QE Will Not Add To Money Supply: Really?

November 17, 2010 6:33 pm

Ben Bernanke explained the Fed’s move in the Washington Post the day he announced QE2. Read: What the Fed did and why: supporting the recovery and sustaining price stability. He makes an interesting claim there:

Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits.

Really? Let us see. The FOMC plans to buy 600 billion worth of bonds over the next few months. This FED needs to generate this cash from somewhere, it would electronically create this cash. Now its a different story if this cash would find its way into the market – that depends on lending decisions taken by banks.

Given the huge impetus on lending, and the street pressures on banks to turn in better numbers, there is a more than reasonable chance that this money would end up in the hands of the common man. 
But look at this argument from aleablog:

QE 2: Effects on Banks Balance Sheet

Note that, in this example, QE 2 changes the mix of the asset side of the balance sheet without changing the amount in deposits i.e no “money printing” or increase in size of the commercial bank balance sheet.

Something doesnt add up. A non-mandated increase in reserves – and Banks not touching thats for lending purposes? NOT HAPPENING.

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