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Hi everyone.
Based on recent comments/twitter posts/ email, vm, dm & twitter stream have been inundated with questions about, & challenges to, my assertions regarding QE being "deflationary" rather than "inflationary"

Many extremely smart & successful people (many of whom I like & respect) disagree with me.


As such, I have been asked for "Proof" or my "Source" to back up my assertions.

The "Smoking Gun" per se...

I'll attempt to answer this as clearly as possible below

Some clarification:

The assertions aren't to say QE is "never" inflationary.

Or "can't" be inflationary.

The assertion is that it's "not currently" inflationary.

It needs cooperation from commercial banks in form of credit extension (which isn't currently happening).

And...since banks are currently NOT lending...

there is no money multiplier effect...

and thus the inflationary pressures that would normally come if they WERE lending...

are NOT currently present.

As far as "source/proof" goes:

My answer is the Federal Reserve Act itself.

On broad basis Congress gave Fed power to regulate the economy by setting monetary policy.

To accomplish its goals it gave the Fed power to LEND but not to SPEND.

Powell recently reiterated this.

As such, with exception of physical currency (notes) & coins, Fed liabilities are NOT legal tender.

Because Fed liabilities being legal tender would effectively grant them the power to spend.

Which as Powell himself says would be in violation of the Federal Reserve Act.

Does this mean FR Liabilities are useless?


Reserves do have function. (partly explained below)

But serving as medium of exchange in real economy or to purchase On the Run Treasury Bonds is not one of them.


This last statement has become the most controversial and challenged portion of the assertion.

Well all seem to agree that in QE Commercial Banks trade (swap) a bond to Fed & in exchange Fed "credits" the account of the Commercial Bank that sits at the Fed with new Reserves.

These new "Reserve Credits" sit next to the other "Reserves" in the Commercial Banks accounts at the Fed.


What are these "other" Reserves that have suddenly entered the picture?

Yes, there are other ways that Banks get/have Reserves at Fed other than received via QE.

Bank Reserves can ALSO come from Commercial Banks themselves depositing cash at the Fed.

Where do Commercial Banks get this cash?

From the market in normal banking operations.

So where is smoking gun that Fed deposited Reserves r diff than Bank deposited Reserves?

Where is line in FRA that explicitly says cant buy Treasuries w/ Fed Credits received in QE?

The same place it explicitly says Mickey Mouse cant be Fed President.

It doesn't exist...

Again, is there a diff between Reserves that the Fed deposited...and Reserves that the Banks deposited?

Technically? No...

Visibly on a Balance Sheet? No...

Clearly delineated on the Fed's website? No...

Legally? Yes...

And that last part is the key to it all...

Just bc Reserves LOOK same from an economic perspective on a Balance Sheet...

Just bc Reserves r DEFINED the same way on Investopedia...

Just bc a car has a speedometer that goes to 120mph...

Does NOT mean can be treated same way or used as such from a LEGAL perspective.

Q: When US Treasury goes to Market & sells bonds what do hey want to receive in return?

A: Legal Tender/Money

To be money must be:
1-store of value
2-unit of account
3-medium of exchange

Reserve credits from Fed satisfy 1-2 but not 3 bc 3 is LEGALLY encumbered.

Treasury has bills to pay (lots!)

Last thing they want to do is get bogged down in legality of accepting restricted $ for latest T auction.

& if u think Congress...

The most Power Hungry group of people on Earth...

Will willingly cede their power over spending to Fed...

Now I know what some of u are thinking:

Fed & Congress r the most corrupt, evil & willing to break the law organizations to exist...right?

If that's the case, then why do you keep asking me to cite a law passed by congress or a page written in Fed document stating my case?

Why would u trust something written by them as evidence if u already think they are corrupt & willing to break the law?

Furthermore, if you are looking for legal proof, why are you not accepting the legal proof I offered at beginning which is the Federal Reserve Act itself!

So why don't Central Bankers clear up the confusion?

They don't want to clear it up. The more confusion the better.

They want u to believe when they tell u they r flooding market with liquidity.

Bc if you believe them u will change your behavior.

And that helps them.

So them some will say:

If you can't find a specific statement/paper/document that says Fed deposited Reserves are different than Bank deposited Reserves...

Then why do you think so...?

Who is the secret source that is telling you it's this way...?

The answer is that Shaq told me.

Just kidding. The real answer is the collective wisdom of millions of participants from all over the world.


The market is telling me that the Banks are NOT paying for new Treasury auctions with newly created QE credits.

If you think the banks have been monetizing the debt...

with spendable cash received from the Fed in QE...

with only the PDs as a short term intermediary...

For 11 years...

Then why did the dollar rise & why haven't we had hyperinflation?

Seriously, why would there even be a DEBATE?

What more could inflationists want than 11 yrs of monetization?

If the way QE is popularly described is true...

And Fed liabilities r able to be spent by Banks as if they are cash...

It would be like setting dollars on fire.

In any case I know I'm not going to convince most of you.

I know it doesn't seem right.

And I know you want certainty.

So I would encourage everyone to keep digging. Even if think u already understand it all.

You might be surprised at what you find.

Thanks to @PatrickCeresna & @ErikSTownsend at @MacroVoices for having me on to discuss this.

And of course a big thank you to @RaoulGMI and @RealVision for giving me the platform to discuss this further with @MetreSteven

Hope you all check out both places to hear more.

Finally, some thanks:

I've personally spoken to the following about this exact topic this week & they deserve credit.

Lacy Hunt

Pretty solid group.

Happy to go to war with this lineup if I had to.

But I prefer peace...✌️

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