Scott Grannis and friends:

[Crafty_Dog]

Woof All:

I have posted here from Scott Grannis previously because of the regard in which I hold him, but because of the following piece which deeply challenges many of our core assumptions held around here I have decided to open this thread.

Please read with care and comment.

TAC,
Marc
===================================

http://scottgrannis.blogspot.com/2013/03/the-fed-is-not-printing-money.html

[Crafty_Dog]

A friend asks Scott:


As I understand it, The NY Fed in engages in MBS and Operation Twist buys,  and purchases the bonds from the Primary Dealers.  The money to buy comes from Bank Reserves.  Since the Banks do not take out the money, the Reserves can still be lent at 10% fractional banking, even though the Fed is using the money for the Purchases.
The "commissions" from the transactions are credited back to the Primary Dealers as more Reserves.  

Reserves held are somewhere about $1 trillion.  In the last 6 months alone, the Fed has purchased $85b per month, which would amount to about $500b total.  Over the last couple of years, the Fed has bought over $1T in MBS.

Please explain to me how the Fed can keep buying using Reserve money.  That money has to exhaust itself at some point, even with the new "commissions" being credited to the Reserves.




=================================

Scott replies:

The Fed can buy anything it wants (so far only Treasuries and MBS), but it can only pay for what it buys by crediting a bank's reserve account with "reserves." Bank reserves are "money" that only exists at the Fed. You can't spend reserves on anything. Reserves are only good for 2 things: 1) banks are required to hold about $1 of reserves for every $10 of deposits, and 2) banks can exchange their reserves for currency.

In the past, prior to 2008, banks wanted to minimize their holdings of reserves because reserves did not pay any interest. Banks would actively sell excess reserves on the overnight market to other banks that needed them to meet their reserve requirements. If the banking system wanted to increase its lending, then banks in aggregate would need to increase their holdings of reserves because increased lending means increased deposits: banks "create" money by extending loans to people, and that is done by crediting the borrower with a deposit. The Fed actively managed the supply of reserves to the banking system in order to control the amount of money that banks were able to create.

Since 2008 lots of things have changed, most important being the fact that the Fed now pays interest on reserves. Reserves have now become the functional equivalent of T-bills. In fact, they are more attractive that T-bills, because 3-mo. T-bills only pay 0.06% interest, while reserves pay 0.25%.

Banks have been very willing to accumulate reserves in their Fed accounts, because reserves are the most attractive way to own safe assets. Banks have been forced to increase their capital requirements and clean up their balance sheets, and holding more reserves is the most efficient way to do that.

So what the Fed has been doing is transmuting T-bonds and MBS into very attractive "safe" assets that the world has been very hungry for. With risk-aversion still very high all over the world, the Fed has been working hard to create safe assets in sufficient quantity to satisfy the world's voracious demand for safe assets.

Banks have increased their lending activity only very modestly, despite their huge accumulation of reserves. This is "proof" that the Fed has only been supplying safe assets to the banking system in response to banks' demand for safe assets. If banks didn't want to hold so many reserves, they would be inundating the world with new loans and the money supply would be increasing at a tremendous rate. But that's not happening. There is no sign of a huge excess supply of money. Gold has gone nowhere for almost 2 years. Commodity prices have gone nowhere for the past 5 years. The dollar is up against most currencies over the past 5 years. Inflation has been about 2.5% per year for the past 5 years.

Here is a chart of bank reserves, which have grown by $1.75 trillion since late 2008:

 

Of the current total of $1.87 trillion of reserves, only $0.116 trillion are "required" to back up bank deposits. So there is a total of $1.75 trillion of "excess" reserves that banks are holding because they want to hold them.

Currency in circulation has increased by about $315 billion since late 2008, which means that banks have exchanged an equal amount of reserves for currency. Since the amount of currency in circulation is never more than the demand for currency (unwanted currency can simply be returned to the Fed in exchange for reserves which pay interest), the 7% annualized growth of currency is a measure of how hungry the world has been for dollar cash (the bulk of dollar currency in circulation is held overseas).

Altogether, the Fed has purchased a little over $2 trillion of bonds and MBS since September 2008; $315 billion of that now exists in the form of currency in circulation, and the rest is sitting in banks' reserve accounts at the Fed where it earns interest.

