Held in Reserve

Art points out what has happened to all the QE money.

It is in excess reserves.  Not exactly every last penny, but the great vast majority.

His comment to graph #3 at his link:  "Base money less excess reserves shows a gradual uptrend. Almost like normal growth."  This got me wondering what normal growth actually is.  The graph below illustrates YoY % growth in {base money - excess reserves} (FRED series AMBSL - series  EXCRESNS)

First observation:  The growth number varies a lot, but is between 5 and 10% most of the time since the mid 60's.

Second observation:  Without prior knowledge, there is absolutely no way to detect any QE event on this graph - exactly to Art's point.

Third observation: The rate of change always increases during a recession, from the very minor uptick in 1974 to the quite dramatic upticks of 2001 and 2009.  But there's also a big, narrow spike in the late 90's, and significant bumps in the mid 80's and early 90's - all non-recessionary times.

Fourth observation:  The rate of change increased steadily from zero to about 6% during the 60's.  Since then it looks like about a 7.5% average, BUT - with an increasing standard deviation.

I don't know what to make of this history, but the clear message of more recent events is that the apparent big cash infusions of QE (see Art's graph #1) were no infusions at all.  The net result is that banks, by drawing a small but real return on excess reserves have further enriched themselves while doing no good at all to the economy at large.  This is just one more - and very subtle - form of rentier activity.

Bottom line:  We are so screwed.

Update:  Just for Kicks, here are the monetary base and the monetary base less excess reserves for the period 1960 through the end of 2007.  Both lines are plotted, but they overlap completely.

Now, here they are for 1/1/2008 on.  Not so much overlap now.

Update 2: In comments, Nanute says: "Does it not seem that all the QE money has had the perverse effect of slowing down the velocity of money? By paying interest on excess reserves the Fed is basically allowing banks to profit from borrowing from the government. It's like free money."


Indeed.   A look at this FRED graph (normalized to 100 at 1/1/2005) shows how velocity for all the money measures has tanked since 2008.  From Art's earlier post, QE initiation dates are Sept. '08 and Nov. '10.   In fairness, we have to note that velocity for M1 and M2 had been sliding since early '06.  Not so for MZM, though, which rose steadily until late in 2007.

Correlation isn't causation, but we can safely say that two rounds of QE did nothing to increase money velocity, for any money measure.