Thread by @Darky999

This is a must watch video from @GeorgeGammon

Interestingly I came to the exact same conclusion on Thursday last week (b4 this video came out), having spoken to REAL PEOPLE in CBs and also Commercial Banks, to understand the flows and mechanisms

1/N

TL;DR is that M2 can increase due to QE, when non-banks (e.g. pension funds, insurance co's, biz's, retail investors) sell bonds VIA the bank to the Fed (bank = intermediary); as the bank does credit the bond seller with new deposits, hence M2 does increase

2/N

If a bank sells its own bonds (from its B/S) to the Fed, there is NO increase in M2, as this is simply a shift of Reserves from the bank to the TGA (i.e. the Treasury) - both have Fed accounts, there is no M2 impact

3/N

Banks can use Reserves to buy bonds, and banks hate reserves as they pay 10bps, so they buy bonds with their Reserves to increase the yield (say to 25bps or more), and these bonds count as HQLA (High Quality Liquid Assets) too for regulatory reasons - the same as Reserves

4/N

Bottom line: QE is both inflationary AND deflationary, inflationary as M2 can increase, deflationary as QE happens when economics are weak, bank lending is decreasing (look at H.8 each week), hence reducing M2...

Deposits have velocity

Reserves have in-effect no velocity

5/N

I came to exactly same conclusion on Thurs last week as George Gammon did in his latest video, we have NOT discussed this (I tried to reach him, but no reply), so if anyone has better access to George i'd love to get an intro as we have been trying to solve the exact same Q

6/N

So what does this all mean?

It means that if there is one thing to watch, it's the H.8 data, i.e. deposits (main part of M2) and also the C&I loans. Both are trending down after spiking in Mar

Also how much of Treasury auctions PDs (banks) buying, vs total amount of QE

7/N

...but there are lags, CPI doesn't increase/decrease instantly, no one knows exact lag times, so whilst it's great data to help, it won't tell you exactly when to make investments sensitive to rising/falling inflation

Right now, deflation has more data supporting it IMO

8/N

No surprise there is no silver bullet, this thread should help with understanding if u r curious about these dynamics - and I appreciate only a sub-section of folk care about stuff this geeky 🤓

@bondstrategist @RaoulGMI @SantiagoAuFund @LukeGromen @LynAldenContact @MetreSteven

Finally, FX is also important, if USD falls 30% (however u want to measure it) then imports will become more in USD terms = inflationary

If USD strengthens then opposite = deflationary

Recent USD move down, same time as CPI up, now USD perhaps stabilised again (TBC...!)