Why the Fed’s QE isn’t booming the economy …

Two related articles caught my eye …

First, the Washington Post editorialized that:

The only part of the Obama economy that has flourished  is Wall Street.

Only the trickle-down from the wealthy financial players, who have thrived off the conveyor belt of money as it travels from Washington to Wall Street, has had much of a positive effect on the economy as a whole.

Let’s break down the economic fundamentals.

First, a chart showing the “conveyor belt of money” …



Note that the M1 money supply increased from about $1..4 trillion in 2009 to today’s $2.6 trillion.

Shouldn’t a cool $1.2 trillion more in supply of money get the economy cranking into overdrive?

Here’s the rest of the story …


The second article: Bloomberg ran a piece by economist Gary Shilling titled “Why Fed Has Failed to Lower U.S. Unemployment”

Shilling says that the Fed’s program to spark job-creation is a five-step process that is supposed to work like this:

First, the central bank buys Treasuries or mortgage-related securities.

Second, the sellers reinvest the proceeds in stocks, commodities, real estate and other assets, pushing up prices.

Third, higher asset prices have a wealth effect by making their owners feel richer.

Fourth, consumers and businesses spend on goods and services and capital equipment.

Fifth, that spending spurs production and demand for labor.

Shilling observes that the Fed’s actions have propelled U.S. stocks to record levels.

But, the Fed’s efforts haven’t worked very efficiently when it comes to the last three steps.

The U.S. unemployment rate remains high by historical standards, and  payroll employment remains well below the previous peak in January 2008.

Why is that?


Shilling says that there have been virtually no follow-on effects from the Fed’s creation of member bank reserves.

When the central bank buys securities, the proceeds clear through the seller’s bank and end up as additions to that bank’s reserves at the Fed.

In normal times, those reserves are lent out by the bank with successive relending to businesses.

But since August 2008, when the crisis started, the multiplier has dropped … and bank reserves have swelled.

In technical terms,  it all boils down to a deceleration in the“velocity of money” … in effect, the number of times that money changes hands.




Since 2008, the velocity of the M1 money supply has dropped from about 1.6X to .75X.

Putting the pieces together – the level of the money supply and its velocity – measures the net impact of the QE programs.

Back in 2008, the supply was $1.4 trillion and the velocity was 1.6X … which multiplied together gives an effective M1 money supply of $2,24 trillion.

Currently, the money supply is higher ($2.5 trillion)… but, its lower velocity  (.75) … generates a 13% lower effective money supply ($2.6 X .75 = $1.95).

That’s why all the QE money isn’t making the economy boom.

It just pushes stock prices and bank reserves higher.


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One Response to “Why the Fed’s QE isn’t booming the economy …”

  1. TK Says:

    The funny part has been watching Wall Street accuse Obama of being a Socialist while he shovelled money into their vaults. Time to admit that trickle down doesn’t work and we need to focus on lifting middle class incomes and suppressing management greed.

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