QE Forever: The Fed’s Dramatic About-face

“Quantitative easing” was supposed to be an emergency measure. The Federal Reserve “eased” shrinkage in the money supply due to the 2008-09 credit crisis by pumping out trillions of dollars in new bank reserves. After the crisis, the presumption was that the Fed would “normalize” conditions by sopping up the excess reserves through “quantitative tightening” (QT) – raising interest rates and selling the securities it had bought with new reserves back into the market.

The Fed relentlessly pushed on with quantitative tightening through 2018, despite a severe market correction in the fall. In December, Fed Chairman Jerome Powell said that QT would be on “autopilot,” meaning the Fed would continue to raise interest rates and to sell $50 billion monthly in securities until it hit its target. But the market protested loudly to this move, with the Nasdaq Composite Index dropping 22% from its late-summer high.

Worse, defaults on consumer loans were rising. December 2018 was the first time in two years that all loan types and all major metropolitan statistical areas showed a higher default rate month-over-month. Consumer debt – including auto, student and credit card debt – is typically bundled and sold as asset-backed securities similar to the risky mortgage-backed securities that brought down the market in 2008 after the Fed had progressively raised interest rates.

Chairman Powell evidently got the memo. In January, he abruptly changed course and announced that QT would be halted if needed. On February 4th, Mary Daly, president of the Federal Reserve Bank of San Francisco, said they were considering going much further. “You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, one that you would use more readily,” she said. QE and QT would no longer be emergency measures but would be routine tools for managing the money supply. In a February 13th article on Seeking Alpha titled “Quantitative Easing on Demand,” Mark Grant wrote:

If the Fed does decide to pursue this strategy it will be a wholesale change in the way the financial system in the United States operates and I think that very few institutions or people appreciate what is taking place or what it will mean to the markets, all of the markets.

The Problem of Debt Deflation

The Fed is realizing that it cannot bring its balance sheet back to “normal.” It must keep pumping new money into the banking system to avoid a recession. This naturally alarms Fed watchers worried about hyperinflation. But QE need not create unwanted inflation if directed properly. The money spigots just need to be aimed at the debtors rather than the creditor banks. In fact regular injections of new money directly into the economy may be just what the economy needs to escape the boom and bust cycle that has characterized it for two centuries. Mark Grant concluded his article by quoting Abraham Lincoln:

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.

The quote is apparently apocryphal, but the principle still holds: new money needs to be regularly added to the money supply to avoid an overwhelming debt burden and allow the economy to reach its true  productive potential. Regular injections of new money are necessary to avoid something economists fear even more than inflation – the sort of “debt deflation” that took down the economy in the 1930s.

Most money today is created by banks when they make loans. When overextended borrowers pay down old loans without taking out new ones, the money supply “deflates” or shrinks. Demand shrinks with it, and businesses lacking customers close their doors, in the sort of self-feeding death spiral seen in the Great Depression.

As Australian economist Steve Keen observes, today the level of private debt is way too high, and that is why so little lending is occurring. But mainstream economists consider the rate of growth of debt to be irrelevant to macroeconomic policy, because lending is thought to simply redistribute spending power from savers to investors. Conventional economic theory says that banks are merely intermediaries, recirculating existing money rather than creating spending power in their own right. But this is not true, says Prof. Keen. Banks actually create new money when they make loans. He cites the Bank of England, which said in its 2014 quarterly report:

[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. . . .

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

Loans create deposits, and deposits make up the bulk of the money supply. Money today is created by banks as a debt on their balance sheets, and more is always owed back than was created, since the interest claimed by the banks is not created in the original loan. Debt thus grows faster than the money supply. When overextended borrowers quit taking out the new loans needed to repay old loans, the gap widens even further. The result is debt deflation – a debt-induced reduction in the new money needed to stimulate economic activity and growth. Thus the need for injections of new money to fill the gap between debt and the money available to repay it.

However, the money created through QE to date has not gone to the consuming public, where it must go to fill this gap. Rather, it has gone to the banks, which have funneled it into the speculative financialized markets. Nomi Prins calls this “dark money” – the trillions of dollars flowing yearly in and around global stock, bond and derivatives markets generated by central banks when they electronically fabricate money by buying bonds and stocks. She writes, “These dark money flows stretch around the world according to a pattern of power, influence and, of course, wealth for select groups.” She shows graphically that the rise in dark money is directly correlated with the rise in financial markets.

QE has worked to reverse the debts of the banks and to prop up the stock market, but it has not relieved the debts of consumers, businesses or governments; and it is these debts that will trigger the sort of debt deflation that can take the economy down. Keen concludes that “no amount of exhorting banks to ‘Intermediate’ will end the drought in credit growth that is the real cause of The Great Malaise.” The only way to reduce the private debt burden without causing a depression, he says, is a Modern Debt Jubilee or People’s Quantitative Easing.