The Fed has monetized federal government debt only to the extent that the world has preferred to increase its holdings of safe dollar assets and dollar currency. This is not scary, nor the end of the world.

=========================

a response:

<This is "proof" that the Fed has only been supplying safe assets to the banking system in response to banks' demand for safe assets.>

I find this statement absolutely incredible. Sure the banks have a "demand" for "safe assets" -- they want to get all those toxic assets off their balance sheet and replace them with something that has a known value. Very logical. But what is happening is that the banks have been badly managed and are loaded with assets that either can't be priced at all, or have a market value substantially lower than the price the bank paid. Why should the Fed bail out these bad investment decisions? The cost will surely fall on all the rest of us in time, if not immediately.

If a person or a bank wants to change its assets for different assets, let that person or bank sell its assets on the open market and then buy what it wants. Why should bankers get a free ride that is unavailable to anybody else?

Free markets yield asset and goods prices which are beneficial in countless ways. The central planners in the Fed are not helping to promote a growth economy. In the financial realm we might as well be living with the Politburo.
===============================
, , ,


Scott, your reference to 2.5% annual inflation really baffles me. I'm sure that is the official number but I really question it based on my personal experience. Add 5% and I think it's in the ballpark, maybe still a little low. As Pat pointed out, the things I buy are rising at a much greater rate than 2.5% per year. I put this figure in the same basket as purported "budget cuts" which are really reductions in projected growth. Truth seems badly lacking in Washington and I don't believe the 2.5% figure. If prices were increasing in the high single digits how would that change your view of things?

=========================

I have been a student of monetary policy and inflation for more than 30 years. It started when I lived in Argentina in the late 1970s, at a time when inflation was routinely in the triple digits.

I have spent the better part of three decades sifting through the economic statistics of the U.S. and many other countries. I am as skeptical as anyone when it comes to government stats. But I am convinced that the U.S. (and almost all other countries) are doing a pretty good job of measuring inflation and other macro economic statistics. The simple truth is that all these numbers are so interrelated that you can't just fudge one, you have to fudge everything. There are many measures of inflation and growth, and they are all consistent with each other.

I know very well that lots of prices at the store are up, and up big time. But I think it's easy to forget all the prices that are falling. Inflation is measured by averaging the prices of everything. So maybe cereal is going up, but computers are going way down.

The only country that is fudging its inflation numbers these days is Argentina. Believe me, it is very obvious just by looking at the numbers. The government says inflation is only about 10%, but it is really more like 30%.
=================

, , ,

Scott replies:

The CPI is the most basic, and most narrow measure of inflation. There are others that are much better, since they measure a much broader range of prices, and they correct for changing quantities: the Personal Consumption Deflator and the GDP implicit price deflator. All measures say pretty much the same thing: inflation is somewhere in the range of 2-3% a year. But that masks a huge and ongoing change in relative prices of different types of goods and services.

Durable goods prices, on average, and taking into account qualitative improvements, have declined almost 30% in the past 18 years. This has never happened before, and it is highly significant, easy to overlook, and easy to underestimate:

[Crafty_Dog]

The consensus among the people I am dealing with is that if QE stops buying MBS, goodbye to Real Estate.  MBS buys account for 50% of the GSE business.
===========================

Scott responds:


I seriously doubt whether the end of QE would spell disaster. The Fed currently owns only a fraction (about 12-15%) of marketable Treasuries and only a fraction of outstanding MBS. Their purchases can not seriously distort or impact these markets. What most people fail to understand is that Treasuries and MBS are bonds, and bonds are largely fungible. A 7-year bond is almost identical to an 8-year bond, and MBS and Treasuries share some characteristics and can even be made to look like each other with the use of derivatives. What sets the price of bonds is the prevailing level of interest rates, that that level in turn is set by macroeconomic forces that operate on all bonds. The Fed's purchases are a drop in the bucket; the global bond market is several tens of trillions in size, and the Fed only owns only $1.8 trillion of Treasuries and $1 trillion of MBS.

Also, bear in mind that the Fed is not going to stop QE unless and until they judge the economy to be fundamentally stronger. A stronger economy naturally warrants higher interest rates. Higher mortgage rates will not necessarily wipe out the housing market if the economy is improving.

