The Fed said this week it may look to start winding down its Quantitative Easing program. Given the downward reaction of the markets, you’d think this is a critical development for the global economy.
But the numbers suggest the effects of QE were actually a lot less than many investors believe.
A lot of QE enthusiasts start with the chart below. The U.S. monetary base. Indeed, the amount of money in the country did take a huge jump following the onset of QE in 2008/09. Up about $2.35 trillion.
This looks like a huge inflationary force. But look at another chart: excess reserves at U.S. banks. Notice that excess reserves took a massive leap at exactly the same time as the monetary base exploded.
In post-crisis times, excess reserves have ballooned to $1.85 trillion.
Here’s why this is critical. Of the $2.35 trillion created by the Fed through QE programs, about 80% of it has ended up sitting in bank vaults as reserves. It’s not on the street. Not buying food, cars, oil, stocks or gold. It’s not doing anything productive.
Only about $500 billion has actually made it outside the banking system. This is a much smaller amount “roaming the street” than many investors believe.
Here’s a final stat to add to the mix. Since the economic crisis of 2008, savings in the U.S. have grown by $2.5 trillion. That’s a huge amount of money taken off the street. Much larger than the amount of QE money that’s actually been pushed out into the economy.
What effect did QE really have over the last five years? Mostly psychological. Encouraging big investors that it was okay to keep sloshing their pools of capital around the globe, rather than hoarding them in fear.
The market sell-off we saw this week was the same investors starting to feel differently, now that the warm glow of QE is fading.
Here’s to real money, doing real things,
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