QE2: Money Abroad

Bon voyage!

As QE2 rolls to a close, let us bid farewell not only to the policy itself, but to the wealth that was transferred in the process.

In a pervasive analysis of the financial implications stemming from the "policy instrument" that was deemed necessary to sustain the American economy, Penn State University Professor John Mason notes that much of the post-QE2 accounting clearly displays a wealth transfer to "foreign-related institutions."

Basically the Federal Reserve pumped all these reserves into the banking system and there they seemingly sit.  Yet, the amazing thing is that of the almost $800 billion increase in cash assets in American banks, almost 85 percent of the increase, or about $670 billion, ended up on the balance sheets of Foreign-related Institutions in the United States. 

 

And, what increased on the other side of the balance sheet?

 

Net deposits due to related foreign offices.  These balances rose by almost $500 billion since the end of last year. 

 

In essence, it appears as if much of the monetary stimulus generated by the Federal Reserve System went into the Eurodollar market.  This is all part of the “Carry Trade” as foreign branches of an American bank could borrow dollars from the “home” bank creating a Eurodollar deposit.  This Eurodollar deposit could be lent to foreign banks or investors and this would not change the immediate dollar holdings of the American bank.  This lending and borrowing in Eurodollar deposits could then multiply throughout the world.  And, the American bank might be the ‘foreign-related” institution mentioned above and included in the statistical reports.

 

Note that the original dollar deposit created by the Fed is still recorded as a deposit at one Federal Reserve bank no matter how much shifting around the borrowing and lending in the Eurodollar market occurs.    

 

Thus, it appears as if the Federal Reserve pumped one-half a trillion dollars off-shore since the end of 2010!

 

 

The real lending by commercial banks is not taking place in the United States.  The lending is taking place off-shore, underwritten by the Federal Reserve System and this is doing little or nothing to help the American economy grow. 

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