U.S. Quantitative Easing Has Just Begun

With the FOMC meeting currently under way, it's worth reflecting on the Fed's implementation of the monetary policy this year. Surprisingly, according to the latest Credit Suisse research, there hasn't been much quantitative easing in 2009.

But how could that be possible, given the way the Fed has been growing its balance sheet? The chart below shows securities held outright by the Fed. How can this NOT be a form of quantitative easing?

Credit Suisse argues is that the monetary base has not really grown much in 2009, as the following chart shows.

Source: Bloomberg

So where is all the cash going from the Fed's purchases? It has to end up in the banking system and show up in the monetary base. The argument Credit Suisse makes is that all the short-term lending the Fed had put in place last year as an emergency measure has been shrinking in size, effectively offsetting the securities purchases.

Banks are de-leveraging, trying to reduce their borrowing from the Fed. Effectively securities purchases put Fed’s money with the banks, while the banks in turn pay back the Fed on their loans, thus neutralizing the impact. As we discussed before, this has slowed down the pace of the Fed's balance sheet growth significantly.

In addition some of the cash for the Fed's recent lending had come from the SFP program in which the US Treasury has issued treasury bills with the proceeds to be used by the Fed for its emergency lending. That type of program does not add any new cash to the system, because while the Fed injects cash (by lending to banks, etc.), the Treasury takes the liquidity out by selling bills. That in fact was the original purpose for SFP.

But SFP is expected to be wound down shortly. The impact of the reduction in short-term funding facilities will end as the programs come to a close. Therefore there will be nothing more to offset securities purchases going forward. That means that if the Fed continues purchasing paper at it's recent pace, quantitative easing finally will kick in with force.

This will end up ballooning bank reserves and truly “flooding” the system with dollars. The chart below from Credit Suisse shows their projection for reserves (translating into a rapidly rising monetary base):

The Fed is keenly aware of this problem going forward, particularly with the dollar weakness. Once SFP as well as the short-term facilities wind down, every dollar of purchased securities will be a new dollar “printed”.

That is why the Fed is now supposedly putting together a new securities reverse repo program with the dealers. The idea is that going forward the Fed will be buying new securities by borrowing money from the dealers rather than “printing” new dollars. The Fed will place its securities with the dealers as collateral when it borrows.

In fact, the central bank may choose to borrow against the existing securities as well. New security purchases will be putting liquidity into the system, but by borrowing from the dealers, the Fed will be temporarily taking liquidity out.

Eventually the Fed will have to outright sell the trillion plus of securities it holds, taking liquidity out permanently (the reversal of quantitative easing) – a dangerous thing to do in this economy. And the more purchases it makes going forward, the harder on the economy it will be to reverse it. For now however, the reverse repo effort will have to do, by (at least in part) compensating for the wind down of SFP and the short-term emergency lending programs.

Comments

[Monty Pelerin:]

There is an assumption in the article that the Fed wants/will be able to halt the expansion in its balance sheet. This might be true in the same sense that we all might want to look like Brad Pitt. The reality is that they have to fund the deficits to keep the government going, and they have to continue to inject liquidity into the system to keep the economy from collapsing. It is the latter consideration that will mean that the Fed, while it may provide a head faint towards responsible behavior re the use of primary dealers, needs to continue increasing its balance sheet. These increases are likely to exceed the (underestimated) deficits as the banking system starts to reflect the increasing default rates on commercial and residential mortgages, developing problems in FDIC, FHA, etc.

Monty

Sep 23 11:16 AM

[conceptwizard:]

If Bernanke and Obama were truly concerned about preserving jobs, they would have required banks loaded with taxpayer bail-out loot to lend these funds to consumers and business. China did so, ordering its banks to increase credit. And boy, did they, expanding credit by an eye-popping 30%, rocketing China's economy out of recession and into double-digit growth.

But the Obama Administration has gone the opposite way. The White House letter to the G-20 calls for slowly increasing bank reserves, and that can only cause a tight credit market to tighten further.

It's not that the White House completely ignores job losses. The US letter suggests, "The G-20 should commit to ...income support for the unemployed." You can imagine the Europeans, who already have generous unemployment benefits—most without time limits—turning purple over that one. America's stingy unemployment compensation extension under the Stimulus Plan is already beginning to expire with no live proposal to continue aid for the jobless victims of this recession.

Sep 23 11:18 AM

[inthemoney:]

> If Bernanke and Obama were truly concerned about preserving jobs, they would have required banks loaded with taxpayer bail-out loot to lend these funds to consumers and business. China did so, ordering its banks to increase credit. And boy, did they, expanding credit by an eye-popping 30%, rocketing China's economy out of recession and into double-digit growth.

The problem is that US consumers can't handle anymore debt so Chinese solution won't work, we already used up this trick in 2002 recession. At some point one has to pay the piper and FED is simply delyaing the inevitable.

As for QE results, just look at the stock market, corporate bond market , where did all that money come from if not QE? And since FED makes everything a secret, I prefer to trust my eyes then whateve incomplete numbers FED puts out to promote its story,

Sep 23 11:37 AM

[Hans111:]

He is already fighting to keep up the ratings.....

and in the process disregarding basic needs of the man in main street.

Oh well, the main thing is to keep the rich rich...

Sep 23 12:02 PM

[Pat C:]

I have another question. I wonder how much of the Securities held outright are foreign purchases which were offset by issuing treasury securities to replace them? Did we also bail-out foreign banks and governments?

Sep 23 12:14 PM

[Socialism c...:]

If Bernanke and Obama were truly concerned about preserving jobs, they would have allowed bad banks to fail, and supported businesses and consumers with real, substantial tax cuts...along with accompanying large cuts to government. China's economy didn't rocket out of recession...they were NOT IN one. They went from double digit growth down to mid-to-upper single digits for a while. That's not recession...merely slower growth.

But the Obama administration has gone the opposite way -- endorsing continued fiscal insanity, continuing the errant Bush policy of propping up the failed banks...and that can only cause more job losses and further strain on the taxpayer.

It's not that the White House completely ignores job losses. It's just that the White House is full of Marxists who see the opportunity to "never let a crisis go to waste." At present, that means expansion of government and an opportunity to impose conditions and control over businesses that further restrain capitalism. I can imagine the Europeans, as they are very familiar with 10% unemployment on an ongoing basis, wondering what the heck America is doing. America's focus on personal responsibility is waning, and we are becoming like the socialist European nations whose national defense and general economies our prosperity has subsidized for decades. Extending our already generous unemployment compensation *entitlement* will only further strain the nation's finances and lead to reduced personal incentive. Will Europe subsidize our national defense and general economy, as we have done for them, now that we've fallen out of the role? They can't afford to. The stimulus plan will either expire and the propped-up U.S. will fall sharply...or it will be expanded until hyperinflation forces a complete reset -- what should have been allowed to happen to begin with.

Sep 23 01:36 PM

[Mad Hedge F...:]

ind Reviewing the current political and monetary landscape, I would be remiss, irresponsible, even negligent, if I didn’t revisit one of my favorite ETF’s, the Proshares Ultra Short Treasury Trust (TBT). This is the 200% leveraged bet that long Treasury bonds, the world’s most overvalued asset, are going to go down. While the Fed is going to keep short rates low for the indefinite future, it has absolutely no direct control over long rates. The only political certainty we can count on it the continued exponential growth in the supply of government bonds of all maturities. Like all Ponzi schemes, their eventual collapse is just a matter of time. It’s simple a question of how many greater fools are out there (sorry China). Look at how they are trading now. We currently have the greatest liquidity driven market of all time, and the ten year is only eking out a 3.40% yield, pricing in near zero inflationary expectations. The average yield on this paper for the last ten years is 6.20%, a double from the current level. Get the yield back up to 5%, a distinct possibility in 2010, and that takes the TBT from the current $45 to $70. Sure we may get a sideways grind in yields for a few months, which will be expensive due to the mathematic idiosyncrasies of the 2X ETFS. But a security that is unchanged if I am wrong, and doubles if I am right is the kind of risk/reward ratio that I will take all day. And I believe that in my lifetime Treasuries may lose their vaunted triple “A” rating and be priced closer to subprime (warning: I am old). That could enable the TBT to deliver the holy grail of trades, your proverbial ten bagger.

Sep 23 02:10 PM

[Bad Dog:]

At the very least, have government representation on the BOD of banks receiving bailout money! When you buy a big chink of a Company you get a set on the board, but taxpayers got nothing. So the banks can continue to lie, cheat and steal, and we are paying for it. And they sent Bernie Madoff to jail! He's an amateur compared to B of A.


On Sep 23 01:36 PM Socialism cannot compete! wrote:

> If Bernanke and Obama were truly concerned about preserving jobs,
> they would have allowed bad banks to fail, and supported businesses
> and consumers with real, substantial tax cuts...along with accompanying
> large cuts to government. China's economy didn't rocket out of recession...they
> were NOT IN one. They went from double digit growth down to mid-to-upper
> single digits for a while. That's not recession...merely slower
> growth.
>
> But the Obama administration has gone the opposite way -- endorsing
> continued fiscal insanity, continuing the errant Bush policy of propping
> up the failed banks...and that can only cause more job losses and
> further strain on the taxpayer.
>
> It's not that the White House completely ignores job losses. It's
> just that the White House is full of Marxists who see the opportunity
> to "never let a crisis go to waste." At present, that means expansion
> of government and an opportunity to impose conditions and control
> over businesses that further restrain capitalism. I can imagine
> the Europeans, as they are very familiar with 10% unemployment on
> an ongoing basis, wondering what the heck America is doing. America's
> focus on personal responsibility is waning, and we are becoming like
> the socialist European nations whose national defense and general
> economies our prosperity has subsidized for decades. Extending our
> already generous unemployment compensation *entitlement* will only
> further strain the nation's finances and lead to reduced personal
> incentive. Will Europe subsidize our national defense and general
> economy, as we have done for them, now that we've fallen out of the
> role? They can't afford to. The stimulus plan will either expire
> and the propped-up U.S. will fall sharply...or it will be expanded
> until hyperinflation forces a complete reset -- what should have
> been allowed to happen to begin with.

Sep 23 04:48 PM

[Bad Dog:]

Oh and you are full of crap. Forgot to add that one. "Full of marxists" indeed! If only they were!! At least they'd be on the right side of the barricades!! Nitwit!!


On Sep 23 01:36 PM Socialism cannot compete! wrote:

> If Bernanke and Obama were truly concerned about preserving jobs,
> they would have allowed bad banks to fail, and supported businesses
> and consumers with real, substantial tax cuts...along with accompanying
> large cuts to government. China's economy didn't rocket out of recession...they
> were NOT IN one. They went from double digit growth down to mid-to-upper
> single digits for a while. That's not recession...merely slower
> growth.
>
> But the Obama administration has gone the opposite way -- endorsing
> continued fiscal insanity, continuing the errant Bush policy of propping
> up the failed banks...and that can only cause more job losses and
> further strain on the taxpayer.
>
> It's not that the White House completely ignores job losses. It's
> just that the White House is full of Marxists who see the opportunity
> to "never let a crisis go to waste." At present, that means expansion
> of government and an opportunity to impose conditions and control
> over businesses that further restrain capitalism. I can imagine
> the Europeans, as they are very familiar with 10% unemployment on
> an ongoing basis, wondering what the heck America is doing. America's
> focus on personal responsibility is waning, and we are becoming like
> the socialist European nations whose national defense and general
> economies our prosperity has subsidized for decades. Extending our
> already generous unemployment compensation *entitlement* will only
> further strain the nation's finances and lead to reduced personal
> incentive. Will Europe subsidize our national defense and general
> economy, as we have done for them, now that we've fallen out of the
> role? They can't afford to. The stimulus plan will either expire
> and the propped-up U.S. will fall sharply...or it will be expanded
> until hyperinflation forces a complete reset -- what should have
> been allowed to happen to begin with.

Sep 23 04:50 PM

[Celcius:]

If Obama wants to create jobs for US citizens he needs to permanently end the H-1B, H-2B, etc.. foreign worker programs. This would significantly reduce unemployment for US CITIZENS. There is no excuse as to why these programs should remain with 16+% unemployment (full & part-time). Corporate America has used these foreign worker programs to undercut US salaries, and fatten executive salaries.

Corporate law should also require cost cutting employee pay cuts to start from the top down at the same proportional rate as all workers. If labor gets a haircut, then start at the top! The same with layoff's, top down.

Sep 23 05:04 PM

[cash:]

>>If Obama wants to create jobs for US citizens he needs to permanently end the H-1B, H-2B, etc.. foreign worker programs.

That is it! Blame the unemployment on these earnest, hard-working, educated and under paid folks! Not the banksters, house flipping spend-thrifts and the union thugs that pocketed billions at the expense of tax payers. Of course not, the banksters own the treasury & fed, the unions own the politicians. They are untouchable.

Sep 23 05:55 PM

[inthemoney:]

> If Obama wants to create jobs for US citizens he needs to permanently end the H-1B, H-2B, etc.. foreign worker programs. This would significantly reduce unemployment for US CITIZENS. There is no excuse as to why these programs should remain with 16+% unemployment (full & part-time). Corporate America has used these foreign worker programs to undercut US salaries, and fatten executive salaries.

If you ban H1Bs these jobs will simply be exported as well because there are simply not enough qualified americans in certain areas. We need to get more H1Bs , they are educated hardworking people who will be spending their money here in the US, buying the houses in the US, they don't need our tax dollar support like illegal immigrants, they pay SSN even though they are never going to use it unless they eventually become citizens.
In short, you are barking at a wrong tree.

Sep 23 08:21 PM

[TxTim:]

Mad Hedge Fund Trader....

Agree with your assesment of TBT. However, what are your thoughts about how TBT mgt uses a synthetic position, closed out daily to approximate the 2X's short position of 20 yr treas? I also understatnd that the TBT fund will discontinue waiving some of it's high fees at the end of Sept. In light of these points do you still deem it "acceptable" in capturing your macro theme?

Thanks for your comments here on SA. Always valuable, thought provoking.


On Sep 23 02:10 PM Mad Hedge Fund Trader wrote:

> ind Reviewing the current political and monetary landscape, I would
> be remiss, irresponsible, even negligent, if I didn’t revisit one
> of my favorite ETF’s, the Proshares Ultra Short Treasury Trust (seekingalpha.com/symbo...).
> This is the 200% leveraged bet that long Treasury bonds, the world’s
> most overvalued asset, are going to go down. While the Fed is going
> to keep short rates low for the indefinite future, it has absolutely
> no direct control over long rates. The only political certainty we
> can count on it the continued exponential growth in the supply of
> government bonds of all maturities. Like all Ponzi schemes, their
> eventual collapse is just a matter of time. It’s simple a question
> of how many greater fools are out there (sorry China). Look at how
> they are trading now. We currently have the greatest liquidity driven
> market of all time, and the ten year is only eking out a 3.40% yield,
> pricing in near zero inflationary expectations. The average yield
> on this paper for the last ten years is 6.20%, a double from the
> current level. Get the yield back up to 5%, a distinct possibility
> in 2010, and that takes the TBT from the current $45 to $70. Sure
> we may get a sideways grind in yields for a few months, which will
> be expensive due to the mathematic idiosyncrasies of the 2X ETFS.
> But a security that is unchanged if I am wrong, and doubles if I
> am right is the kind of risk/reward ratio that I will take all day.
> And I believe that in my lifetime Treasuries may lose their vaunted
> triple “A” rating and be priced closer to subprime (warning: I am
> old). That could enable the TBT to deliver the holy grail of trades,
> your proverbial ten bagger.

Sep 23 10:32 PM

[THofler:]

Re: the TBT. I've had a small position in this for several months and increased it a little about 5 weeks ago. Over the last month it has been pretty good about tracking the inverse 20 yr. (Though it does look closer to a single inverse than a double inverse.)

But... in the last 2 or 3 weeks it has leaked a considerable amount of value. I suggest that you chart the TBT and the TLT over the last 1 or 3 months & look at the results for yourself.

IMHO I will avoid the TBT, UNG, and any other leveraged, inverse, and futures based ETF in the future.

Sep 23 11:15 PM

[THofler:]

Sorry, the TBT tracked OK for 5 or 6 months, then took a sizeable hit in the last few weeks.

Sep 23 11:17 PM

[Mansoor H. ...:]

What do you think of this idea to deal with the banks?

Please follow link.

seekingalpha.com/artic...


On Sep 23 01:36 PM Socialism cannot compete! wrote:

> If Bernanke and Obama were truly concerned about preserving jobs,
> they would have allowed bad banks to fail, and supported businesses
> and consumers with real, substantial tax cuts...along with accompanying
> large cuts to government. China's economy didn't rocket out of recession...they
> were NOT IN one. They went from double digit growth down to mid-to-upper
> single digits for a while. That's not recession...merely slower
> growth.
>
> But the Obama administration has gone the opposite way -- endorsing
> continued fiscal insanity, continuing the errant Bush policy of propping
> up the failed banks...and that can only cause more job losses and
> further strain on the taxpayer.
>
> It's not that the White House completely ignores job losses. It's
> just that the White House is full of Marxists who see the opportunity
> to "never let a crisis go to waste." At present, that means expansion
> of government and an opportunity to impose conditions and control
> over businesses that further restrain capitalism. I can imagine
> the Europeans, as they are very familiar with 10% unemployment on
> an ongoing basis, wondering what the heck America is doing. America's
> focus on personal responsibility is waning, and we are becoming like
> the socialist European nations whose national defense and general
> economies our prosperity has subsidized for decades. Extending our
> already generous unemployment compensation *entitlement* will only
> further strain the nation's finances and lead to reduced personal
> incentive. Will Europe subsidize our national defense and general
> economy, as we have done for them, now that we've fallen out of the
> role? They can't afford to. The stimulus plan will either expire
> and the propped-up U.S. will fall sharply...or it will be expanded
> until hyperinflation forces a complete reset -- what should have
> been allowed to happen to begin with.

Sep 24 07:48 AM

[EUARTE:]

China now has a massive credit bubble. Watch out for any stats that China puts out. They are purely political. All bubbles burst! Watch out world.


On Sep 23 11:18 AM conceptwizard wrote:

> If Bernanke and Obama were truly concerned about preserving jobs,
> they would have required banks loaded with taxpayer bail-out loot
> to lend these funds to consumers and business. China did so, ordering
> its banks to increase credit. And boy, did they, expanding credit
> by an eye-popping 30%, rocketing China's economy out of recession
> and into double-digit growth.
>
> But the Obama Administration has gone the opposite way. The White
> House letter to the G-20 calls for slowly increasing bank reserves,
> and that can only cause a tight credit market to tighten further.
>
>
> It's not that the White House completely ignores job losses. The
> US letter suggests, "The G-20 should commit to ...income support
> for the unemployed." You can imagine the Europeans, who already have
> generous unemployment benefits—most without time limits—turning purple
> over that one. America's stingy unemployment compensation extension
> under the Stimulus Plan is already beginning to expire with no live
> proposal to continue aid for the jobless victims of this recession.

Sep 24 12:55 PM

[Celcius:]

I am not blaming the H-1b workers. And, yes they are very hard working people. I am advocating that we can resolve a major part of our unemployment problem by eliminating laws that increase the available domestic pool of workers. It is a supply side issue to a demand problem.

In regards to the economic meltdown there are several major factors that have contributed: greed, repeal of the Glass-Steagal Act, Greenspan's creation of cyclical bubbles via low interest rates, the shadow banking system (GS & crew), CDO's, SIV's, CDS's, ratings agencies, and the failure of our government regulatory agency's.


On Sep 23 05:55 PM cash wrote:

> >>If Obama wants to create jobs for US citizens he needs to permanently
> end the H-1B, H-2B, etc.. foreign worker programs.
>
> That is it! Blame the unemployment on these earnest, hard-working,
> educated and under paid folks! Not the banksters, house flipping
> spend-thrifts and the union thugs that pocketed billions at the expense
> of tax payers. Of course not, the banksters own the treasury &
> fed, the unions own the politicians. They are untouchable.

Sep 24 04:52 PM

[Celcius:]

The US has more than enough qualified workers within our citizenry. This is a game of wage economics using an immigration law to undercut domestic wage earners. I am in the tech industry which is under assault from lower wage foreign workers who have lower qualifications that are replacing higher qualified US workers. My brother who has worked at Microsoft has had to train multiple Indian workers to perform his job. And, if you refuse to train them then Microsoft puts you on a blacklist and will not hire you for any other projects. I have worked with H-1b employees who have told me that their Indian friends have blatantly lied on their qualifications to land very high paying jobs. One of them was hired by Fannie Mae for a six figure salary with no experience in the job role he was hired.

If US companies want to hire foreign workers then they should outsource them to India or China. At least these wages are recorded in the Current Account Balance and will cause currency appreciation in the outsourcing country. H-1b's undercut this process by suppressing local wages indefinitely. Outsourcing wage costs would rise with the currency appreciation. Especially, as the dollar depreciates against other major currencies making domestic wages more competitive.


On Sep 23 08:21 PM inthemoney wrote:

> > If Obama wants to create jobs for US citizens he needs to permanently
> end the H-1B, H-2B, etc.. foreign worker programs. This would significantly
> reduce unemployment for US CITIZENS. There is no excuse as to why
> these programs should remain with 16+% unemployment (full & part-time).
> Corporate America has used these foreign worker programs to undercut
> US salaries, and fatten executive salaries.
>
> If you ban H1Bs these jobs will simply be exported as well because
> there are simply not enough qualified americans in certain areas.
> We need to get more H1Bs , they are educated hardworking people who
> will be spending their money here in the US, buying the houses in
> the US, they don't need our tax dollar support like illegal immigrants,
> they pay SSN even though they are never going to use it unless they
> eventually become citizens.
> In short, you are barking at a wrong tree.

Sep 24 05:07 PM

[paulbain:]

On Sep 24 04:52 PM Celcius wrote:

> I am not blaming the H-1b workers. And, yes they are very hard working
> people. I am advocating that we can resolve a major part of our unemployment
> problem by eliminating laws that increase the available domestic
> pool of workers. It is a supply-side issue to a demand problem.

Bingo. You have hit the nail right on the head. The cheap, immigrant labor (CIL) _must_ be expelled. NOW!

> In regards to the economic meltdown there are several major factors
> that have contributed: greed, repeal of the Glass-Steagal Act, Greenspan's
> creation of cyclical bubbles via low interest rates, the shadow banking
> system (GS and crew), CDO's, SIV's, CDS's, ratings agencies, and
> the failure of our government regulatory agency's.

Yes. But let us not forget that CIL played a large role in causing the high unemployment rate. We could greatly reduce the unemployment rate simply by taking the jobs away from the CIL and returning them to Americans.

-- Paul Bain, Esq.
[e-mail]

Dec 05 07:57 PM