How The Fed's Latest QE Is Just Another European Bailout

Back in June 2011 Zero Hedge broke a very troubling story: virtually all the reserves that had been created as a result of the Fed’s QE2, some $600 billion (which two years ago seemed like a lot of money) which was supposed to force banks to create loans and stimulate the US (not European) economy, ended up becoming cash at what the Fed classifies as “foreign-related institutions in the US” (or “foreign banks” as used in this article) on its weekly update of commercial banks operating in the US, or said simply, European banks.

And while many, primarily the British press, demonstrated how simple it is to confuse cause and effect, and suggested, incorrectly, that the surge in cash was due to arbing the Fed’s IOER (it wasn’t, as otherwise all excess reserves would have migrated to European banks due to the open-ended arbitrage instead of merely tracking the ebb and flow of the Fed’s reserves), what we showed was that there a one to one correlation between the surge in foreign bank cash assets courtesy of the Fed, and the EURUSD exchange rate, a proxy for European stability, not to mention a key signal for virtually every ES correlation algo.

As the chart above shows, there was a clear and definite correlation, if not causation, between the $500 billion that the Fed added as cash to European foreign banks, and the nearly 2000 pip move in the EURUSD, at which point everyone was pronouncing the European crisis over. It also resulted in a wholesale surge in risk assets. Just like now (incidentally, a topic we covered last night).

So with the Fed’s open-ended QE in place for over 3 months now, or long enough for the nearly $200 billion in MBS already purchased to begin settling on Bernanke’s balance sheet, we decided to check if, just like during QE2, the Fed was merely funding European banks’ US-based subsidiaries with massive cash, which would then proceed to use said fungible cash to indicate an “all clear” courtesy of Bernanke’s easy money. Just like in 2011.

The answer, to our complete lack of surprise, is a resounding yes.

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First, some basics.

While there is much theoretical confusion over what excess reserves are, which are merely the fungible cash-equivalent liabilities created on the Fed’s balance sheet whenever Ben Bernanke has to monetize the US deficit by purchasing Treasurys or MBS, and thus needs to create offsetting money-equivalent liabilities, especially by academics whose only job day and night is to debate endlessly just what constitutes “money” as their value added in any other field is negative, from a practical standpoint the answer is and has always been one and the same. Cash.

And because there is always confusion on this matter, especially by the monetary intelligentsia-cum-philosopshers club, here is the evidence. Excess reserves = bank cash. Bank cash = excess reserves.

In the chart above, the black line is the surge in Fed excess reserves since September 2009 (source: St Louis Fed), while the shaded area chart shows the break down of bank cash between small domestic, large domestic commercial banks and foreign banks (source: H.8). The two are identical.

So that should remove any of the the confusion of where the the Fed’s main de novo created liability ends up as an asset on commercial banks operating in the US – both domestically-chartered and foreign ones.

continue at ZeroHedge:

http://www.zerohedge.com/news/2013-02-02/how-feds-latest-qe-just-another-european-bailout-vehicle