Interest rates today are low because the economy is perceived to be very weak. A stronger economy tomorrow will justify higher interest rates. The economy drives interest rates, not the other way around.



 

[DougMacG]

Crafty, going back to your original post here: "the following piece which deeply challenges many of our core assumptions"...  http://scottgrannis.blogspot.com/2013/03/the-fed-is-not-printing-money.html

Quantitative expansion:  We are pouring kerosene all around, giving it no spark, and then pointing out no observed increase in fire or heat - so far.

Scott and I have reversed positions on the inflation concern, if my memory is correct.  Without finding the exact exchange, I argued a few years ago that the Fed's record against inflation was not too bad, typically 2-3% per year and it was pointed out back to me what a huge loss of value that is over any extended time period, which is true.

Now Scott argues: "The idea that the Fed is "printing money" with abandon, and that this is seriously debasing the U.S. dollar, is a fiction borne of ignorance of how monetary policy actually works."

I find his hedging, second sentence far more telling:  "Fed policy may indeed pose the risk of serious debasement in the future..."  - Unfortunately, Yes.

My view is that inflation is the diluting of our currency and that general price level increases are a consequence of that, following in time and dependent on other variables as well.

What did Milton Friedman say:  MV = PQ  

(From a previous post: http://dogbrothers.com/phpBB2/index.php?topic=985.msg70088#msg70088)
These four very important but difficult to measure variables are all intrinsically tied to each other, either proportionally or inversely.  The money supply times the velocity of money (MV) equals the total value of all the goods and services (PQ) in the economy.

We know the Fed is 'monetizing' at the rate of 3/4 of trillion dollars a year (M).  We are pouring in the dollars, literally in the trillions, and by measuring the result indirectly we are saying it isn't increasing the money supply any faster than usual.

We know velocity (V) as measured is way down, and I would argue is a poorly measured phenomenon currently understating the malaise.

We know Price levels (P) are all over the map, some up, some down, with a net result so far allegedly only at 2-3% price increases per year.

We know that the total amount of goods and services in the economy (Q), is virtually flat in our no-growth economy.

IF and when economic growth and vitality returns, then what?  Rejuvenated velocity will multiply with the trillions of accumulated monetary expansion (do we know how to put that toothpaste back in the tube?) and drive price levels to spiral up faster than actual output can or will increase.  MHO.  

I admit 'ignorance of how monetary policy actually works'.  I wish our dual mission Fed had the same humility.  My trust of the Fed knowing what they are doing would be much greater if they weren't working on the dual mission of pretending to help with unemployment, not a monetary problem, while working to maintain a stable value of our currency.

[Crafty_Dog]

Doug: 

Thanks for your thoughts.

The questioning of Scott's analysis continues:
==========================================================
Scott,

You keep looking at this from a one dimensional perspective.  It is not that simple.

The only thing keeping housing where it is right now is because the Fed is purchasing 50% of all  new mortgage originations.  That is because there is little demand for the new GSE MBS's, since the return on the new MBS's are running no more than 2.75%.  Who in their right mind would buy an MBS for a 30 year period of time, with a return of 2.75%?  This is negative income, even now.

There is no one ready to pick up the slack if the Fed jumps out of the market.  There are too many things to be done to rebuild the foundation for lending  to begin again.

1.  Fannie and Freddie are being wound done.  In fact, as of today, the Fannie Portfolio is 30% less than what it was at the peak.  In five years, both Fannie and Freddie are to be completely wound down, but there has been no decision by the government on what to replace them with, or even replace them at all.  (My people think that the government will likely create similar entities, only smaller, which will simple be GSE 2.)

2.  The banks can't portfolio lend for several reasons. a) Basel 3 requirements for reserves are so complicated that no one can determine how  mortgage loans are going to be tiered.  b) CFPB rule making for loans is going slower than anticipated, and the banks are afraid to lend otherwise. 3) A serious lack of qualified borrowers based upon current underwriting methods.  d) There is no way that current default risk can be properly evaluated. Deefault Risk is the key to complying with Basel 3.  e) Follow up systems developed to continuously monitor and adjust for risk as economic and other issues change, so that Basel 3 can be complied with after loan originations. f) Home values are still uncertain, and so lending practices must consider that, and factor that into future risk evaluations as  well.  This must all be resolved for portfolio lending to resume.

