Why You Really, Really Need to Care About the Implications of QE

Executive Summary

• The Fed's money-printing actions are simply creating new unsustainable bubbles in certain assets, like stocks
• QE-created huge excess reserves on banks' balance sheets are the rocket fuel that can –and like will – trigger explosive inflation
• The Fed is extremely unlikely to be able to unwind its QE efforts in a controlled way
• Things WILL correct, and when they do, the lack of an exit strategy will result in a massive financial dislocation
• The fundamental case for owning gold

If you have not yet read QE for Dummies, available free to all readers, please click here to read it first.

The Risks of Money Printing & 'Excess Reserves'

The first is that the recipients of all this thin-air money could just sit on it and do nothing.  No loans would be made, which means no new deposits would be made, which means the 'miracle' of fractional reserve money multiplication would not happen, which means the economy would not get juiced.

Indeed, that's exactly what has happened.  We can detect this in the form of what are called 'excess reserves,' which are dollars that banks now hold that are in excess of what they need to have on hand to satisfy reserve requirements.

There must be a lot of disappointment at the Fed that all of these funds are just piling up there and not doing anything (yet) to supercharge the economy, and so you might wonder why the Fed persists in 'quadrupling down' on a strategy that is not working as intended.

Unfortunately, I don't have a satisfying answer for that, as it mystifies me, too.  The only thing that makes sense is that the Fed is essentially just gunning for higher stock and bond prices in the hopes that asset inflation will bolster confidence and insulate large financial institutions from potential losses.

But this brings us to the second risk.  Take another look at the excess reserves chart, but this time look at the flat blue line that exists pre-2009, before the crisis started.  Excess reserves used to be best measured in billions, or perhaps tens of billions.  Not hundreds of billions.  And certainly not trillions.