Understanding QE in Detail:

For the past few weeks a lot of us over fintwit have been arguing over whether QE creates new money or not and if that would be inflationary.

@SantiagoAuFund , @LynAldenContact started that and then @coloradotravis and @MetreSteven joined.

2/ From there I learnt a bit more on the sides and wrote my own thread on what QE does.

TL;DR of that thread: QE does not create new money if bought from banks (only reserves swap) and adds "new money" if bought from Pensions. But pension money goes to fin asset not econ

3/ Then came yesterday's debate from @LynAldenContact where the bone of contention was that QE when done by Fed and bought directly from PD, does create new money. She also showed evidence of that in the form of rising M2 https://twitter.com/LynAldenContact/status/1315051651099750400?s=20

4/ That does appear new money got created. However I believe its a mis-understanding of details which are very esoteric. Lets try to understand one final level deep and see how that M2 growth has happened.

5/ @LynAldenContact contention was that when Fed buys treasuries from PD directly, then they are transferring the reserves of Fed to real money to govt.

She is not wrong there. But there is a facade happening there IMO.

6/ To understand this lets understand what is a Treasury Securities?

Treasury Securities is nothing but a "savings" account at Fed similar to Savings or CDs account at commercial banks.

7/ When Pension Fund or PDs buy treasuries, they are basically nothing but a bunch of nos. added to Fed's Securities accnt with an understanding after maturity, u wud also get an extra $ as interest/yield

8/ Fed has another accnt called as Reserves accnt. Which is something we all are very familiar with.

Now here's the catch. The value residing in Fed's Reserve account is part of "Money" calculation - namely MB which is M0 (coins + physical) + Reserve Money.

9/ However, the money sitting in Treasury accnt is NOT considered part of "Money" calculation. So you don't find that money sitting in Securities account as part of MB, M1, M2 etc.

10/ Now lets track how money can reach Securities accnt.

If a PD buys govt. securities, it either uses its own money or borrows money from market in repo or other operations to buy those govt. securities. Once done, that money then goes and sits as a bunch of nos. in Fed accnt

11/ When Fed buys those securities from PD, all they are doing is swapping the Securities accnt money to Reserve accnt for that PD. That's it.

Also, they increase the govt. reserve accnt at Fed with same amnt.

12/ Now Govt, seems to have got extra new money which they can spend in econ. Once its moves from govt's reserves to money govt can spend, it becomes part of M2 when they spend as fiscal stimulus to public

13/ However, think what actually happened.

The money govt spends back as fiscal stimulus is the same money PD got from economy and put it as Securities accnt while buying those Treasury Securities in the first place.

14/ But since money once it reaches as Securities is NOT part of M1, M2, this money was "hidden" all this while

The moment Fed buys treasuries from PD, it swaps that into reserves, then to govt reserves and then finally it appears again as M2 when govt. does fiscal from it

15/ So the reason, @LynAldenContact and we see M2 shot up is not because "new" money got created. It's because the money from econ which got hidden as Securitiies when PD bought Treasuries, now got converted back to M2 again.

I don't think new money got created again

Here's Warren Mosler explaining similar concept.