Thursday, September 5, 2013

QE3 Ineffective In Growing Credit In The US.... But Where Has the Money Gone

The below chart is via Soberlook

Based on the data from the Federal Reserve Bank of St. Louis here is a single chart that shows credit growth in the US is continuing to decline while the Fed's balance sheet is expanding.

So if the money created by the Fed has not gone into credit creation, then where did it go. Yes, I know the argument that the Fed's balance sheet growth has led to the build of excess reserves on banking balances sheets. And for the most this is true, as the lion share of the expansion has ended up as excess reserves. But the missed story is that more than 20% of expansion, by my estimate, is leaking into broader markets. Since the end of 2008, excess reserves on banking balance sheets have expanded by over $2.1 trillion versus an on expansion of $2.7 trillion for the Fed's balance sheet. This equates to a difference of about $600 billion in unaccounted for money, which considering the lack of credit growth leads me to conclude that the difference is leaking into the investment markets. More so, the cumulative differential has expanded since 2008.

One may have argued that the Fed's balance sheet expansion was landing as excess reserves, but it appears that QE efforts are increasingly landing in the investment markets.

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