Agree. Not sure I'm convinced with Steven Van Metre's argument that QE pulls out liquidity from the market.

The Lords of Finance is good.

This is a great book to understand why and what the Feds existence is for. It's great on audible too.

Started that book. It has a very biased perspective in my opinion. Picked up on inaccuracies as I got into it. Google book reviews before you spend a lot of time on it. Better to read "Lords of Finance" which was brought up in the interview today.

Not only did i buy and read it but i then bought a dozen copies to get my friends and family to read it. Also read the Lords of Finance - interesting but not as riveting.

Fed

I was about to say US Mint, but that’s coins. Probably this https://moneyfactory.gov/

Money (credit) is created by Banks creating loans

It drains collateral (bonds) but adds to the monetary base, which is the "high powered-money" that the system uses to create bank deposits - the more reserves the more potential bank deposit growth (depending on demand for new debt). What I think many miss is the fact that the bonds the Fed buys in QE represents earlier government deficit spending - that liquidity remains in the system but the debt instrument issued to fund the deficit spending has now become part of the monetary base. Once upon a time, gold was the monetary base - now it's social security payments (among other Federal liabilities).

William, RV covers both sides of the Inflation/Deflation debate and puzzle, however you look at it. This guy (george gammon) sums up the differences in views really well, IMHO. Hope it helps. https://www.youtube.com/watch?v=oLhO7tIAtoY

Ok, fine. I've heard this from Peter Schiff as well. By definition printing is inflationary. But they're not printing, they're performing an asset swap. Reserves for US Treasury securities, government agency securities and mortgage backed securities. So, is it inflationary then? Even so, let us say it is, by definition, inflation. Well, that's not the inflation that the greater population is referring to. That one? The one whereby the price of goods and services increases because there is a tide of money flooding the global economy? That's not happening. Not for the last 13 years at least (present day supply shocks and demand surges exempted; nothing pervasive or persistent). Hot Sauce!!!!!!!!!

Jonathan, you need to listen to the interview again and check some other videos - George Gammon for example. Emil, say Hi to Jeff :)

That million would not buy Brent Johnson's house!

Nicely said!

With respect, the Fed is not currently buying photos from citizens as part of their QE operations. They are buying Treasuries from Banks. Those banks have their bank accounts at the Fed. And that is where the Fed places the credits when doing QE. These credits cannot be withdrawn. Thank you very much for listening.

they can be withdrawn in cash

The following document by the St Louis Fed may be helpful. It's a great summary, but you can skip straight to the section Examples of Open Market Operations, "When the Trading Desk purchases government securities, such as Treasury bonds, the Fed deposits funds into the bank accounts of the sellers." https://www.stlouisfed.org/open-vault/2019/august/open-market-operations-monetary-policy-tools-explained The mechanism of banks posted reserves overnight with the Fed is a different system. Obviously the Fed doesn't buy photographs. I liked the example though as if I had have used a Treasury security instead, it may have raised other questions in the readers mind, such as the TGA, taxation, or government spending. A photograph is a new real asset created only with my labour, and hence doesn't have the complications of a Treasury, MBS, or gov-backed corporate debt. Hence a nice example. Central banks, through open market operations, can and do buy real assets, for example gold.

Just a quick note too that I did actually enjoy Steve's interview. I gave it the thumbs up, but I do think the erroneous part should have been edited out :)

This is how the Fed explains QE, it exactly how Steve has explained it. https://www.stlouisfed.org/open-vault/2019/august/open-market-operations-monetary-policy-tools-explained

For the record this made me feel gross, like I need a shower now to wash this milkshake off me

I'd love to hear the specific answer to this, since I've also asked it. I surmise that the answer will be "Government spending is largely unproductive." That is, they spend it but the system is still over leveraged, and barely any of the banks loans (or they don't lend) go to things that are productive. Another nuance might be that most government workers are older and they just hoard, and that's where most government spending goes to ... old workers and their pensions.

He's talking about QE being deflationary. It boosts the assets prices higher by lowering supply. The banks get paid in dollars that cannot move (0 velocity). For holding those reserves the member banks get paid dividend by the Fed, I think about 6%.

Our question regards YOY government spending via more debt. Is it just a trade with "money" pulled from member banks (economic potential) and then shelved, so it's a decrease in the money supply technical, to government spending which is directed and inefficient?

How do you know that it does? Couldn’t it be pension funds, savers or non-US

It's actually very simple. Because everyone believes it inflates it. They act accordingly. Momentum is created. Momentum begets more momentum and it actually changes things in the economy. The Fed's put the biggest poker face by lying and the market believes it! It's incredible!

I must have rewinded 4 or 5 times to listen to it over and over and think about this. This stuff makes sense. Finally!

Quick update: I am still unsure of the answers to the reserve account questions I raised above. However, Brent clarified on Twitter that he isn't saying QE is *never* inflationary; it just needs the commercial banks to lend to create inflation, which shows no signs of happening now. To which I would agree.

Indeed! Sounds like it's the Swiss National Bank!!! And obviously the government's checks... !!! What's the real data on them and all those Robinhood accounts last 6 months??

Too early. How about bailing out Wall St buddies?

Nice example, so on the bank’s balance sheet the investor’s deposit is the bank’s liability. The bank’s asset is the $100k in reserves. In aggregate, the banking system will always have that reserve (which has to be funded), until the Fed changes it/allows it to change.

