Federal Reserve Banks’ reserve balances explode!

Fortunately for you I’m not sharing a recording of me singing the Bread classic, “If a picture paints a thousand words”.  However, I am sharing an incredible chart on the failure of QE.  As we, at Kamp Consulting, have shared in previous posts, QE by itself is not stimulative, as the swap of bonds for reserves actually removes liquidity from the economy, as higher yielding bonds are removed for lower yielding paper.  For QE to be stimulative, there needs to be a second derivative effect achieved through cooperation from the banks via lending.  The link (picture) that we share today highlights the fact that the reserves received through the QE bond swap have not been lent at the pace necessary to produce the outcome that QE intended.

The markets are fearing tapering, but we suggest that their concern is unfounded.  There has been little stimulus provided by the QE program to date.  “Exaggeration is a blood relation to falsehood and nearly as blamable. ” ~Hosea Ballou