I've said this too many times, so I won't go into detail here. Just some updated graphs.
- QE2 is not causing money supply to skyrocket.
- QE2 money is rapidly moving to excess reserves at the Fed.
- Banks are still reducing their loan portfolios, which is why they aren't holding on to the new QE2 money.
- Banks do have an incredible amount of liquidity, and some risk free profit from their 0.25% interest earned on $1.4 trillion in excess reserves.
These only make sense if you understand the terms that the Fed uses:
- M2 = currency, checking accounts, savings accounts, and CD's - excludes large, business accounts.
- Reserve Bank Credit = Fed's holdings of US Treasuries, mortgage backed securities, and emergency purchases of assets during crisis - such as Bear Stearns'. See FRB H.4.1 for details.
- Excess Reserves of Depository Institutions = Reserves that commercial banks keep at the Fed, in excess of the amount required by Fed regulations.