Hi Charles, sorry but I don't follow the accounting here, nor can I see how steps 4 and 5 are equivalent to how a bank makes a loan. 1. When the bank buys the T-bond from the investor the entries must be (to the bank) Dr Bond Cr Cash If the investor is also a depositor at the bank then the 'net' effective entries would be (to the bank) Dr Bond Cr Customer deposits 2. When the bank sells the T-bond to the Fed, the entries are (to the bank) Dr. Reserve account with Fed Cr. Bond So after the two entries the bank has undertaken (buying then selling the bond), the bank has either - Increased its reserve account with the Fed, funded by its own cash, OR - Increased its reserve account with the Fed, funded by a customer deposit (if the investor is a depositor with the bank) What am I missing?

Hi Romesh, I probabbly over simplified it. First I assumed the investor had an account at the bank. Also to be clear the federal reserve system, it's ledger, is completely separate from the bank's internal ledger. I believe it would be more like the following: At the conclusion of the transaction the banks lending department accounts would look like this: asset account: would show the increase in the banks reserve deposit at the fed. (This is not actual money but the estimated value of the deposit. Think of it like a car title from a loan. ) liability account: $100k to the banks trading department. The trading departments accounts would look like this: liability account would include $100k in the investors name + $100k owed to the lending department asset account would include the $100k on deposit + $100k received from the lending department. As you can probably tell I am not an accountant just a student of markets and finance. My first reaction to Brent and Steven's interview was that I disagreed with them. However I think it may be more semantics. Here is what I took away from their discussion + a little bit of my own opinion. 1. All else equal, falling interest rates signal decreased demand for loans and rising interest rates signal increased demand for loans. 2. All else equal, increased loans are inflationary because it puts more money in the system. 3. All else equal, the level of demand for loans increases as rates decrease. For example for the same monthly payment you can have a larger home loan when rates are at 3% vs 5%. 4. QE manipulates markets to pull interest rates lower than their natural level. 5. The lower rates create additional demand for loans. However it is a one time increase. (QE is initially inflationary.) 6. QE causes banks loan margins to contract below their natural level. 7. Over time banks compensate for the lower loan margins by raising credit standards to reduce their loan losses. 8. Once the influence of 7. exceeds 5. QE becomes deflationary and the process is self reinforcing.

The reserve deposits the Fed has created can be used by the banks to fund themselves) & the banks can lend them into the real economy if there was demand - there is no demand. In that scenario the Fed thinks it will control the high powered money by paying Interest on Excess Reserves in ever higher interest rates directly to the banks (to do nothing) Pre-GFC the Fed's balance sheet was ~$800bn US Government t-bills (Assets) ; Liabilities were Federal Reserve Notes in form of cash + Equity. Bernanke ballooned the Fed balance sheet to support debt assets that the Fed considered "money good" - Fannie/Freddie MBS (and expanded the loan limits) & Bernanke promised that the Fed would allow those asset to mature. Jeff Gundlach 10 years ago said QE is not inflationary because The Federal Reserve is buying paper (debt) representing money that was already spent. In April 2011 in his Deja Vu presentation - Gundlach laid out that people were confused because QE increased US government yields because money would flow out of US govies & into riskier paper & instruments (so long as the market believed the Fed would continue QE) ; as soon as QE ends then risk spreads begin to widen & money flows back into US Govt paper & rates begin to fall again (signaling deflation) The game is up when the Federal Reserve Act gets amended to allow financing of state & local governments directly (the Fed has started buying some debt already e.g. Illinois on a "temporary basis"), but a bill has been sitting in the Congress courtesy of Senator Robert Menendez since March 20th to make the changes permanent here: https://www.congress.gov/bill/116th-congress/senate-bill/3550/text?r=24&s=8

Peter P. - Thanks. Good comment. DLS

I've done till the end. it was wrong at the beginning but by the end it becomes just unbearable. I even had to check if it's still RV, or I was watching kind of "how the world really works" youtube channel.

i surely don't know anything about the subject, but how can these guy be so wrong, as well as Raoul, whom i'd assume reviews so that wrong info isn't being released..

If Steve and Brent are wrong on how the money system works then Dr Lacey Hunt and Jeff Snider are also wrong. Dr Hunt and Jeff say exactly the same thing about how QE works. As Jeff Snider said "if you think QE is money printing then you don't understand QE". Dr Hunt has said in many interviews that QE is not money printing. The Federal reserve cannot create legal tender money, only the banks can create new money by creating new loans.

@Matthew I'm not sold on your final conclusion. You've re-iterated the idea that QE is not money printing, yet it is, because money "goes" into financial assets/stocks. Jeff Snider would counter that by saying no, swapping bank reserves for bonds hasn't resulted in a "doubling" of bank balance sheet assets, and it hasn't encouraged banks to "double" the number of loans they make to hedge funds and investment banks. The Fed, through Open Market Operations, transacts with Primary Dealers simply to buy bonds. It doesn't set out to credit the account of Aviva (using your example) to specifically take bonds off Aviva's hands so Aviva can then buy stocks or other assets. Jeff Snider says rather, that QE is a form of theatre, or puppet show, for finance industry professionals and for portfolio managers. The message says "act now, because inflation is coming, we're going to let the printer run hot." Funds already managed by the industry are deployed into assets like stocks, hence resulting in asset price rises. QE is a kind of pop psychology - if people believe central bankers, then they will act in an inflationary way to carry out the policy.

thank you. I was quite puzzled by the first 15min also

@Damian Y. Don't matter who is saying, what is being said matters only.

