Wednesday, August 12, 2009

Quantitative Easing through October

The Fed had an uneventful FOMC meeting today. The notes are pessimistic about the economy despite recent events in the DJIA and other economic indices. There is no suggestion of rate hikes from 0% as it stands now. They did extend the window of quantitative easing by a month from September to October, but the amount remains $300B for treasuries, and then around $1.5T in "agency" mortgage-back securites and "debt."

For the record, $300B equals $2175 T*Bux, and $1.45T is $10,512 T*Bux. In other words this round of bank bailouts runs close to $13,000 per taxpayer. But money isn't coming from taxpayers... it's coming from the printing presses of the Fed, and so the tax is more of a devaluation of existing currency than something taken from our income. Such devaluation will be reversed as the bonds are paid back. Treasuries will be repaid, but I'm highly skeptical about agency mortgage-backed securites and debt, and so much of that $1.5T would be pure monetary expansion handed to the bankers.

My guess is, money supply will be diluted by around $1T from this. This would be bad for anyone holding onto cash.

Cash supply now runs around $1T (discounting what is sitting idle in bank reserves), and fractional reserve debt runs around 9x that (with approximately $4T in mortgages and $1T in consumer debt)—and so I'm guessing a ball park money supply of around $10T from cash and credit.

In the current environment of tightening credit, we have 90% of the money supply that could potentially contract quite a bit, and if credit falls more than 15%, such would wash out any total monetary expansion from quantitative easing.

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