3.  Dodd Frank compliance with the lender Fiduciary Duty to a Borrower and Ability to Pay issues.  This is a key point.  The Qualified Mortgage is supposed to take care of this issue, through a Safe Harbor that will protect lenders from lawsuits on a Qualified Mortgage and Ability to Pay issues, but I have already figured out how to attack that, so we are trying to create processes to ensure that lenders will have a viable defense in the event of lawsuits.  Who will lend on loans where they would be subject to lawsuits?

4. Private Securitization is still essentially non-existent.  Only a few companies are doing Private MBS, and with such high quality of loans, few loans could even qualify.  Private Securitization cannot be restarted until underwriting issues and Ability to Pay issues are resolved,  since those loans  will generally not be subject to the Safe Harbor provision.  Additionally, as we found out, the algorithms that were used to defer risk in the Trusts were faulty.  New methods of populating the Trusts must be done to adequately defer risk.  To do that, Default Risk must be properly evaluated on each loan, so that the risk can be spread out.

5. Hard Money lenders will cease to exist in almost all  forms.  Dodd Frank and the CFPB will drive them out, beginning next year.  This is a whole category of lending that has not even begun to be addressed, yet borrowers often do have a need for Hard Money, under certain situations.

6.  Banks cannot loosen lending standards on a whim.  Just reducing FICO scores or allowing smaller down payments don't work.  FHA has shown that to be a problem.  There is much to be considered with any loan, including Cash Flow Analysis for an individual borrower.  We are working on that as well.

7.  Stress tests for banks are very critical.  The tests involve multi-faceted scenarios, across all lending platforms, and under varying economic and political conditions.  We have people who have developed such tests in the past and are currently improving upon them for the future.

These are only a few of the issues that directly affect the housing market, and don't even begin to go into the continuing default servicing, modifications issues, negative equity, population demographics and other issues that will come into play as well.

That is why:

1.  The Fed cannot discontinue QE until these issues are worked out.

2.  If they do discontinue QE before the issues are resolved, housing will crash again, and much harder.

[Crafty_Dog]

I have sidebarred Scott and asked for his comments about our conversations here and he has been kind enough to oblige:
================================

Yes, you are (mostly) all at variance with how I see things. To me it is very clear, whereas I think you guys are not viewing things from the proper perspective. The economy is in bad shape, but it IS improving. The deficit IS declining. Government spending as % of GDP IS declining. The deficit IS shrinking.

Yes, things are very bad. This is the worst recovery ever. Obama is a disaster. Obamacare is a huge disaster. Employment is way below where it should be. Congress doesn't seem to understand anything. Fiscal policy is all wrong: instead of increasing spending and increasing tax rates, we should be reducing spending and reducing tax rates. I could go on.

But all of this is known. This is old news. This is why PE ratios are still below average even though corporate profits are at all-time record highs, both nominally and relative to GDP. This is why the dollar is very near its all-time lows. This is why the demand for money is extraordinarily high.

So: what is important is what is happening on the margin. On the margin, government spending is not increasing. Government spending is decreasing relative to GPD. Congress is gridlocked. Taxes are not going to rise, and the Republicans are going to pick up seats next year and it will be even harder for taxes and spending to rise. It's far from certain that Obama will be able to push through his budget; his popularity is falling and he is not engaged. Dems who are facing re-election next year are already sh*tting in their pants. The deficit is declining, both nominally and relative to GDP, and by a LOT. If current trends continue, the deficit will be zero within 8 years or so.

Obamacare is so bad that it is far from certain that it will see the light of day without suffering huge changes or postponements. Lots of things can happen between now and the end of the year to modify Obamacare. The private sector is already hard at work searching for alternatives which work. And there are many that are surfacing already. Concierge medicine, instant clinics, etc. It would only take ONE change to the tax code to change everyone's incentives for the better: make healthcare insurance deductible for everyone, not just employers.

The world according to Obama is unsustainable, therefore it will not happen.

[DougMacG]

This is a great post.  Thanks to Scott and to Crafty. 

Where he loses me starts with this:  "the Republicans are going to pick up seats next year", and to presume Republicans or at least responsible economic and fiscal views will do reasonably well thereafter.

There is plenty in history to support that prediction, unless one believes there is a major political shift going on.

If you substitute 50-50 in place of that certainty, the outlook is quite a bit scarier.