The craziest part was when they said that reserves cannot be used to buy Tsy secs and the other guy then claimed that banks are taking cash out of the economy to pay for them... Almost as weird as claiming that banks can „lend against reserves“ — that‘s not even possible in the real world

Hi @Jeremy I’m a little confused by your comments. I didn’t say (much less ‘reiterate’) that QE ‘is money printing but it isn’t’. I said that – contrary to the opinions of some commentators, including Jeff Snider – QE does result in the creation of real money in the form of deposits. The issue is that the money created thereby lands in the accounts of investors, who simply reinvest it in financial assets and do not spend it. So it boosts the prices of financial assets but does nothing to generate real economic activity – and therefore cannot be inflationary. I also didn’t say anything about ‘encouraging banks to “double” the number of loans they make’ to anyone. I very explicitly explained that banks don’t need reserves to make loans. And as far as I can see, under the present regime there is nothing that the Fed can do to compel banks to lend more. (Professor Richard Werner has lots to say about this topic.) I also explained that, yes, central banks always deal directly with banks (in the US, primary dealers), but that often they indirectly buy financial assets from non-banks, by using banks as intermediaries. I nowhere said that the Bank of England ‘credit[s] the account of Aviva’. Rather, as I set out in some detail, when the BoE buys bonds from Aviva, it credits the account of Aviva’s bank at the BoE, and this allows Aviva’s bank to create a deposit in Aviva’s account at its bank. This is the only way the BoE can buy financial assets from non-banks. Jeff Snider is very good on many things, and I know he is tremendously popular among RV-ers, but I am afraid he is wrong about this key issue. I would be grateful if you could disregard his comments on the ‘puppet show’ long enough to reread my post. I have also written a second post explaining the relationship between inflation, taxation, bank notes and gold. You can find it at the link below. I’d be even more grateful if you could read this too. https://themoneyprogramme.blogspot.com/2020/08/how-monetary-system-works-part-2.html

@Matthew, thanks for taking the time to reply. My main issue is still with your contention that central banks target specific non-bank investors to put more newly created money in their hands. Because the new deposit funds aren't added, without subtracting something from that non-bank or institutional player's balance sheet. Using your example again, Aviva has *lost* title to the bond through a sale transaction. It sold it to a primary dealer. It doesn't concurrently own both the bond AND the newly created deposit funds. The bond's title is now with the central bank, and left on its balance sheet. That is the inflationary condition I'm challenging in your argument. Unless both items - the bond, and the deposit funds - are available at the same time to transact with, then this is simply a swap. Which is what I'm referring to when I say nothing has "doubled". When we think of historical inflation, we think of a profligate government literally giving its soldiers or cronies new paper currency, without subtracting old currency to match. The primary dealer banks buy bonds in advance of QE from the market by bidding them up, knowing the fed will pay a higher prices to take them. Aviva stockpiles bonds understanding the central bank will buy them, and a primary dealer will buy them - but it cannot transact directly with the Fed. Aviva, yes, has had its bank account credited - and this account could be a chequing account, which it could then theoretically be used to buy things in the real economy, but most likely it will buy something in the financial economy. But it has come at the expense of selling that original bond.

Hi @Jeremy. I’m even more confused by your comments now. I make no ‘contention’ that central banks ‘target specific non-bank investors’. I don’t even know what that could mean. I certainly do not suggest that in my example Aviva ‘concurrently own[s] both the bond AND the newly created deposit funds’. That would be utterly bizarre. How could Aviva both sell something and keep it? That would be nonsense. I don’t understand what you are suggesting. All I am saying is that when the central bank buys financial assets from non-banks, both reserves and deposits are created. I have set out the mechanism in detail in my blog post. In that event, Aviva has sold the bond. Now it has a deposit. There are fewer government bonds in existence. Aviva has to buy something with the deposit. The stock of financial assets has fallen. The stock of deposits has risen. Asset price inflation is inevitable. It’s pretty simple. Once again I would urge you to read what I wrote.

@Matthew Could you please clarify the below paragraph from your first post - you've specifically said "the BoE wants to buy from": "Let’s say the Bank of England wants to buy £10m of gilts from a financial institution that is not a bank – Aviva, for example. And let’s assume Aviva has an account with Barclays Bank. The BoE wants a new deposit of £10m to arrive in Aviva’s account at Barclays. So it directs Barclays to credit Aviva’s account." Aviva is what I would call a non-bank investor, which to my understanding, you're staying above, the BoE wants to specifically replace its bond holdings with cash. I'm familiar with Richard Werner's work of deposits novated "from nothing" though Daniel Lacalle would argue that the loan is originated on the back of the borrower contracting to make payments on the loan i.e. the borrower trades on his credit (from Latin - belief or trust) or promise to pay.

Thanks Matthew. Very clear explanation of how QE works and why it has inflated asset prices without increasing CPI.

Very interesting comment, thank you for taking the time to articulate your view so clearly. Would love to see Brent or Steven dive into the points you made!

