The Fed Has Not Been Printing Boatloads of Money

As I listen to commentary on cable TV about the Fed’s quantitative easing, I find it amazing that people smarter than I, as well as better trained and more knowledgeable about many things, keep making the same mistake they have made for the past three or four years. Their predictions of an inflationary break-out and/or a collapse of the dollar haven’t come true during this time, but instead of going back and reviewing their assumptions, they merely say it is bound to happen even though it hasn’t happened yet.

What they fail to grasp is that their initial assumption that the Fed is printing boatloads of money simply isn’t true. If it were true, I would join them in their dire predictions. But it simply isn’t true and hasn’t been true throughout this period. The latest estimates from the Fed’s H.6 Money Stock Measures show M2 growth actually declining since the Fed resumed significant asset purchases last fall. M2 growth in the three months ending in February was 4.6 percent; it was 6.5 percent in the previous six months and 6.8 percent over the previous 12 months. Even this moderate growth is muted by the average decline in M2 velocity of around 3 ½ percent in recent years, yielding a growth rate of nominal GDP of roughly 4 percent per year.

Asset purchases by the Fed normally lead to a multiple expansion of money since, at the margin, reserve requirements are only about 10 percent of deposits. The roughly $2 trillion of asset growth from before the financial crisis through QE2 was largely offset, however, by an expansion in excess bank reserves of $1.6 trillion. In other words, the banking system has been sterilizing or neutralizing the impact of the asset purchases on the money supply. The good news is this is why we haven’t had an expansion of inflation or a collapse of the dollar. The bad news is that is also why the purchases have not stimulated economic activity more than they have. The effect seems to be limited to the downward pressure placed on interest rates.

The Fed’s asset purchases have been increasing bank reserves. The Fed adds Treasuries and Agency MBS’s to its assets and pays, in effect, by crediting the reserve accounts of the banking system. But that’s where it has been stopping.

It is true that the Monetary Base, which used to be considered high-powered money because it consists of currency outstanding plus the reserves of the banking system, expands with the expansion of bank reserves. But, with banks hoarding excess reserves as they have been, the Monetary Base has not had its historical impact on the public’s money supply. If one insists on calling the Monetary Base ‘money,’ then it is money that has gone only to the Treasury and the sellers of MBS’s. This has made the financing of our outsized deficit easier and cheaper. That will come to an end some time and financing the deficit will become more expensive; then holders of fixed-income securities will experience market losses if they sell them before maturity. But there are no inflationary pressures building.



Comments (24)

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  1. flow5 says:

    Roc’s in MVt = roc’s in nominal-gDp. Roc’s in RRs (required reserves) are a proxy for money flows. This has always been true for the last 100 years. I.e., contrary to Friedmanites, monetary lags are not long & variable. Lags in the roc’s for MVt have been mathematical constants. The proxy for real-output is 10 months. The proxy for inflation is 24 months.

    The roc in the proxy for inflation peaked in Feb (as did commodity prices). The roc in the proxy for real-output just peaked. The recent surge in economic activity is now over. The surge was due to 2 factors, the lag effect of money flows & the expiration of widespread FDIC insurance coverage (which lead to a one time acceleration in Vt).

  2. soolebop says:

    The question is: How do banks refill their inventories? The fed buys from banks, but banks don’t buy from other banks, they buy from the gov. which spends the money into the system.

    In the case of MBS Gennie mae sells them to banks, and banks sell them to the Fed, but Gennie Mae has no account at the Fed, so, the money they get for MBS isn’t in bank reserves. It’s being loaned into the system.

    Whenever someone makes the case you are making i feel like it’s an assault and insult of my, and market participants’ intelligence when there’s no mention of where tresuries and MBS come from. The twist was sterilized, but QE1 and 3 are not, hence the big move in stocks off the 2009 lows and the big move thus far in stocks since late last year right after the announcement QE3..

  3. BigEd says:

    No mention by Dr. McTeer of the loan suppressing effects of the Fed paying interest on those bank excess reserves. At a time of otherwise near zero rates on fed funds a return of 0.25% (with no credit risk or capital requirements) is counter-productive to more lending to the private sector. To say nothing of the $4 billion/year subsidy to the biggest banks.

  4. wworth says:

    So inflation is tame and the dollar is relatively stable because banks have been good boys and girls and have not used their excess reserves for lending? In essence, the Fed has put the inflation gun in the hands of banks. Gee, I feel better.

  5. K T Cat says:

    So what you’re saying is that the Fed is not monetizing the government debt? Whew. That’s a relief. I thought it was buying $1T of government bonds every year with money made out of thin air.

    Nothing to see here, citizens. Move along.

  6. Tall Trees says:

    This analysis is absolutely correct. Perhaps the banks are not loaning the funds because creditworthy borrowers do not want to take on debt. Also, with the excess reserves more than 10% of banking assets, loaning the funds would require an increase in risk-based capital, something that is still scarce in the banking system. If the Fed sold $1.6 trillion of excess reserves back to the banks today they would keep those assets because they are safer than making loans. Thank you for this commentary.

  7. Gene says:

    So $85 billion more each month from monetizing debt is a constant. As you heap that up, and on top of what came before, the $85 million becomes a smaller and smaller percentage increase. Elementary mathematics, Dr. Watson. No reason to excuse the Fed for that. Still way too much money propping up an out of synch government fiscal mess. If the government wants to borrow money take the Fed brick off the interest rate and make them borrow it from savers, pull some of the money back into circulation. And stop the spill over of too low interest rates funding the next boondoggle bubble, whatever it may be. All its doing now is hyper funding the government and inflating wasted past boondoggles at the expense of truly productive investment.

  8. Jaksonole Wyoman says:

    I’m so confused. Everytime I read about QE’s I come away more confused than the time before. It’s printing, no it’s lending, no it won’t cause inflation, yes it will, it has no risk, it has plenty of risk, the banks have more to borrow but they don’t, huh?…

    But the question is: If the economy is doing all so great why do we need QE’s? The Dow sets a record but we still need 85 billion a month in QE’s?

    Are QE’s the answer to modern civilization? Is it a loophole that allows any kind of mischievous banking without repercussions? Maybe it’s too confusing to be a risk. Maybe we need something like Qualitative Production that lends conjured money to homeowners to add solar panels to their homes. What’s the limit if we can just fool ourselves?

  9. Jaksonole Wyoman says:

    Correction: …the banks have more to lend but they don’t, huh?

  10. Jacksonole Wyoman says:


    Ok, so where did the Fed get the money? Is that where it starts by the Fed initiating (QE) money that didn’t exist before?

    Or did the Fed have to sell bonds to have the money to lend to the banks?

    If it’s money simply being added to the monetary system by the Fed in the form of loans to banks, how is that different than printing money?

  11. Lee says:

    What a complete joke. This argument is the ‘ol bait and switch routine. On the one hand he talks about money “printing” but yet he analyzes “money supply”. So what if money supply isn’t increasing, money is still being created out of thin-air. Inflation is much, much higher than CPI reports -remember that at one time CPI calculated cost of living, whereas now it looks at a declining cost of living (expensive goods are constantly swapped for cheaper goods). There are other ways that CPI is massaged, but really the only people who feel there’s no inflation are those who don’t live on a modest fixed income, and of course those who benefit most from inflation.

  12. Vikram says:

    About Feds QE3 is a rugged Theory where when you try to understand the depth of the words he will change the subject. Because in any country when the quantitative easing takes place that becomes the worst part before all the countries. So how Gold price will affect in it, lets check.
    How will Cyprus affect Gold price.?
    Spare a minute and check
    .Gold has undergone a broad range of consolidation and the target of $1522 and below is still very much undisturbed, where as yesterday the net long positions in commodities has crossed the November high, as I told earlier the game goes international in that momentum Cyprus issues syncs in such a way where it dramatically dragged Gold prices and came till $1590.
    Overall the current scenario will act according to the rumours and the worst is in making,
    Why before April15? The consolidation stage is prolonging for more than 3 months which is never good for any metal and speculators so called commodity players must be waiting for the closure of this contract as well as the closing of the accounting year by 31March. Operators Loves Big Game rather mercy killing so we expect again.

  13. Jack says:

    Dr. McTeer did an article a few months back about QE and the fact that banks are withholding far more money than federally required. The whole point of QE was to keep inflation from stagnating. Who cares how the Fed measures CPI, so long as it’s consistent.

  14. flow5 says:

    Only price increases generated by DEMAND, irrespective of changes in SUPPLY, provide evidence of inflation.

  15. Lee says:

    Inflation calculations are NOT consistent. Based on calc used in 1980 US inflation is running around 9%… And don’t let a banker tell you deflation is all bad, there have been many periods with falling prices in which the economy did quite well (James Grant is a good source for historical reference)

  16. Benjamin Cole says:

    Yes, the banks are collecting 0.25 percent interest on the excess reserves, and some say the Fed should stop paying that.

    But, commercial and industrial lending is rising nicely, and home buying is up. So the banks are doing something.

    Perhaps the Fed’s QE program is just not aggressive enough. I suspect so. Add another $1 trillion and see if that gets things moving.

    Feeble dithering may seem safe or prudent. But sometimes the “safe way” is not. Like now.

  17. A voice in the wilderness says:

    You are so wrong, yes Wilber we are printing money and yes we have had inflation of around 10% a year for 4 years. Has your medical insurance gone up 50% and your gas doubled? Oh neither of those things go into the government cpi along with many other things.
    We haven’t YET had more inflation because we don’t have money all we have it debt–a dollar is nothing but a non interest bearing debt. Government debt and private debt is so huge that printing 2-3 trillion is just filling the bucket more, when we reach the tipping point is when the dam breaks.

  18. Benjamin Cole says:


    In QE, the government prints (digitizes) money and buys bonds, thus deleveraging taxpayers. Debt is wiped out. Erased.

    I like this approach, just wish for a more more trillion dollars worth of it.

  19. Bridges says:

    1) If the Fed is printing money, then why is the money supply (m2) going down this year? Nobody has been able to demonstrate that the Fed has been printing money at a rate higher than the past 50 year average.
    2) The Fed’s QE programs are not effective if the Fed is buying back billions of treasuries that the government just sold at auction.
    3) Banks hold deposits at the Fed because the Fed is paying more interest than T-bills.
    4) Wilderness: keep holding gold if that’s what you believe. The problem is government budget deficit, not what the Fed has done.

  20. Marvin J. Greenberg says:

    Key point in the article is “banks hoarding excess reserves.”

    Now why would they do that, Mr. McTeer?

  21. Bridges says:

    If I can chime in, the excess reserves are simply the deposits that banks made at the Fed. At 25 bp, the Fed pays more interest than other financial instruments. So you make more interest holding the cash at the Fed than outside of the Fed. So you can’t compare current excess reserve levels to historical levels.

    If you want to see something fascinating that seems forgotten, take a look at the 16-week treasury yield index in the fall of 2008 when the Fed began paying interest on excess reserves (symbol IRX).

    As for why banks aren’t lending more, I suspect its a result of increased regulation. At least that’s my experience.

  22. Doug says:

    Banks don’t lend out their reserves because they make more from the Fed’s interest on reserves than they can get from a comparably riskless US government T-bill, and there’s no private loan demand in a slow growth economy. The longer rates stay low, the longer expectations are that they will stay low. Until expectations exceed current policy rates, there is no monetary stimulus. See my paper “Yield Expectations and Monetary Policy” ( ).

    So, no monetary stimulus, slow growth continues, the Fed pours in reserves, which the banks don’t lend, so no monetary stimulus, and on and on. The good news is that inflation stays low despite the massive build-up of reserves.

    To break the cycle of stagnation 1) end interest on excess reserves – the funds will begin to flow into the private sector, and 2) increase expectations for future interest rates so people buy that house or make that investment or purchase NOW, not in the future.

  23. John Chew says:

    The Fed has invented perpetual wealth!

    The US government can provide ALL goods and services to its citizens by issuing US Bonds which the Fed can then buy by crediting member banks’ accounts at the Fed, they then can hold these reserves. Perpetual debt monetization will lead to infinite wealth!

    What’s the point of working, then?


  24. Rob says:

    Boy I feel better
    I thought we we were a third world country you know the kind that monetizes their debt, debases their currency, tries to create a wealth effect, tries to control the yield curve, manipulates salient economic numbers for their purpose employment numbers inflation numbers, tries and does control the stock market etc. The stock market returns are correlated the expansion of the fed balance sheet they will not taper they can’t the will expand and do more qe. That is all they know, these people should not be be looked at reverently, ben bernake is Bernie mad off with a Ph. D