QE-funded Debt Relief

In antiquity, as Prof. Michael Hudson observes, debts were routinely forgiven when a new ruler took the throne. The rulers and their advisors knew that debt at interest grew faster than the money supply and that debt relief was necessary to avoid economic collapse from an overwhelming debt overhang. Economic growth is arithmetic and can’t keep up with the exponential growth of debt growing at compound interest.

Consumers need that sort of debt relief today, but simply voiding out their debts as was done in antiquity will not work because the debts are not owed to the government. They are owed to banks and private investors who would have to bear the loss. The alternative suggested by Keen and others is to fill the debt gap with a form of QE dropped not into bank reserve accounts but digitally into the bank accounts of the general public. Debtors could then use the money to pay down their debts. In fact Keen says it should go first to pay down debts. Non-debtors would receive a cash injection.

Properly managed, these injections need not create inflation. (See my earlier article here.) Money is created as loans and extinguished when they are paid off, so the money used to pay down debt would be extinguished along with the debt. And the cash injections not used to pay down debt would just help fill the gap between real and potential productivity, allowing demand and supply to rise together, keeping prices stable.

A regular injection of money into personal bank accounts has been called a “universal basic income,” but better would be to call it a “national dividend” – something all citizens are entitled to equally, without regard to economic status or ability to work. It would serve as a safety net for people living paycheck to paycheck, but the larger purpose would be as economic policy to stimulate demand and productivity, keeping the wheels of industry turning.

Money might then indeed become a servant of humanity, transformed from a tool of oppression into a means of securing common prosperity. But first the central bank needs to become a public servant. It needs to be made a public utility, responsive to the needs of the people and the economy.

_______________________________________

This article was first published on Truthdig.com. Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including Web of Debt and The Public Bank Solution. A 13th book titled Banking on the People: Democratizing Finance in the Digital Age is due out soon. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

21 Responses

  1. If you had a public banking system like Bank of North Dakota, would you still have the “national dividend” ? Or is the “universal basic income” or “national dividend” a compromise alternative (better than a poke in the eye) under our current private mega bank economy only?

    • Congress has the authority to create money by deficit spending. The U.S. Treasury is the National public money issuer, via it’s proxy agent, the Federal Reserve Banks which carries out these monetary operations on behalf of the Treasury and Congress.

      Bank of ND is a state public bank. It does not have the same power of money creation as the federal govt. But it can create money to make loans at interest, possibly no interest. The loans can be targeted for community benefit and the interest collected can become income to the state treasury.

  2. Quantitative easing” was supposed to be an emergency measure.

    Well, of of course. The emergency is based on the fact that the free market has not yet returned by adding debt-free medium into circulation, thus letting the Fed off the hook to raise interest rates and purge over-levered debt on the basis of a Yin-Yang model for total liquidity. The Fed has been trying to serve two masters for decades. It can’t go on.

    The Fed is now in wait for the free market to show up. Free market capitalism is a full team event. A Yin with no Yang cannot survive …. but symbiosis is most powerful.

    • No, it would not be “the full team event”. The full team event would be a mixed economy with the criminogenic, parasitic “free market” properly subordinated, IMO. A mixed economy is the only reality, “free market capitalism” being as much of a fantasy as total socialist ownership and control. The question is, what shall the mix be? Should banking be by and for the capitslists, or for the whole economy? Should our “defense” be left to the capitalist death merchants to constantly reap their murderous billion$? Should the sickness and death industry (aka “health”) be allowed to continue to poison and torture us at absurdly high cost and profit for the international capitalist masters?

    • Everything about our banking system is a fraud. Fake price discovery, fake markets, fake fraudulent Wall Street megabanks (Trump even pardoned 5 Wall Street megabanks for massive fraud in 2018).

      Wall Street and Washington are asset-stripping Main Street to pump-up Wall Street. The Pentagon, three-letter-agencies, the UN, World Bank and IMF are asset-stripping the entire world to pay for the massively *criminal* US empire.

      This is not sustainable by any measure. This massive fraud on humanity *must* end. The sooner, the better.

  3. Private debts are definitely THE problem. The ones in the FIRE sector are seemingly fuelling the growth in the economy but they are unrepayable. The sums are enormous, like between $800Trillion and $1.4 Quadrillion[???} but I believe it’s mostly in wagers and insurance deals. These will be written off with out compensation. I agree with Steve Keen that ordinary citizens who are not in debt be compensated with cash injections. These will stimulate the economy and keep it from recession.
    So called “government debt” is where a lot of QE funds are parked. These are investor assets. They cannot pay for government spending because the spend extinguished the debt as it got paid well before the bonds were offered. Also the money belongs to the investors and not the government, even though it is officially its debt being in the Fed’s reserve savings accounts.