"Oh, bond prices are spiking? Here, have $5 trillion in new treasury issuance. In fact, have $10 trillion. Short squeeze over." This doesn't make sense, firstly Congress can't agree on anything at the mo... And if Biden is President and GOP has Senate it will be the same still. The only way they could act fast is if DEMS controlled House, Senate and Presidency. Which is possible, but it's far from certain, and it's not happened yet. Bond squeezes happen incredibly quickly when they happen, you are talking a few days. Even if DEMS controlled everything, it's hard to move that quickly. And they don't control everything (sure they MIGHT, but that's just a probability at this moment)

p.s. Re countering a bond short squeeze, and the question of congress having to authorize new borrowing: First, the Treasury has trillions in leeway via the ability to change the maturity mix. That is to say, if the squeeze happens at the long end, Mnuchin could issue new trillions to refinance existing borrowing at the short end or in the middle. Because this would be retiring shorter-term debt by financing it with longer-term, presumably at better rates, Treasury could do this instantly without having to invoke congress. Second, Treasury could easily coordinate with the Fed to do something on the spot involving a supply-generating exercise via the Fed's balance sheet. This might be totally legit to do instantly or it might involve a little bit of gray area, but in case you have noticed nobody is penalizing the Fed's foray into gray areas. Has anyone stopped them, or even really admonished them, for buying junk bonds yet? Third, even if Treasury did have to go to congress, the pitch would be fairly simple, even easier than Paulson's down-on-one-knee ask for $700B. The pitch would be something like "You guys need to borrow X trillion immediately, at basically zero cost, to keep the whole economy and global financial system from being wrecked again. You good with that?" It's not like the pols would say "No, we don't want to borrow at null cost in order to save the economy from being destroyed by the bond market killing off key participants." There are quirky angles, but again, the bond market short squeeze doesn't play. There are things they can do legally to move maturities toward the long end of the curve, there are coordinated Fed actions they could take just as fast, and in terms of gray areas is is Calvinball, they have a ton of leeway to make up the rules as they go.

There are so many errors of omission and commission in this response it’s hard to know where to begin. That this is the top comment is even more hilarious.

WooOoOo too many treasuries WoOOooO

@Nathan R -- Ad hominem doesn't help anybody. If you don't like the critique, point out the flaws and add to the knowledge base. If you've got a multi-point rebuttal, deliver it. I was actually hoping for some well-considered pushback to the comment, which might in turn sharpen my own sword and improve my framework by demonstrating the weak points. Clear thinking and rational understanding are the goals here, for the sake of practical flow-through into trading and investing decisions.

Alex, I encourage you to go study Milton Friedman, Lacy Hunt and Jeff Snider’s writings as well as the Fed Reserve Act. More urgently, that you read Brent’s Twitter unroll from today that should help answer your objections. For posterity, I attacked the omissions and commissions in your response. I’m afraid that leaves poor old ad hominem out in the cold. Best of luck in your studies.

@ Nathan R -- you sound like an acolyte who lacks the intellectual confidence to deploy the arguments of the masters at whose feet he sits. I am well familiar with Friedman, Hunt, Snyder, and the Federal Reserve Act, and do not see where the views and teachings of those individuals conflict with my critique. I again invite you to serve up a multi-point rebuttal. If you refuse to do it, there is reasonable grounds for suspecting that you can't.

The indicator for the treasury or fed to act is spiking prices. This in itself negates your argument. Even if they act within an hour of their alarm going off, I made money. Also, please follow jeff snider.

Alex, Your paragraphs on rates and inflation/deflation strike me as a chicken-and-egg problem and I confess I am bewildered by your explanation. As to the impossibility of a bond squeeze, your explanation is sheer fantasy. So $10T can be conjured at the drop of a hat? And the market is anticipating that as a first salvo. And the DXY is at 93?! Are you kidding? DXY should be 85 and plummeting to 70 right quick. Oh, wait, maybe the bond market knows spending doesn’t work like you say it does. Curious. Our buddy the 10 year UST at 0.72% “anticipating huge, huge issuance.” Wow, what a huge jump in yields. AHHHHHH! 1980 here we come! I guess the bond market is “completely missing the fiscal side.” Perhaps you’re unaware, but the USD is the oil of global trade and reserve managers need that oil. Oh, they may trim here and there but to expand balance sheets and facilitate trade requires USD collateral and lots of it. On the CHF deal, I have no clue but your explanation sounds cogent enough. So super job. 1. Maybe. Yields disagree with you and banks are scrambling for pristine collateral, cutting credit exposure and raising loss reserves. 2. Sorry bro, you are 110% incorrect. The Treasury Secretary cannot issue debt without Congressional appropriation. We aren’t a banana republic quite yet. I’m also assuming you missed the bond squeeze last summer where the government issued $10T in new....oh, wait, they didn’t. 3. I’ll take your word for it. “Pay attention to the charts, gentlemen. The dollar is weak, picking a bottom is folly, and the arguments presented here are wrong, wrong, wrong.” Really? Charts are screaming there is high UST demand even with “fiscal” looming. Every USD chart besides the DXY is unequivocal that USD demand is steady to robust. There will be very, very transient pockets of inflation with unemployment this high, zero wage pressures and rents falling like a stone. And finally, our friend Timeframes. Mine is 12-18 months. USD steady to up, UST yields way down, stocks...who knows...when the fever breaks it will be a sweaty mess. This time next year, no idea. Will let the price dictate.

