The Federal Reserve wants us to believe it has every thing under control. After all, how many times is Powell going to say "the Fed has all the tools it needs" only to announce the creation of another tool?
Of course, he is only echoing the actions of his predecessors. Bernanke did the same thing during the Great Financial Crisis. How could the New York banks get in so much trouble when the primary regulator of them is the Fed itself?
For decades I heard how reserves are money printing and the Fed is able to inject [liquidity](@leoglossary/leoglossary-liquidity0 exactly as it is needed. Those who believe in the mythology of the Fed really do not understand its history.
Long before the Maestro, Alan Greenspan, the fed was looked at for its failures. It completely botched the Great Depression After the crash of 1929, the Fed basically stood by doing nothing. Of course, legenedary Fed chairs like Arthur Burns has well earned reputation that is not very flattering.
The last few weeks have revealed what many of us knew: the belief in the Fed and its "money printing" is completely misplaced.
Money Printer Go Brrr
How many times have we heard this nonsense? Economists want us to believe in the Fed and the power of reserves. Unfortunately, when it comes to money, it is worthless. It does not penetrate the general economy nor can it be collateralized. Hence, to the banks, it has very little value.
Another question is how many times have I posted "the Fed doesnt create dollars". For at least the last 18 months, I hammered home the fact we were in deflationary money. Those who were pointing to the M2 and other metrics that are severely outdated did not know what they were talking about. This was a point also driven home.
Here we sit in 2023 and we have a banking crisis. Actually, what we have a liquidity crisis that is showing up in the banking system. Of course, this will ultimately branch out to other areas of the economy since banking is crucial to all of them.
If the Fed created so many reserves, over $4 trillion of them, how come we have a liquidity crisis?
Certainly, banks going under due to a lack of liquidity is something that doesn't mesh with the narrative.
The reason for this is because the narrative is wrong. The Fed doesn't create dollars, hence, it is not involved with the legal tender game. It creates bank instruments that appear on the balance sheet of depository institutions in exchange for securities.
Unfortunately, with the Fed, what is up is really down and left is right.
Quantitative Easing = Tightening
How can this be?
If we truly under how things operate, we can see how QE ultimately tightens economic conditions. Easing is only that if it increases liquidity in the system to increase economic activity. This is not what happens.
Reserves are not broad economy money, hence have no benefit to the economy. Central bank money, other than banknotes, are not held by individuals or businesses. On the other hand, commercial bank money is the digital dollars that are created through making loans. Unfortunately, the Fed cannot make the banks lend so it has to resort to its propaganda.
There is one form of money that does stimulate economic activity and increase global trade. That is Eurodollar money. This can be viewed as collateral. Here is where QE actually tightens things.
When entering the international financial arena, collateral is king. Since central bank reserves cannot be collateralized, they do not operate in this arena. They can be transferred to other commercial banks yet are of no use when dealing with money market funds, insurance companies, or hedge funds. These entities do not have master accounts with the central bank.
By removing the securities, US Treasuries and mortgage backed securities, the central bank is actually tightening the system. They are swapping assets that can be used as collateral for ones that cannot be.
This is how we get into the situation of balance sheets being constrained.
Banking Crisis Brought On By A Lack Of Liquidity
Anyone who believe Bitcoin is the answer best understand what is taking place. Fixed money never was the answer. This is why we are unlikely to see BTC as the reserve currency or even the basis for the monetary system. There is no elasticity which is the situation we find ourselves in.
The Fed has once again created a problem. It can blame the management at Silicon Valley Bank for being incompetetant all they want. This assertion has its merits but we have to give the Fed the blame it deserves.
We have a liquidity crisis created, in large part, by the Fed and other central banks. The last 15 years have shown the major problem. Powell can appear on 60 Minutes all he wants and claim he is printing "money". The reality he is creating an impotent stablecoin that never gets into the economy.
In other words, it is all a farce and completely foolish to buy into. If the Fed created dollars, we would not have a liquidity crisis and banks would not be in danger of going under. Yet that is exactly what we have.
If the Fed was printing so much, why are liquidity issues showing up on an epic scale?
If you found this article informative, please give an upvote and rehive.
gif by @doze
logo by @st8z