Federal Reserve Market Influence

UPDATED: 12/8/2021 - Refined view in italic

Today I have three great videos that summarizes the effect of Quantitative Easing.

First is from the YouTuber Bond King, what is QE, and what they are doing in the marketplace.

Many think QE is 'money printing', in effect like a banana republic just printing money and injecting it into the economy.  The first question I have, how can the Federal Reserve "give" money it creates out of thin air into the monetary system?   There is no method it can do so currently.  (I suspect it will eventually with a crypto dollar issued by the Fed, but that's years off.)

What it is doing is "swapping assets", specifically swapping out US bonds with Federal Reserve Assets.  The reasoning is to try to suppress interest rates and strengthen the dollar.  Lets take a look at bond rates and dollar valuation since 2009 to see if this is indeed the result.  US Bond Rates are down and dollar is up.  This supports it isn't going Banana republic and printing money like Weimar republic.  (If you believe different, please add in comments the rational and data to support!)

The Video that explains the mechanics of QE is below, interestingly this video says the fed gives an impression to suppress bond rates, but he doesn't say it is actually effective. After this video, below is another that shows the fed doesn't actually suppress bond rates, but gives an illusion it does. 

If the fed is able to suppress bond rates, then market signals cannot be trusted.  Historically the financial system uses bond rates to indicate risk on-risk off in investments.  My personal belief is QE helps stabilize rates by reducing the potential volatility of bond selling, but the actual rates are in fact reflective of what the market is willing to support.   It reduces volatility by putting the asset in control of the Federal reserve, out of the hands of institutions that could someday in the future engage in mass selling of federal bonds.  By becoming the 'buyer of last resort' for federal bonds, they can prevent a meltdown of US bonds, and therefore a collapse of USD valuation in the future.

What this does do is help banks with confidence in lending, and this is a market psychology rather than 'free money'.  Banks can at will create millions if not billions of dollars with no reserves, they are the TRUE creators of money/debt/credit out of 'thin air'  And unless banks lend, there is no money growth.

The video that walks through how QE has NOT rigged the bond market rates.

Net result?  Federal Reserve bank, even if it cant suppress rates, or print money, it presents itself like it can.  It supports the market  Psychology that it is somehow 'rigging the market'.    That helps create debt/credit creation by banks which does in fact inject new money into the system.  But it isn't banana republic money creation, people have collateral against this debt, and banks could liquidate customer assets as required.

But there is another angle, WHAT assets does the Federal Reserve buy?  US Treasuries AND distressed assets.  For the moment we will count US treasuries as reliable, but distressed assets?  These are assets no one wants to buy, unless there is a deep discount.  But the fed buys distressed assets without ANY discount.  Further if these assets lose money or implode? It doesn't matter, the fed can print as much money as it wants to stabilize those assets.   THIS is inflationary!  Because if the federal reserve didn't buy these distressed assets there would be a deflationary price to dump them, and a likely cascade of deflation as it helps kick off a chain reaction of deflation. (margin calls, banks raising more capital to cover losses, etc)  THIS is the leaking of money into the economy, through bad loans having no consequences. And when you remove consequences from actions, you are destroying the strength of capitalism.

To learn more, watch this:

Generally speaking majority of new debt is created by those who have collateral.  Those people tend to have assets like houses, stocks, and yes bonds.  They are the ones who don't take a huge hit on the failed assets, and are able to continue to benefit more of wealth growth.  They can then add to their assets more loans to buy houses, stocks, and even bonds.  The vast majority of money creation by the banks therefore is slanted to make the rich richer without the larger consequences of deflationary events.   Its is ponzi like, as the system depends on growth to sustain asset appreciation of those who already have assets.  Now is there any way to prove this is the result of QE? At the bottom is my final chart, you be the judge.  

As long as the world demands dollars (USD is the world reserve, 'gold standard' holding), I don't know when this dance ends.  I suspect US Treasuries hit on average about zero across 1, 5, 7, 10, 20, and 30 year holdings.  For at that point asset investments may seek a new store of value.  As this unfolds, together we will learn more about a breaking point.