@ Nathan R -- Okay. First, thanks for taking the time to actually engage versus merely talking smack. Something like that is what i was anticipating in the first place. So, here we go: My paragraphs on rates and inflation / deflation were very simple. About 5 minutes into the interview one person said "What I like to say is that low interest rates are deflationary..." and the other responded with "Well, it's funny because I've always said that low rates are deflationary as well." I was pointing out that low rates a sign of a deflationary environment, not a primary cause. They contribute at the margins as I noted, but they aren't the big drivers, which are things like overburdened debt-to-GDP and financialization (along with other things like technology deflation, offshoring, wage stagnation, etc). That shouldn't be hard to understand, so I don't buy the fact you were bewildered. As for the bond squeeze -- you miss my point again, and it seems deliberately so. I never said bond prices couldn't spike, my point is that the issue could be taken care of very quickly via Treasury actions, or coordinated Fed-Treasury actions. In order for a bond market short squeeze to wreck the system and cause massive dislocation, it would have to be more than a one-off spike that was handled quickly. And if so many players were in dire trouble, handling it quickly is exactly what Fed and Treasury could do. There are so many ways they could do this it makes one's head spin. They could change the maturity mix as I already explained, which would solve the problem immediately if there was enough volume there. You aren't authorizing new borrowing if you are just changing the debt mix from shorter term maturity to longer, this is basic. They could do something with the Fed's balance sheet, where the Fed does some kind of conversion that allows the Fed to sell trillions worth of assets all at once which the Treasury puts in some kind of escrow and then sells new USTs against it. That might be a gray area thing, but again, you don't seem to understand, this is Calvinball. It is all Calvinball. The financial crisis of 2008 was essentially ended, in a way, because not only did the Fed absorb the banks' bad assets, they suspended mark to market accounting for bank balance sheets. Then, too, congress, that is still an easy thing. The Treasury Secretary calls congress, says please borrow a trillion, and by the way, if Republicans balk at this, promise to put it in a safe account and only spend it on social security or something. The point is that, the powers that be, who are tasked with keeping the system afloat, are not just going to sit back and let the players in the system get trashed, particularly when the powers that be 1) have lots of leeway and 2) have a primary interest in keeping the systemic players happy. So, again, a wrecking squeeze is not plausible. Spike? Sure. But the spike would be dealt with quickly, that is guaranteed. They would move so massively fast it would be over within days if not 24 hours, precisely because trillions in new UST supply is something they can find a way to supply if they have to, no prob. Re USD being the "oil of global trade" -- Well, perhaps YOU are unaware that 1) monetary regimes don't last forever, they go for a few decades and then die 2) US Treasuries have negative real yields now 3) US Treasuries are likely to have negative real yields for years, maybe decades 4) All of the global reserve asset managers sitting on huge piles of USTs, which are costing them money as a result of negative real yields, are already starting to feel stupid 5) Russsia, a major oil exporter, and China, a major oil importer, are already taking deliberate steps to move commodity pricing away from dollars, for obvious reasons 6) In a world of negative real yields, where USTs are negative proposition after inflation and where the USD is weak, it makes more sense to have a smaller pile of dollar assets on the books 7) The dollar doesn't have to be abandoned for the USD to enter a multi-year decline, it just has to see reserve managers want to make their big dollar piles somewhat smaller, e.g. going from 60% to 50% which is exactly what I described As for yields disagreeing with me... you don't understand financial repression and fiscal dominance. Look them up. Of course UST yields are low, and will stay low. -- UST yields are low right now because what's being described is anticipatory, we don't have inflation in the system yet, but markets are anticipating its arrival within a reasonable time frame, e.g. 12 to 18 months out (anticipating is what markets do) -- UST yields will also STAY low because the Fed LITERALLY will not let them rise, the Federal Reserve will buy however many USTs as it needs to, when the time comes, to avoid letting interest rates spike too much, because spiking rates would kill the US economy Ever heard of a guy named Ludwig Von Mises? Austrian economics? About 70 years ago Von Mises wrote that if a government drives a boom via massaging the credit cycle, it will ultimately have to choose between destroying the economy or destroying the currency. The reason the choice came down to the CURRENCY is because the bond market can always be supported by the central bank, meaning, the central bank can buy all the bonds that get sold -- but it will have to flood the system with currency in order to do that. And that is another factor in this whole argument, by the way, because the market is not just anticipating big supply of USTs down the pike, it is foreseeing those USTs getting monetized, in a sense, by the central becoming the buyer of last resort as supply outpaces demand, in part because of massive issuance and in part because global reserve managers will be noping out. On charts -- dude, come on now, look at the trade-weighted US dollar index via FRED: https://fred.stlouisfed.org/series/DTWEXAFEGS Slide the marker out to 2007 and look closely. Or actually look at it from across the room because it's so big you can still see it. The trade-weighted US dollar index has broken a TEN-YEAR TREND. Again, this whole bullish thing is just wrong. Not only is it wildly against the charts -- look at that FRED chart -- it makes a massive miscalculation about supply versus demand. In very simple terms, a huge amount of treasury supply is going to come from 1) the US government and 2) global reserve managers who are sick of holding treasuries that are giving them negative real yields, as such resulting in 3) the Fed having to buy the USTs nobody wants in order to keep yields low, which adds more currency to the system And then ON TOP OF THAT add the point that 4) We are heading into a world of reduced dollar trade by design, as political forces and pandemic forces result in a lot of reshoring and winding down of supply chains 5) The next administration may actually WANT AND FAVOR a weaker dollar anyway, to help with exports and improve the outlook for the US manufacturing sector So yeah, again, this dollar bull theory hinges on one very big thing -- an assumption of a dollar shortage -- and the markets and the charts are saying that big assumption is massively wrong. Got any more ammo, or was that it?

That was it. I’m out of ammo. Seeing Alex’s electronic legions cresting the hill, Nathan accepts his fate. The stark light of day shows Alex victorious and triumphant. The purple of his robe dark and terrible against the dawn sky, his keyboard well-worn and blooded he delivers the coup de grace. Nathan’s limp corpse slumps and it is finished. Alex, my friend, you and I are clearly on two utterly separate intellectual planes; never the twain shall meet.

That's what I want to know ?? Maybe the big boys re-balancing their portfolios after equities crashed, ie selling bonds and buying equities.

Yes my question too. Is Steven saying that after the fed buys these treasuries that the banks then just sit on their hands and do nothing with the reserves? I watched an interview where Stan Druckenmiller was saying that when the fed purchases the treasuries from hedge funds and banks etc they then move out the risk curve into equities...which would explain the meteoric rise...

When the Fed prints to buy assets (eg Treasuries), they keep them for themselves. In exchange they are injecting money into the banking system. Assuming there is no new issuance of securities, QE removes assets from the investable pool. In doing so they displace existing asset holders. Each displaced asset holder will tend to compete to buy other investor's assets rather than sit on cash. Think of it as musical chairs. Think of every assets (eg treasuries, MBS, ETFs, stock, gold etc) as a chair. Each time the Fed does QE, they remove some chairs. So, the Fed may buy a Treasury from a broker dealer. The broker dealer then has cash and must go out and buy an asset to replace it. Perhaps they buy a MBS from a family office. The family office needs to replace their asset (rather than hold cash), so they go out and buy something else, which could be SP500 stocks.

It seems a natural conclusion that this period of monetary expansion hasn't been particularly price inflationary. However QE has certainly increased money supply (https://fred.stlouisfed.org/series/M2) and fractional reserve lending is implicit in this, whether it's called printing or something else seems a little semantic. The question to me seems to be, why has the increased money supply not been inflationary and this is largely due to velocity IMHO.

The Swiss print in order to meet demand by outsiders for Swiss Franc Paper....so the SNB is selling the CHF as well as supplying the Swiss Franc paper, it receives in exchange from these foreigners foreign currency (U$) which it then invests in equities. The SNB is not borrowing from the Swiss people. Norway has saved proceeds of decades of petroleum reserves & bought global equities - now Norway is reversing this to support the Norwegian Krone & the Norwegian government spending (See Ben Melkman interview)...the Swiss were just printing money out of thin air to offset demand for Swiss Francs & buying Apple stock (until the US complained) and the purchases by the SNB then broadened to a wider swath of the US equity market -> but when foreigners eventually reverse, so can the SNB.

Hi Peter, Thanks for the reply. I'd suggest having a look at the SNB balance sheet if of interest. FX assets have increased by about the same as bank reserves and equity since 2015 (as a random start date). It looks to me like they funded USD assets by creating reserves. The Assets then increased in value which they've taken to equity.

Hi Alex, you would expect M2 to go up as the reserves that are created by QE are funded by deposits at the banks. So if you do a lot of QE in one hit and then stop, you should see a large increase in bank deposits (M2 rises) and then deposits will flat-line as will M2 (aside from natural growth due to bank lending). On the banks' balance sheets the high level of deposits (Bank Liability) fund the high level of bank reserves (bank Asset). Which gets back to the usefulness of these reserves. BTW this is a gloss over on many small points such as the mix of bank funding.

Hi Darryl, I think we agree but the dialogue in the video seems to be hung up on the word "printing". QE has led to increased money supply, this seems indisputable and the primary route for this is through fractional reserve lending. Lacy Hunt agree's that QE increases the propensity for banks to lend, whether they choose to accept risk premia or are efficient in doing so is another issue entirely. In allowing reserves to be substituted or by reducing reserve ratios the FED is increasing the propensity of banks to lend, which leads to an increase in money supply through fractional reserve. rightly or wrongly most people assume this is analogous to printing i.e. an expansion of the monetary base. As per my comment, in my mind, the real questions is "why is monetary expansion not particularly inflationary".... yet.

So you're saying that it's not so much that commercial banks are unable to lend the money from QE, but that they choose not to lend the money because the risk premium is raised as a result of the same event that caused the Fed to start QE in the first place?

Absolutely. Borrowers couldn’t service the risk premium and banks were limited by leverage ratios.

100% agree Collins this is alarmingly inaccurate. Having run bank balance sheets for 13 years in 8 countries including with access to the Fed the lack of understanding of how balance sheets work here is astounding but I don't have the time or patience to comment on everything in this video. As you and Lacy have mentioned the constraining factor currently on lending is capital not funding or reserves. Its going to take time for banks to work through their current loan books and increase in risk weightings and hence increased capital that has to be held against their back books let alone put these excess reserves to work in the short term for new business.

Yeah, they both lost me at the point that QE is in fact deflationary. What's QT then? Super deflationary? Does not make sense. CFA level 2 - bank reserves. Either they are in cash as others or primarily with the Fed - on the bank balance sheet they r still reserves against which banks can lend. The problem is normally banks will not lend if defaults are high and rising. They will in general tighten credit across the board - reserves or not. Guys, go study basic CFA concepts...seriously...it's all there in black and white.

Definately some people worth paying attention to. I think the key is to ask yourself why they think what they do and then try and figure it out for yourself. Along with listening to Lacy Hunt, I'd also suggest reading this book which helped me realise the difference between 1920s Germany and modern QE and therefore the different outcomes we are seeing (I don't think it's the MMT reason that they just did a bit too much). https://www.goodreads.com/book/show/8567383-when-money-dies Reading the comments on this video and adding one myself earlier I can see that psychology plays a big part as well. It's hard to change your mind.

Brent Johnson interviewed Peter Schiff a while back, but I don't recall them discussing the Milkshake for very long.

Please, anyone but Peter Schiff. Too many honest people have been hoodwinked by intellectually rigid and/or marketing narrative actors post-GFC. If you have a position, then you had better be able to defend it with primary sources and past/current data.

"Brent Johnson interviewed Peter Schiff a while back, but I don't recall them discussing the Milkshake for very long." Heh why would anyone interview Peter Schiff. Just look up an old interview from 10-20 years ago, he has been playing the same broken record forever.

Although Banks cannot spend money from Fed bond purchases, is that true of all primary dealers that the fed conducts OMO with?

Care to explain where the mistakes where made? I would love to learn more

10 yr yield went up in prior QEs. To do fiscal at the scale US govt does, they need fed i.e. QE. If unemployment remains at 10%, you think fiscal will stay at the sidelines. No...not going to happen. Fiscal at large is inflationary. Yes, near term dollar can push higher. But it is a game of relative growth and policy expectations between a pair. Gerome has been scared. He will whatever needed working with fiscal. Not a case of sub orbital dollar. SNB doesn't print currency for export. It is considered one of the safest currency. Plus a few more inaccurate statements, but you get the idea. It was entertaining to listen to, but people should always homework. Get the ideas from real vision, but always think for yourself.

A week of coverage on this from RV could buy me another 3.5hr of sleep/night !

These are excellent requests :thumbsup

Can we get Ben Bernanke on here? He's got nothing going on and he would be able to tell us what QE does. May be hook him up to a lie detector so he has to speak the truth.

Agreed, I would love to see these questions answered.

Very good questions and points to clarify that would be helpful.

You wrote "I would love for RV to more specifically try to clear up some of these issues over the coming weeks" - It's a wrong expectation of RV as its just a platform for different markets opinions and markers are nothing but the "play of probabilities". This is why no one can predict markets as definitive means but rather just as a play of probabilities and i hope RV continues to provide a neutral platform for all these probabilities rather than trying to re-define the narratives to suit the trendy arguments. Again, Prof Werner, Rich Koo, Lacy Hunt, Tony Deeden or Lyn Alden ...etc won't END these questions but instead give their take on such probabilities and we tend to agree or disagree depending on our acquired understanding/bias of economic theories. This is precisely the reason i enjoy hearing different takes to keep entertaining such probabilities

When someone says no inflation, it depends on what they are measuring. https://chapwoodindex.com/

This excellent interview between Lacy Hunt and Grant Williams clears up much of the confusion (https://podcasts.apple.com/us/podcast/the-end-game-ep-6-lacy-hunt/id1508585135?i=1000487560045) . Basically Steven and Brent are correct in stating the reserves printed by the Fed are not money - these reserves are not a medium of exchange as they cannot leave the Fed. However, the Fed may push for these reserves to become a medium of exchange in the next crisis, which will then cause the hyperinflation everyone has been expecting. Once you understand this it all makes sense.

I guess there are 3 parts to this: 1. They will be making a profit while flipping these Bonds to the Fed 2. There really is not those many places that they can lend to - making loans involves risking capital , and the value of a lot of the usual collateral like RE is rather suspect. The economic outlook is rather bad at the moment 3. Eventually , something will be done to deal with the crisis- Fiscal stimulus, Govt programs etc and inflation will come up one way or the other, and the current 0 reserve requirement will be raised back to ~10% like before. When this happens, the reserves will come handy.

Exactly !! Please can someone answer your question. I suppose there's likely a gain on the sale to the Fed that boosts the commercial bank's profit ? And/or is the commercial bank speculating it will be able to use its Fed reserve credit to buy back from the Fed a greater quantum of Treasuries in the future at such time as the Fed becomes a net seller of Treasuries thus depressing their price ?

Whoops. didnt realise Joseph had already answered.

I may not understand it completely but it’s the Treasury department that decides how much bills, notes are bonds to issue, not the Fed. The Treasury has limits on how much they can issue based on budgets passed by Congress and based on tax revenue shortfalls. Also once the money is in circulation it may also be used by people to pay down their debt, which destroys money and is disinflationary. Most money is created by the banks using the magic of fractional reserve banking. So if bank lending is not increasing, there may be little inflationary pressure even if fiscal deficits are increasing, Note that the Fed has been practically begging Congress to get busy increasing their spending and deficits.

It is not 'stealing' because the reserve account is still an asset to the bank . I think the controversial part which has created debate in the comments is that the Fed gives the banks a credit to a reserve account rather than cash - but I don't think this really influences whether a bank will lend or not. Hopefully this is not as controversial when you think about it in accounting terms. We know the Fed is expanding their balance sheet - ie. they buy bonds (debit assets) and credit a reserve account (credit liabilities), hence expanding their balance sheet. If they bought a bond (debit an asset) with cash (credit assets) they wouldn't be expanding their balance sheet. The point for debate is whether this expansion of the Fed balance sheet achieves its purpose.

in know nothing, except to say, if there is minimal lending now at current rates and we are in contraction, they make little money... I cant imagine more loans being taken if rate increase... They have to first GET loans, then worry about the rates to make more money... They'll have to get their cake< more borrowers>, and maybe wait to eat it< higher rates>.

In addition to Don P. 's point -, on a much shorter time frame, the banks have made some UST purchases in anticipation that they will sell them to the Fed when the next round of QE happens. So they would want to make the flip at a profit.

In addition to Don's and Joseph's points it will also help avoid loan losses

Both are only partially accurate. Exercise caution.

Because a crash would presumably hurt the probability of re-election for the current President - and so the prediction that they would do this presumes that this is the outcome they want.

They do not want the economy to crash , I guess only the stock market, so that the fed will resume doing QE and they can flip the bonds that they have accumulated at a much higher price in anticipation of this. Anthony R.'s point would explain why the Dems might not want to pass bills that provide fiscal stimulus anytime soon.

If central banks are indeed willing do anything to fight deflation, then they will likely go through the currency debasement route to do so. Which is to say, Gold / Bitcoin / hard-assets are likely going to be good choices over the long term, but perhaps a little more volatile over the short term if a deflationary bust / crash / correction occurs.

Here's Raoul's direct response to that question: https://mobile.twitter.com/RaoulGMI/status/1299149923691175946

I think you are missing a trick here. If the USD goes down and down and down, there will be inflation for US-based people, paying for stuff in USD. If the DXY was at 20, and not 92, of course there would be giant inflation. No matter what the Fed is doing, or what Reserves anyone has etc etc. Now i'm not saying DXY is going to 20, i'm just illustrating that many people (and I have discussed this with Steve many times over the last year or so) forget nothing else matters if USD tanks to oblivion. And in this scenario I am 99% sure you want to be holding hard assets (one can argue all day which ones...) Now, Steve and Brent's view is that USD will strengthen, and so then one can use the opposite argument, if DXY goes to 120 (to just make up a larger number) then when added to the argument about Reserves not being money, this means deflation (or at least disinflation) is highly likely - for US-based people paying in USD (could be very different in Europe as the Eur would have devalued). If DXY was at 120 that would likely be bad for hard assets (although Brent would argue differently to some degree, depending on timeframe, as he is also long gold atm) Point is that it's a complex system, yes velocity of money, M2 etc do matter. - for sure they matter. But ultimately the release valve is currencies, and that is a relative game too (USD vs EUR vs JPY vs AUD etc)

Thanks for the replies - however, implied in them in is this assumption that continued QE will be inflationary and I understood Brett & Steven's thesis to be that it would have the opposite effect coupled with a strong dollar. So I'm still curious as to their view on how bitcoin currently markets itself as an inflation hedge in the face of impending currency debasement. I understand the macro arguments as they apply to currencies generally but also understand that perhaps, in the case of the USD, the outcome will be different simply because it is a major global reserve currency. To be clear, my point is not whether BTC/XBT is a worthwhile investment - I certainly don't want to go down that rabbit hole with the RV community - my question is whether the presenters feel that perhaps the marketing strategy (or principal argument oft cited) in favour of BTC/XBT is inherently flawed.

Bitcoin is an inflation hedge, regardless of how it markets itself. Whether that is the best argument for Bitcoin bulls to push is another question. It is also a hedge against financial system collapse and bank bail-ins. If the dollar sky rockets then Bitcoin bulls will change the characteristics of Bitcoin that they choose to emphasize.

Can you enlighten us on some of your grievances? Right now your contradiction has no weight as you have not backed it up.

which inaccuracies in particular?

Peter, I’ve been with RV almost since inception and after having watched hundreds of videos found this one to be one of the best ones I’ve seen. I also think Brent did a great job in both the curation of this guest and in conducting the interview. Perhaps you could enlighten me as to how my view could be so juxtaposed to yours?

I thought it was a great interview and it made a lot of sense. There's are two other interviews that provide more light on the topic. If you are interested look up the Grand Williams podcast interview w. Lacy Hunt from August 6th and with Mike Green from July 6th. Both of them where very helpful to me to understand it. They also answer many of the questions asked here, ex... How liquidity flows to the markets? Here are the links to those interviews. https://www.podbean.com/ea/pb-jr3bt-e23cce https://www.podbean.com/ea/pb-w9ebx-e63066

Peter.....

balance sheet shrinks (unless they buy a new bond)

I have the same question. So does Lyn Alden.

I too have this question. 10 min into the interview and the discussion is that "FED buys bonds from banks". huh? I thought Fed bought bonds directly from the GOVT. I agree that more recently it may have been buying commercial bonds from banks , but what about before that ? why do banks have to sell the bonds to their boss??

Agree. Please bring in the other side of the discussion.

Aditiya - the Fed 100% for sure does not buy DIRECTLY from the US Gov (i.e. Treasury) at the moment. This is very clear, and as per the Fed Reserve Act. Now the Fed DOES buy bonds from banks (who own most of the PDs, e.g. JPM, BOA are PDs too), who may have only held that bond for days, but it's still not direct from the Gov. There is a market pricing event. There is no debate on the above, it's incredibly well documented on the Treasury website with all the bond auctions. Honestly there is 0 debate on this. Some people say that the 'few days' that go by before Fed buys the bonds mean it's monetising debt directly, but this is forgetting that there was a market pricing event. The confusing parts (and there are many) are not this part. Put the time in to research properly, all the info is out there.

Good back and forth... Chris D, I understand your point but I'm curious how you would characterize the "market pricing event" and resulting prices? I'm not being flippant. I understand your point of clarification but I myself wonder how to think of the prices? If the FED is undertaking big QE and they announce their intended time frame, amounts, and maturities targeted for purchase, isn't that just a look thru for the PDs and they become prince insensitive buyers. Anything u can say to give this some color would be appreciated.

Steve -- What kind of time frame do you see this scenario playing out as we have already seen banks starting to restrict credit. 1, 2, or 3 years? Thanks

We'll never know. Unfortunately, I've concluded u can't trust them to be constructive for broader interests, only their own. So sure, a sweeping downturn is bad for business for a few quarters, and might risk additional regulations. But if they know they'll be bailed out, then the risk is not existential, and they make a killing on forced fire sales and collateral claims, and start all over again. First thru inflation, then thru deflation... until they own it all. I don't feel strongly about this. I genuinely don't know.