While the trillion dollar deficits are narrowing, that permanent debt accumulated all that time and continues to grow, as do the unfunded liabilities.  Also accumulating is the number of people who permanently left work and the number of years since this economy has generated healthy start-up businesses, hungry to grow output and employment.

What is different with this catastrophe as opposed to say WWII or 9/11 is that we deliberately chose this train wreck and for the most part just voted again to keep it going.  If not for the political art of re-districting (Republicans lost the House election nationally by 1%), the forces of stagnation and decline would already control all branches of government.

[Crafty_Dog]

Charts can be found at the URL
======================

:- http://markdow.tumblr.com/post/48620046809/everything-you-think-you-know-about-the-fed-is-wrong


Everything you think you know about the Fed is wrong
by Mark Dow and Michael Sedacca

Few would still argue against the assertion that the Federal Reserve has been central to the financial stabilization and economic recovery from the 2008 crisis. They fixed the plumbing and are now trying to incentivize animal spirits to pump water through the pipes. The debate has now migrated to exit strategies and whether growing side effects from exceptional monetary accommodation outweigh incremental benefits.

Nonetheless, it is the Fed, views are heated, and many misperceptions persist. The concept of money printing resonates strongly and intuitively with almost everyone, but most of the intuitive reactions to the Fed’s QE are turning out to have been wrong. Here are some of the major ones that linger.

1. Money printing increases the money supply. The Fed does notcontrol the money supply; they control base money (or inside money), which is a small fraction of the broader money supply. In our fractional reserve system, the banks (loosely defined) control the other 90% or so of the money supply (a.k.a. outside money). And the banks have not been lending. This is why the money supply has not grown rapidly in response to years now of QE.

2. QE is “pumping cash into the stock market”. The truth is little of this money finds its way into the stock market. When the Fed implements QE, they are buying low-risk US Treasuries and agency mortgages from the market, mostly from banks. About 82% of the money the Fed has injected since QE started has been re-deposited with the Fed as excess reserves. With the remaining 18%, banks have tended to buy other fixed income assets of a slightly riskier nature—moving out the risk spectrum for a bank doesn’t mean jumping into equities, especially given the near-death experience that most of them have just gone through.

Of course, not all of the USTs and MBS were purchased from banks. And some of the money does end up in equities. But, really, not all that much. The other big holders of USTs/MSBs who’ve been selling to the Fed for the most part have fixed-income mandates too, and they are also unlikely to take the cash from the Fed and cross over into equities with it.

So, the natural question is why—if the above is true—have equities gone up so much in response to QE? The simple answer? Psychology and misconception.
By taking an aggressive stand, the Fed signaled to markets that “I’ve got this”. The confidence that the Fed would do everything it could to protect our economic downside stabilized animal spirits. Then it slowly but surely enabled risk taking to re-engage. The fact that so many people believe that the Fed would be “pumping money into the stock market” and so many buy into the aphorism “don’t fight the Fed” (notwithstanding September 2007 to March 2009) made the effect that much more powerful.

In short, this largely psychological effect on markets—one that I (Mark) had initially underestimated—bought time for household balance sheets to heal and is allowing fundamentals to catch up somewhat with market prices.

3. QE will create runaway inflation. “Yet” has become the favorite word of the inflationistas. As in, “Oh, it’ll come, just hasn’t yet”. And the magnitude of that expected inflation has been dialed down from ‘hyperinflation’ to ‘high inflation’.

But some continue to hang on. The most extreme inflationistas insist that it is here now and the Fed is cooking the books. The reality, of course, is the Fed has nothing to do with the compilation of US inflation statistics, which is done by the BLS. Moreover, for those who are worried that all departments of government are conspiring against the American people, you would also have to believe the MIT is in on it too. MIT runs the Billion Price Project, a means of testing, using broad-based internet price sampling techniques, the extent to which the government’s measure of CPI reflects reality.

But, there really has been no inflation, even with rounds of QE and interest rates stuck at zero. What we have learned in this crisis has driven home the points that the lending and borrowing that drive the money supply are more sensitive to risk appetite than they are to the price of money.

Is it possible that this will end in a bout of inflation? Yes. But the odds are lower than consensus had been thinking and they are dropping—fast , as inflation continues to be well anchored and people come to understand better how the transmission mechanism of monetary policy actually works.

