NY Fed President Bill Dudley spoke to CNBC this morning and confirmed that QE is not “money printing”. Unfortunately, Mr. Dudley also proved that the Fed has no clue what is actually driving this recession and therefore continues to misdiagnose our current problems. Mr. Dudley rejected the notion that the Fed is “printing money” and showed that the Fed is merely swapping reserves with treasuries:
Dudley, a former Goldman Sachs economist, also rejected the widely held view that the Fed is really printing money. “What we’re doing is, when we buy Treasury securities, we are increasing the amount of reserves in the banking system. For those reserves to actually create money, the banks actually have to lend those reserves out. The problem with the U.S. economy now is that there is insufficient lending and he doesn’t expect the Fed’s purchase program to solve that problem because there are ample reserves in the system. He expects the current program to help the economy by lowering interest rates for businesses and consumers.
This is half right and half wrong. Mr. Dudley nails the fact that we are not printing money. However, like Mr. Bernanke, he continues to misdiagnose the illness and therefore the cure for the US economy. Banks don’t lend their reserves. The money multiplier that we learned in school and apparently still believe in at the Fed is simply not true. Some of Mr. Dudley’s own colleagues have debunked this myth in the past. You would think that the Fed would have learned this lesson simply by studying Japan or even their own implementation of QE1. Bank lending did not increase when they increased reserves. Adding more apples to the shelves didn’t result in more apple sales! Mr. Dudley reiterated the ponzi economic plan that Mr. Bernanke and Brian Sach have discussed in recent months:
“I think that’s very off base because I think that the goal of our policy is a very simple one, to ease financial conditions,” Dudley said. The Fed is “not trying to push the dollar to any particular level. What we’re trying to do through our large-scale asset purchase programs is to remove Treasurys from the market and force private investors into other assets.”
Someone should inform these men that there is no wealth effect in the equity markets and that they’re doing nothing more than causing distortions in markets while jamming commodity prices higher and causing corporate margins to contract.
Ultimately, Mr. Dudley’s conclusion is dead right:
He said that he agreed with the one critique: that the asset purchases would not have “a huge powerful effect on the U.S. economy.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.