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QE with non-bank

Hello Cullen,

I have been reading your blog for a few years and also read your book a few years ago.

With all the new programs central banks are executing these days, I read a lot of famous economists in my country (Belgium) that the ECB is laying down a path to Zimbabwe.

Of course, I have read your work (and that of others concerning the workings of the banking system) so I know this is a wrong view. It is just an asset swap, no new money is created, banks just get central bank reserves in return for the bonds.

However, I reread some of the papers on this and when a central bank buys the asset from a  bank, it is indeed an asset swap, so (almost) all the economists in Belgium are wrong.

However, when a central bank buys the asset from a non-bank, the bank functions as an intermediary for the non-bank and creates new money. For the non-bank, this means he loses the assets and gets actual new money in return. Net wealth doesn't change, but there is new money.

I wanted to know from who the central banks actually bought all these assets the last few years. So I found some papers by the bis and BNP Paribas and they both show that most of the assets were bought from non-banks.

I think this is rather important because the idea I had that it is just an asset swap only holds if the central bank buys from a bank. However, in practice most assets were bought from non-banks which means these asset purchase programs like QE weren't just an asset swap.

Non-banks lost bonds and received newly created money. Most of them will reinvest it. So of course, these purchase programs don't lead to inflation as many predicted, but it seems to me that this looks a lot like financing the government: an investment fund had a government bond -> the central bank buys the bond -> the investment fund loses the bond and receives newly created money because of the mechanics with the bank as an intermediary -> the investment fund reinvests te money in another bond -> this newly created money is extra demand for bonds that wouldn't be there without the central bank actions

So the idea I had all these years that these QE programs are just an asset swap don't seem to hold up now that I know that most of the assets were bought from non-banks.

Am I missing something here?

Thanks for your insights Cullen!

hi @joerim,

I explain the details of a non-bank transaction in this paper.


Short story is that it's all the same. Non bank or bank. When a non-bank sells bonds the bank acts as an intermediary and creates new deposits. So the bank creates new deposits and the Fed buys the bonds from the bank. So yeah, the seller of the bonds ends up with more deposits, but the private sector still loses the t-bond.

Hope that helps.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Thanks for your answer Cullen.

I understand the mechanics and I agree that net wealth stays the same. The private sector loses a bond and receives deposits. But wouldn't you agree that the private sector has additional money to reinvest in bonds? This money wasn't there before. This is (potential) extra demand for bonds that wasn't there before.

So I agree QE doesn't lead to inflation, I agree that the us government doesn't have a problem financing itself (like you write in the paper), but wouldn't you agree that the fed actions have the consequence of creating new deposits (through the banks that act as intermediaries) that can fund the government?

Thank you for your answer.


Hi Joe,

Yes, the pvt sector has more deposits. But here’s the problem. They also have lower income, all else equal. So what’s the trade off? If you had a 5% yielding savings account and your bank forced you to exchange it for a 0% checking account, would you feel richer? Would you feel more inclined to spend than before? Or would you feel poorer because your income declined?  Yes, you have more money, but you have lower income.

So, this is why I argue that QE is, at best, a non-event, potentially deflationary.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche