A stronger case for monetization.

And why it’s still probably, mostly not. 1/

2/ One dark, stormy night (last night) I lay awake tossing and turning, unable to get a singular vision out of my head.

That vision was the dork spreadsheet below.

3/ What was concerning is that this spreadsheet made it look like the Fed has been, in effect, buying treasuries directly from bank customers, using the banks as mere passthrough entities.

Was this the mythical “helicopter money” of legend, made manifest?

4/ It’s a concerning thought, to be sure, as money does indeed end up in people’s hands. Also personally concerning since a snarky rhetorical style makes things awkward to walk back if you’re wrong.

Thankfully, we’re not there yet!

5/ To help understand what’s going on here, and how putting money into real people’s hands for the purchase of an asset is STILL not a net increase in the money supply, we need to walk through these intermediated transactions step by step.

6/ Let’s begin by just netting it all out -- what does everyone take and offer in this passthrough system?

Fed takes $100 treasuries, gives $100 reserves

Bank takes $100 reserves, gives $100 money

Customer gives $100 treasuries, gets $100 money

7/ Now, fans of transitory logic (or people lying awake last night) might propose that the above is tantamount to “Fed gives money to customer for treasuries”

And I see that, I do.

Lost sleep over it, even.

8/ But the devil is in the details, as always, and what’s missing is that while it is *sorta* true that “the Fed gave $100 to customers” this misses out on one important fact.

We also put $100 of money into the “soul prison” of reserves at the same time.

9/ Which means that, while customers are getting money in their hands, the net output is still just the same as if the Fed and the Bank had been the only ones involved.

Banks are using customers as a *source* of treasuries, that’s it.

10/ So in the end, it's like this:

Fed: “gimme your treasuries”
Banks: “but we still want treasuries; they’re valuable”
Fed: “tough beans, sort it out”
Banks: “okay boss”
Banks to Customers: “hey you wanna sell some of your bonds? We’ll overpay a bit…”

11/ This whole thing is best thought of as the Banks using Customers to replenish their coffers of treasuries. Because they still want to have some.

Because they can see all our transactions, and they know what’s coming.

Deflation.

12/ Could this have interim inflationary aspects? Possibly - bunch of people with money to burn in their pockets.

Maybe they are buying stocks with that money like everyone says, who knows.

But I know what it ain't.

It ain't an increase in the money supply.

13/ Addendum:

I annotated the chart so that I can pull it out and look at it, thus removing its nightmare-fuel-for-deflationists properties: