Monday, November 18, 2013

The QE Circle Illustrated

The following is a brief walk through of how the QE process works in the United States. The Federal Reserve buys treasuries and mortgage bonds from primary dealers (the largest banks) and give them cash. These purchases with printed money are shown in the growth of the monetary base:


The banks then take that cash and re-deposit the money back with the Federal Reserve earning interest on these deposits. The deposits also allow them to have a capital base to speculate in the stock market and other risk assets with leverage. The following chart shows the re-depositing of the fresh cash with the Fed known as excess reserves:


During this process you will notice that Main Street has been cut out of the loop. They do not receive loans from the banks as they once did in the past. Instead, this cartoon sums up what is left for "the rest."

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