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Hi,
Please refer to this article on Velocity of Money. The article talks about the recent surge in the adjusted monetary base (cash + bank reserves) of the US. At one point (in two paragraphs after the second figure) the author links the 1400% annualized increase in the adjusted monetary base to the Fed’s decision to buy non-liquid assets.
I understand that the fed uses treasuries (in OMO) to increase or decrease bank reserves and therefore the monetary base. And with respect to the fed's decision to buy non-liquid assets, I thought the process is a repo agreement whereby the fed exchanges its treasuries with non-liquid assets from banks for time being, allowing banks to have a balance sheet that is liquid and that can be marked-to-market correctly. However, now I am confused by the author's argument in the above article.
Question: Is the fed now using non-liquid assets along with treasuries to increase/decrease bank reserves and therefore the monetary base?
http://www.ritholtz.com/blog/2008/12/the-velocity-factor/
Thanks,
MG.
musicgold:Question: Is the fed now using non-liquid assets along with treasuries to increase/decrease bank reserves and therefore the monetary base?
The monetary base is defiitely increasing. Mauldin argues that this will not lead to a rise in prices because the new reserves are merely being swapped for less liquid forms of "reserves". I'm not certain, but I suspect this is because the "less liquid" reserves are assets that the banks have been able to keep as reserves but who's value is uncertain and, very likely, is currently priced well below what the banks need them to be priced at in order to stay in line with their legal reserve requirements.
In this case, if the Fed merely swaps these for "more liquid" reserves of a value (on the open market) that more closely resembles what the banks need them to be in order to stay within their legal limits, we wouldn't expect inflation. All the Fed is doing is pumping in the reserves to fund loans that have already been made in the past. These reserves will not form the basis of new/additional loans in the system and thus new money.
As he mentions though, the monetization of debt that will accompany this growth in the monetary base will offset this little swap by injecting the funds necessary to bring about future inflation as well... so the end result is much the same. The Fed is trying its damnedest to inflate and lord knows they can if they try hard enough... at least, they can as long as people keep using the money that they can make.
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