4. QE is the reason we have high oil/gasoline prices. This very deeply-held view is just as deeply mistaken. As the chart below shows, post crisis/post QE, oil prices on average (red line) have gyrated around 80-90 dollars per barrel with no ascending trend. The ascending trend came well before we knew what QE even was, in the 2002-2007 period. And the most rapid phase of its rise took place as the Fed was raising rates from 2004-2006.

 
Paying high prices makes all of us angry, and it feels good to have someone to lash out at, but, alas, reality disagrees.

What, then, caused the rise in the price of oil? In brief, the rise of China after it joined the WTO in 2002 and investor allocations to commodities as a “new asset class”, with trend followers, speculators and prop desks front-running the pack. Remember this was a period in which leverage was building and speculative juices flowing full steam.
In any event, it’s pretty clear it was not a result of the Fed and QE.

5. QE has debased the dollar. Good luck convincing people this hasn’t been the case. This is an excellent example of repeating a falsehood until it becomes accepted as true.
Again, roll tape…

 
This is the trade-weighted broad-dollar average. It, much like the oil chart above, shows all the action took place before QE and the crisis. From 2002 to 2007 the Big Dollar, as currency specialists like to call it, depreciated some 20%. And the fastest depreciation came…that’s right, when the Fed was raising policy rates. Since the crisis oil has been roughly unchanged, with gyrations suspiciously similar to oil’s.

Bottom line: Anyone alleging debasement is working from hearsay and priors, not the scorecard. And there are some pretty high-profile people still throwing around the ‘debasement’ word.

In fairness, the Fed did assume that their exceptional monetary accommodation might result in some depreciation of the dollar. But because the US is a closed economy (exports and imports make up a relatively small share of GDP) the Fed felt—correctly in our view—that it should be setting monetary conditions based on the larger domestic
economy. And if dollar depreciation were to ensue, so the thinking went, it would at the margin be positive for US growth, as long as the depreciation was orderly.

Why, then, did the dollar depreciate so much in the 2002-2007 period? Pretty much the same reasons as with oil: it was a period of risk-taking, leverage and deepening optimism regarding emerging markets. All three factors led to dollar selling—well before QE ever made its first appearance in the US.

In sum, much of the received wisdom surrounding the Fed and the effects of its actions is misplaced. Through repetition and ex-ante biases deep misunderstandings have become ingrained in market psychology.

Importantly however, the recent rise in the dollar and fall in commodities suggest that these long-held misguided views are becoming dislodged. There is plenty of risk ahead and the Fed’s task is far from easy or over. But the Fed, for the most part, is ahead of the curve. Make sure


=================

Scott Grannis was making the very same point back in March:  http://scottgrannis.blogspot.com/2013/03/the-fed-is-not-printing-money.html

Also see:

http://hoisingtonmgt.com/pdf/HIM2013Q1NP.pdf

<<“The Federal Reserve is printing money”.
No statement could be less truthful. The Federal
Reserve (Fed) is not, and has not been, “printing
money” as defined as an acceleration in M2 or
money supply. Just check the facts.>>

OTOH, here is an Austrian response:

Much of this is correct, as far as it goes. But let's look at this statement: "This is why the money supply has not grown rapidly in response to years now of QE".

It's obviously true that the Fed has grown "base money" much faster than it has grown the "money supply." If the "money supply" had grown as rapidly as base money, the consequences would likely have been catastrophic. As this article points out, however, there are several ways in which the Fed's purchases have in fact added to the money supply. The rate of such growth has been slow compared base money growth, but that rate has frequently been between 10% and 15% per annum. To say that is "not rapid" overstates the argument. See Michael Pollaro's work for money growth information. Here is Pollaro's definition of the money supply. Note, however, that Pollaro's data does show that money supply growth rates may now be falling.

Not only does this article understate the amount of monetary inflation, it leaves out the principal problem caused by monetary inflation. The problem is that every bit of new money causes relative price distortions wherever that new money is spent. Relative price distortions cause economic actors to make mistakes, both in their consumption and producing decisions. These mistakes result in malinvestments that must ultimately be rectified by market corrections that we describe as "recessions." A recession can be a relatively mild event, or something more significant if the central planners push the distortions beyond the norm.