  4. posted on 21 February 2019

    QE Forever!

    by Ellen Brown, Web of Debt

    The Fed’s Dramatic About Face

    http://econintersect.com/pages/opinion/opinion.php?post=201902212229

    John B. Lounsbury Ph.D. CFP

    Managing Editor Econintersect.com

    Senior Contributor TheStreet.com

    Highly ranked author Seeking Alpha

    ________________________________

  5. Monetize people, not debt (and now equity).

  6. For those that think there is a shortage of money read every word of theses two lean docs and remember who was president when this transaction took place.
    Why and how does the FEDERAL RESERVE claim ownership of all American people and their land?

    https://yourhandsandlegs.files.wordpress.com/2012/02/doc21.pdf doc 1
    https://yourhandsandlegs.files.wordpress.com/2012/02/doc12.pdf doc 2

  7. Because this statement was mentioned “credit card debt – is typically bundled and sold as asset-backed securities similar to the risky mortgage-backed securities that brought down the market in 2008 after the Fed had progressively raised interest rates”.
    Suppose people knew to ask their bank the following 3 questions and found out they cannot be answered with admitting to their fraud.

    Dear Bankster,
    I need you to –
    1. Produce documentation of prior title, ownership and rights to the money you purportedly loaned me;
    2. Produce documentation of the history and origin of funds that you/principal purportedly had prior title, ownership and rights to that you purportedly loaned me. It’s my comprehension that banking requires 3 generations at least if not all the way back to issuance/creation of the alleged funds and that this is why banks issue a letter of origin/history of funds.
    3. Produce documentation of the actual transaction and transfer of said funds (prior title, ownership, and rights) from loaner to borrower (invoicing/receipts) as there is a difference between a “loan” and “debt”, conceptually and factually.

    What will you do? What should you do?

  8. WITH THE CONDITION OF THE U S POLITIACALY AND ECONOMICALLY THIS WILL NEVER EVER HAPPEN. THE CONTROL OF THE FED AND OF WALL STREET IS A MARRIAGE MADE IN HELL AND WAS DESIGNED TO BE THAT WAY. THE LOCK CERTAIN GROUPS HAVE ON THE SYSTEM HAS BEEN AND WILL CONTINUE TO BE IN THERE CONTROL

  9. Well! Ellen I haven’t read your stuff for a while and it certainly seems you’ve made some interesting adjustments in your thinking.

    Suggestion: Keen (who is a wonderful guy, btw) is an economist. You are a lawyer. The law is the correct mechanism for a jubilee, not some economist magician’s trick like an “injection” of funds.

    Honesty and transparency, doncha know.

    You might have read about my my long ago advocacy of a jubilee constitutional amendment, such as here:

    https://strikelawyer.wordpress.com/2011/01/15/amending-the-constitution-the-jubilee-amendment/

    Had a lot of trouble selling the idea. Plus if you look at the text of the amendment in the post following that it was just way too long.

    I recently had a different idea for a much simpler amendment. I thought it would be difficult for anyone to oppose the fundamental idea behind it – that is, a strong legal, even constitutional, preference for home ownership and a significant restraint upon debt enforcement – but the people who bothered to comment have been generally negative!

    I find that so strange!

    Anyway, here is the text of the much shorter amendment:

    https://strikelawyer.wordpress.com/2019/02/13/homestead-amendment-just-the-text/

    And a little explanation:

    https://strikelawyer.wordpress.com/2019/02/09/homestead-amendment/

    So if you ever get around to reviewing all that I’d be interested to know your thoughts.

    Regards!

  10. […] Ellen Brown Writer, Dandelion Salad The Web of Debt Blog, Feb. 21, 2019 February 24, […]

  11. “debt at interest grows faster than the money supply”- yes because INTEREST IS NEVER ADDED TO THE SYSTEM, BUT IT IS ACCRUED TO THE LOAN AMOUNT…… hence why the system is a defacto Ponzi scheme. Without “net new money growth” the system collapses as profits and savings removes money from the ponzi accounts.

    There is only one solution to this: eliminate federal interest payments on Treasury’s. A UBI (without interest accrual on the treasury’s created to supply it) will help to mitigate or at least soften the debt impact, but a lot of variables on that option.

  12. […] by Ellen Brown, February 21, 2019 The original article may be found here […]

  13. “However, the money created through QE to date has not gone to the consuming public, where it must go to fill this gap. Rather, it has gone to the banks, which have funneled it into the speculative financialized markets.”

    “[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. . . .
    In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

    The ‘banks’ don’t require Q.E. money in order to ‘funnel it into the speculative financialized markets’?

  14. […] di Ellen Brown, 21 febbraio 2019 L’articolo originale si trova qui […]

  15. […] "Fed would “normalize” conditions by sopping up the excess reserves through “quantitative tightening” (QT) – raising interest rates and selling the securities it had bought with new reserves back into the market." https://ellenbrown.com/2019/02/21/qe-forever-the-feds-dramatic-about-face/ […]

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