save on all those transaction fees. The Fed keeps buying up the securities from banks used to roll over the old with new.
    Just tell the Fed that they have already redeemed the debt on all those securities by buying them with money it creates out of thin air. And they are an agent of the government buying them with government created money. The Treasury says its securities are “backed by the full faith and credit of the government”. Well an agency of government has redeemed them. And Bernanke says that the Fed is an agency of the government. So, the claim that they are owed the value of the securities they hold is as invalid as the claim of a bank clerk to be paid the value of all the securities it has bought from bank customers for the bank with bank money. So, there really is no debt at the Fed in all those securities it has bought. Now, how do we get the Fed and the President to recognize this, and stop this Emperor’s New Clothes that says there is a national debt? How do we force them into court?

  8. if the fed printed money for the purpose of creating jobs (rebuilding infrastructure, public works..) it would create inflation, causing interest rates to rise which would tank the real estate and bond markets. the fed is trying to save the banks and wall street (pensions, endowments, portfolios). it doesn’t care about the average person.

    • It wouldn’t be inflationary if at the same time we eliminated fractional reserve banking.

      I think the best way to go about it would be to have some govt entity buy up all the outstanding primary mortgages. Then refinance them all automatically, cut principal (.75% for every remaining year on mortgage, so up to about 20%) and use a low interest rate of say 3%. The entity would end up getting paid back 30-40% more than they paid in, even at face value. So consumers win with lower principal, lower payments, and lower taxes because these profits would go toward reducing the national debt. .End this particular program in 30 years as the last payment is made.

      This would give every homeowner a few hundred dollars a month to spend in the economy and allow more flexibility for workers to relocate where they are needed. The ‘new” mortgage would have to ‘stay” with the house or be bought out at closing (at a premium). I.E. the entity gets their money back one way or another.

      The fed is kind of doing this by buying $85 billion in MBS’s each month, but they don’t appear to have homeowner aid in the plans. Fed earnings a are suppose to drip down to the Treasury so maybe the way out of our govt debt is for them to own all the debt and use the interest to slowly pay it down? The is no signal though that benevolence in in their plans.

      Going forward let the social security fund make the primary home loans. This way they can earn a legitimate return rather than relying on tax payer paid interest to provide benefits.

      Banks can continue to act as intermediaries for origination and as servicers of the loan portfolio’s. Non- primary loans would still be fair game as well. Though they could only loan 90% of their capital and deposits under the money printing plan.

      This all would be a great kick start to fix our ails after we got over the shock of dismantling the banker’s power. .

  9. I regret to say that no one who works for the government ever gets arrested and convicted, but I sure would like to see Ben Bernanke in jail.

  10. Dear Dr. Brown: As always, your articles hit the nail in the head.- Americans need to organize around some common 20-points program
    of general appeal and go ahead with a new political force.- Learning from past mistakes should be very helpful in not focusing on single grievances or temporary policies (Wallace,Perot, Tea Party, Paul) but going into a structural reshaping of baselines, to put it in simple words: a christian middle-class constitution.-

  11. The reserves are shoring up “Levered” “Stacked” “Fractional” “Derivatives” created from debt to insulate the whole system from collapse. The normal inflation from the fractional lending scheme has been shut off because it is un-steerable and non-directional and benefits a growing expanding economy. The “direct printing” of money scheme is being utilized because it can be steered and it’s direction pre-determined by the ones printing it. The freshly printed dollars are directly focused to the balance sheets of institutions, to shore up the generational wealth that is stacked fractional derivatives. If one of these pillars holding up the compounded debt fails, it all fails.
    If both of the money creation schemes above were utilized at the same time there would be so much inflation created, to fast, that it would render the dollar worthless within weeks. The expansion of jobs and an expanding economy is being put on hold, while they try and print the illusion back to solvency.

  12. I didn’t read this article. All I know based on solid economic theory is give money to people who don’t have it and the economy will thrive.

  13. […] Ellen Brown Featured Writer Dandelion Salad webofdebt.com February 24, […]

  14. It is all just a form of fraud upon the poor. Government-issued credit and currency could solve all monetary problems instantly if only the money and credit went to those who need it. America and Capitalism are frauds and everyone knows it.

  15. Look up One Peoples Public Trust – OPPT – The Fed is dead..

  16. If the government can subsidies everything else they can do it with fuel. If gasoline were to drop to $2 a gallon right now the economy would take off. People could afford to go places and they could afford to ship things. Everythiing increases in price, because of fuel.

  17. I certainly appreciate what you are saying and I agree to a certain extent. But the Fed cannot fix the economy. Public money and public banking can fix the economy. Not public banking like North Dakota either. Or the current Fed monetizing debt or printing money for public works. True public, democratic banking that encourages democratic economics and human development. Anything less perpetuates systemic injustices. Peace.