The author says:

"Few would still argue against the assertion that the Federal Reserve has been central to the financial stabilization and economic recovery from the 2008 crisis. They fixed the plumbing and are now trying to incentivize animal spirits to pump water through the pipes."

This is absolutely ludicrous, although certainly accepted widely by our mainstream economists and other statists who insist that money must be managed by central planners. Never do these people explain how, exactly, the Federal Reserve has "fixed the plumbing." And they have no clue as to how the "plumbing" got broken in the first place. Never do they explain how the Fed's further actions will "pump water through the pipes."

The Fed has done the only thing it is capable of doing: it has shifted the cost of its bad policies from the banks to the public at large, and it has promoted -- yet again -- enough bubble activities and government spending to produce some rising economic aggregates.

An economy is not a machine. Free market prices are the only method of "incentivizing" people to produce goods and services which actually tend to meet consumer needs. We don't need just any "animal spirits"! We need to have an economy producing goods that people want to buy and can afford to buy out of income generated by producing something useful. Selling things to people by lending them money they can never repay ought to be a discredited idea by now!

Our central planners have done us no favors, to say the least. The Fed has been the most direct cause of all our boom/bust cycles since 1913, and since 2000 the Fed has adopted more and more extreme behaviors that have already produced enormous unintended consequences. The Fed's continued zero interest rate policies can never lead to beneficial improvements in the US economy, or the world economy, for that matter. Fed policies will continue to pile on economic distortions until something happens that makes the housing bust look like an inconvenience -- just as the housing bust made the aborted 2000-2001 recession look like a much better idea

[DougMacG]

The 'Austrian' already answered the points in the post, but I offer this:

1) "In our fractional reserve system, the banks control the other 90% or so of the money supply."   - The Fed controls the 10% and controls the fractions and rules that govern the other 90%.  If M1 or M1 plus M2 is the money supply, why do we have M3, M4, etc. and still have no way of accurately measuring money supply in a largely electronic monetary system?  The precedent for what we are doing today and where it worked out just fine is WHEN?

2) "The truth is little of this money [QE in the trillions of dollars] finds its way into the stock market."   - Absurd IMHO to think this market movement was not largely driven by the monetary expansion.  The Fed also set interest rates to zero which effectively shut done the alternatives to investing in equities like fixed rate bonds and savings accounts.  Without QE-infinity but with the current anti-investment policies, where would the DOW be?  Same?  Surely you jest.

3) "there really has been no inflation"  - I don't agree that inflation of the currency is equal to the current CPI change.  Milton Friedman's theory for example says that Price level in a stagnant output economy is proportional to Money Supply times Velocity, not money supply alone.  When Velocity returns, what happens to Price level, or is stagnation permanent?

4) "The ascending trend [QE did not cause high gas prices] came well before we knew what QE even was, in the 2002-2007 period."   - A distinction without a difference, QE is one golf club in the bag of easy money.  The period 2002-2007 was a period of easy money.  Right?  The only reasons energy prices aren't even worse: a) demand has been subdued by the depression, and b) production increased in spite of federal government attempts to stop it.  If gold is the 'gold standard' of money, isn't it interesting that the oil in gold price is nearly the same today as it was in 1973.  Can we say that for Fed management of the dollar?

5) "QE has [not] debased the dollar."  - The author ridicules the "yet" argument because he hasn't seen spiraling price increases during any part of this long, pathetic period of stagnation.  April 2013, FYI to the author, is not the finish line for measuring the results of this policy.
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Let's ask the question backwards.  If not for the "dual mission" of the Fed where they are charged with fighting a non-monetary problem of unemployment with monetary tools only, would the QE-infinity policy, to the scale of multiples of trillions, have been exactly the same?  If not, why not?

And what about federal debt explosion?  Would the trillion dollar deficits have persisted for FIVE YEARS AND COUNTING if not for the enabling of the Fed?  The federal spenders have not had to pay market price for money or face a market reaction or even find willing buyers of bonds in order to 'borrow' and spend. QE enables them to not have to borrow in amounts equal to the over-spending. If not for that enabling in the trillions of dollars, would the deficits have been that large and irresponsible?  I highly doubt it.  The laws of nature, unimpeded, would have resulted in interest rates that would have made over-borrowing and generational theft at anywhere near these levels prohibitive.