Not QE

Jerome Powell recently said at a speech in Denver on October 8:  “I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis.  Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy.  In no sense, is this QE.”  
https://www.bloomberg.com/news/articles/2019-10-08/powell-says-fed-to-resume-balance-sheet-growth-but-it-s-not-qe

When I first heard it, I thought it was just doublespeak on his part.  But after further thought, I see what he is saying.  The QE build after the financial crisis involved purchases of long-term Treasury bond (10 years and up) and mortgage-backed securities.  QE was deflationary because it sucked future interest payments out of the economy.

This balance sheet expansion is different.  It involves primarily purchases of T-bills with a duration of 1-month to 1-year.  But the biggest difference difference it that this will be inflationary.

The flow of funds looks like this: 

1. Congress decides to spend even more money on worthless projects, like the black hole of the Pentagon, healthcare for old people, university bureaucrats, whatever.  So the Treasury needs to borrow about $100 billion per month.  They issue IOUs, called T-bills, notes or bonds.

2.  The banking cartel, known as primary dealers, will snap up this trash.  About half of this will be sold to investors, like pension funds, mutual funds, etc.

3.  The Federal Reserve Open Market Committee (FOMC) will purchase about $50 billion per month from the primary dealers.  It pays them more than they paid for it.  The $50 billion they spend is created out of thin air. 

4. The result. This should cause inflation of about 16% per year, although this is offset by real gdp increases in the economy of maybe 1.5% and by deflationary forces such as collapsing asset prices and taxes.  It is also offset by ultra-rich people who just keep the money in their bank and don't spend it, thus lowering monetary velocity.  Everybody on the government dole is happy and the bankers are happy and rich people are happy.  The only people who aren't happy are those middle-class people who actually work for a living and don't depend on the government and who actually save money (which is gradually destroyed by inflation).

We can anticipate this state of affairs to last forever, although the pace will pick up when the next recession hits.