  18. You are advised to read all of Ellen’s work carefully. Ignore the topical political drama and understand the system. The fed act gave the power to the money center banks “officially.” They were running it the whole time.

    Making money “free” would be fine except you need to learn the current system, and it’s intent first. The world’s currency system is controlled by the network of privately owned central banks. They didn’t just arrive willy nilly, they were put in place with intent. Taxes exist for a reason, mortgages exist for a reason. Learn why. As we have learned from Ellen, technically taxes don’t need to exist. Money is created with digital book keeping. The government owns the right to “digitally create money” and they do with “supervision” from the NY banks that own the fed.

    A long term thought would be to create money at a state level, as proposed here. Here’s the rub, if you give the folks of Texas the right to create all the money they want, what will happen? Well?

    Our slow economy will not improve until the banking system has something to monetize. As we know, the helicopter system would not work in practice. The principal “monetization target” is real estate obviously.

    If you study the chart of the most recent realty bubble, you will easily see that it hasn’t “blown off” the effects of ridiculous spike yet. In about three years things should be more stable and the controlled inflation of the money supply will continue at a more comfortable pace and our economy can “grow.”

    It should be simple to understand that when you jam 25 years of real estate price growth into 10 years there is a price to pay and we are paying it with the current lack of liquidity.

    Yes the bankers are evil. They create bubbles supposedly, for no reason and then we all suffer the consequences. Study the crash of ’29. Any ding dong could walk into Merrill Lynch and plunk down $100 and buy $1000 dollars worth of RCA or whatever. If you look at the chart it was a ridiculous bubble only challenged by the 1998 Nasdaq spike.

    The similarities of the three bubbles discussed here? All driven by credit. Who drives the credit? The banks. The mortgage brokers were getting loans for people who were, well, broke and the banks were approving them. In 1997, Morgan Stanley brokerage would give anyone with a $10,000 stock account another $20,000 in margin credit…because the bank approved it and so on.

    It is not some hidden secret. It is all right in front of us. I think it would be great to allow the creation of money at a state level, just how in the heck are we going to control it. With no control, there will be an economic disaster. Can you imagine a state senator being given the power to buy all of the votes he wants? Horror movie of the century.

    I suggest more people understanding our money system and fully “commoditzing” it. Like water or electric power. Each state or economic region could manage liquidity and end this entirely weird/unexplainable bubble machine the NY banks have been riding us with for the last 100+ years.

    No doc loans? You didn’t have to prove your ability to repay? What?! I would like to know why the banks decided, in the midst of the realty bubble, to “suddenly” require solid credit on mortgage applications after ten years of granting mortgages to cab drivers and single mothers. Of course the whole thing collapsed.

    Do you understand margin credit from a stock broker? No wonder the market tanks. Read Ellen carefully. Learn the system. You cannot just eliminate it. First an effective system must be ready to fill the vacuum created by the end of the old system.

    • I think you can “create” the money, but you need to do so at a national level rather than on a state level. You would also need international cooperation. To qualify a sponsored currency could only be issued by countries or unions which were able to be almost totally self sufficient. The US could go it alone. Likewise the Euro region, Russia, maybe China, everyone would else would have to partner up or have their currency value decided by the whim of these others. How much you printed would be some function of your national productivity. If you exceed that your currency gets weaker, issue less and your currency gets stronger. In ways like the current system, but no govt debt to strangle us and no differences in value fro common production. I.E. production is measured in units rather than currency value.

      With proper planning this could be transitioned with very minimal pains.

  19. Right on, the Fed COULD fix the economy. But as Ellen points out, the money created never makes it to the 99% in the REAL ECONOMY. What we have now is a system that keeps the Fed and the private banks in business and prevents them from bankruptcy, and NEVER helps “We The People”.
    The Fed and the Private Behemoths are nothing but Banksters, Vampire Squids, Kleptocratic Larcenists (to borrow Max Keiser’s great new epithet) and also ZOMBIES. This central private banking system has taken control, precipitates artificial crises ( comfort zone of disaster capitalism), scares us into thinking that they can collapse the system, and then has the gall to try to make us believe that they alone can save us. Haven’t we seen enough of this B$$llS###t. It is a really bad movie. Can’t we turn it off?
    Yes, we can, but no they won’t until we make them. It seems that FDR was the only president in modern times to have the cajones to tell this “financial roller coaster euthanasia machine” (again, M. Keiser) to stuff it. The Glass Steagall Act was good because it created a firewall between the commercial banks and the investment banks, and it regulated the banks. FDR called their bluff, and he was one of our most popular presidents. The President and the Congress CAN do it. We KNOW they can.
    Back to the beginning of our history as a country, the wealthy central bankers have always tried to block any attempts from government or anyone else to recover the money and bring it back into the economy. Right now they are at it again, making the giant sucking sound, and sucking all the money out of our economy. It is really a ZOMBIE economy.
    The President, the Congress, or We The People CAN do it. We can rewrite the Federal Reserve Act, restore Glass Steagall, set up a firewall between commercial and investment banks, REGULATE all the bastidges, and very importantly, create public state, city, local, and municipal banks. We CAN, but WILL we?

    • YES WE CAN: The President, the Congress, or We The People CAN do it. ”
      We need only “QE4 The People” or like in “QE 4 Disaster Relief”

      Ben Bernanke has proven “QE” can purchase ALL assets without restraint and without ‘deficit spending. He would deserve the Noble Prize for Economic Sciences IT he were to “QE 4 The PEOPLE”.
      ONE SIMPLE ACTION: Rather than 4 the banks, do it for the people.
      ” “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” — Ludwig von Mises . BUT there is Great News;Zero Income Taxes Solves Worldwide Economic Crises ! THE MEANS OF AVOIDING THE FINAL COLLAPSE !
      QE capitalize all banks at 100%. Make them BORROW at 2% for 36 years OR put them in receivership; they are insolvent.
      Back the credit with 100% of borrowed dollars,allowing the financial institutions to de-leverage at a cost of 2% for 36 years.Prevent collapse and at the same time serve a new master-“We The People” THE PEOPLE’ S CHOICE: Total catastrophe or ZERO Income Taxes. When will we show our leaders, (as stated on ” 60 minutes” (12/11/11)” President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ? YES, JUST COLLECT INTEREST ON OUR OWN MONEY, INSTEAD OF TAXES !
      Read more: http://bit.ly/MlQWNs

  20. ” In the US, too, the central bank holds the key to recovery. Only it can create more credit for the broad economy. But reversing recession has taken a backseat to resuscitating zombie banks, maintaining the feudal dominion of a private financial oligarchy. ”

    You go girl !!!!!

  21. While there are short term benefits to be had by shifting money around, and taking it out of the hands of those whose financial credentials are at best dubious, it loses sight of what got us into this mess in the first place.
    Civilisation is always based on a debt based economy: I do work based on your promise to pay me.
    that idea worked for thousands of years, until somebody invented the steam engine. After that ‘work’ took on a whole new meaning, because the ‘work’ of one man was leveraged hundreds of times by releasing the energy in coal.
    But we still used the ‘promise’ system of payment.
    Thus the work of one steam engine provided collateral on a gigantic scale, and as a result debts got bigger and bigger because they could always be financed by surpluses of more and more oil coal and gas. (extracted by the steam engine digging deeper mines and oilwells)
    That’s what created our modern industrial economy, as opposed to the agrarian one that existed up to 1800
    Our economy is supported and driven by energy, not money, No matter how much money you pass around, unless it is backed up by energy, it has no value, spending and respending the same volumes of cash merely reduces its value over time.
    Our economy is a dynamic of (cheap) energy extraction, the more we have, the richer we become. Unfortunately energy is costing more to extract, and we can’t afford to run our industries by burning fuel anymore. This is happening in different places at different rates–but the effect will be the same.
    Without surplus energy, we do not have an economy

  22. Quantitative easing adds NO money to the money supply. It only adds to excess reserves, which are not part of the money supply. I know people think they are adding money and they fear inflation, but they have not added a cent to the money supply. I think the Fed prefers people think they are adding money so they worry about inflation and spend money now. But, QE is not inflationary. It fact, it is deflationary biased because it removes interest income from the private sector.

  23. >>”They move from one reserve account to another, but the total money in bank reserve accounts remains unchanged. Banks can lend their reserves to each other, but they cannot lend them to us.”

    This is not true. Banks can lend to people. But since people tend to keep money in bank accounts, rather than withdrawing cash, the reserves end up merely getting shifted from one reserve account to another.

    But that doesn’t matter, the money can circulate through the bank accounts of many people, and there can be real economic activity going on.

    However, if the Fed gives the banks interest on reserves, which it does, then banks may prefer to keep their money sitting in reserve accounts rather than lending it and putting to work. This is what tends to happen.

    So Ellen’s complaint is partly justified, but she does not seem to understand how they system works.

    • Nope, it’s you who doesn’t understand. Do a search on MMT and vertical versus horizontal transactions and maybe you’ll get it.

  24. @EllenBrown,
    Please note,ErnieM, since you mentioned “Vertical and Horizontal” transactions (money); believe it or not you have mentioned “How The Private For Profit Banks (PFPB) have been able to ‘suck the wealth out of the economy and create the massive gaps in equality.
    Ellen Brown, please check and verifiy.
    The PFPB use what Soddy calls “fictitious lending, which is called “horizontal money” by MMTers, they use that money to make gains of double,yes even quadruple amounts of REAL MONEY.
    The PFPB are legally allowed to TAX this temporary money by charging compound interest on that created out of thin air money thereby raising revenue (profits) for themselves and their group.
    PROOF:
    If the TBTF banks had $100 trillion of loans on the books in 2005, loans just on real estate,residential and commercial, and the average percentage were 6% for an average of 30 years, what would be the end result for the distribution of real money (Money that is issued by the FEDS or US Treasury) ?
    Answer: It would be for the PFPB ,”Heads we win, Tails you lose”.
    Here’s why.
    Of the $100 trillion in loans based upon 2005 regulation the PFPB need only $10 trillion in deposits to be at a pure 10% reserve.
    I’m being nice and not even using the fact that they as quoted by Paulson and Bernanke in 2005 “may be leverage at 30 times or more” (This would be like saying that at a leverage of 10 the PFPB have only $1 trillion in deposits.)
    But ,Friends,what does that really matter? It isn’t even their money needed. They do not OWN their deposits. Deposits are ‘ Other Peoples Money’ put in trust for storage and future usage.
    Bottom line: The PFPB in 2005 had $100 trillion worth of loans (assets)on their books backed by maybe $1 trillion of other peoples money.
    Why do the PFPB say “Heads we win”?
    $100 trillion in loans becomes an asset of over $500 trillion if it is at an average of 6% for 30 years.
    They have taken $100 trillion of “horizontal money”(Fictitious money)(temporary money created out of thin air) into $500 trillion. IF THE NOTES ARE PAID, they must subtract the $100 trillion from their books because they must erase the original asset, since it is now reduced to zero.
    “HEADS WE WIN”, the PFPB get to keep the suckers payments of real money, not the phoney money used, yes the real base currency of $400 trillion.
    How long would it take for inequality to go to such an extreme as to have 1% of the people to own “all the riches of the planet and still be owed more?
    Please, challenge, improve.
    I will reply with : Why the PFPB say, “Tails you lose”

    “WE THE PEOPLE MUST TAKE BACK OUR MONETARY SOVEREIGNTY, OR SURELY WE SHALL PERISH” !

  25. This is such a great article!

    Let the Kleptocratic Larcenists (Max Keiser’s elegant epithet) fail. Break up the behemoth banks. Let’s not subsidize them! They are not too big to fail or jail. Create smaller banks and more competition.
    The gargantuan banks are strangling the life out of us, and are nothing but greedy vampire squid zombies who want to make us their slaves.

    The President, the Congress, and We the People can do this. FDR stood up to these Fascists, and we can too. We must, while there is still a planet left. The Private Central Banking Club that is the Fed, and Wall Street, and the revolving door lobbyists and megacorporations want to Sequester us even more? How dare they! We can’t let them do it.

  26. “QE 4 The People”
    Justaluckyfool says, “Just one major flaw. The government may not create the infinite amount of currency needed to pay back that debt because it is constrained by inflation and moral hazard which would cause self destruction. The government can not win against ‘compound interest’ on debt for that can be infinite in amount. IF ‘compound interest were eliminated then there would be no “systemic failure”. Or better yet; take that most powerful weapon, use it for the people . Let’s try this game: Substitute the words “Central Bank Working For The People” (CBWFTP) where ever” Private For Profit Banks” (PFPB) appears.****PFPB have $100 trillion in assets as mortgages on residential and commercial real property (RE) loans. The average compound interest rate is 4% for a term of 36 years. The PFPB would have created that $100 trillion ‘out of thin air’ (Horizontal Money) which would have an attachment that would require $800 trillion to be paid to the PFPB. YES, take away the smoke and mirrors, this is a fact-the Rule of 72. Now we must replace (reduce to zero ) the Horizontal Money by subtracting $100 trillion leaving a profit,income,taxation from ‘somewhere else’ of $700 trillion. This amount goes as profits to the PFPB. Revenue they may use for their own selfish purposes. That’s not the bad news-what the bad news is :That $700 trillion is real money, real currency, sucked up by the PFPB,yes Vertical Money !! NOW I DARE YOU TO READ IT AGAIN, BUT THIS TIME REPLACE “PFPB” WITH “CBWFTP”. Why would you not want prosperity for yourselves and your children? Why would you not want $700 trillion THAT MUST BE PLACED BACK INTO THE ECONOMY IN ORDER THE PREVENT DEFLATION !
    *********************
    MAYBE,JUST MAYBE, PERHAPS ECONOMIST ARE BEGINNING TO GET IT !!
    ****************
    Amazing that Adair Turner is suggesting Quantitative Easing for the People not for banks.http://t.co/P2o6J8ux9m Copying @ProfSteveKeen?
    Adair Turner recommends Quantitative Easing for the People
    neweconomics.net.nz
    A breakthrough speech on Monetary policy by journalist and financial economist Anatole Kaletsky was published by

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