Since 2009 I have studied Quantitative Easing in some detail, partly because I was interested in the failed claim that QE would trigger hyperinflation and also because it didn't seem to provide any much benefit to the US economy as the headline numbers would suggest it should. (The idea of "helicopter money" turned out to a fiction.)
My conclusion was that the proceeds paid by the Fed to the dealer panel who sold the bonds to the Fed under the various QE programs, mostly ended up back with the Fed in form of commercial bank reserve deposits. The money wasn't lent or spent and made no contribution to the domestic consumption and certainly didn't fire up price inflation. The only benefit to the broad US economy was the general lowering of interest rates. If anything the QE effectively redistributed nearly a $1 trillion in bond income over ten years from private bond holders to the US government. That might have actually suppressed aggregate consumption, but for the US government putting the money into general revenue and spending it.
Following the announcement of the intention of the Fed to wind back QE (by selling down bond holdings or cashing out maturing bonds) I was more that a little interested to see what would happen when the process reversed, given that some of the same people who predicted hyperinflation were now predicting disaster when the "helicopter money" was taken away.
What I found when I compared the change in the Fed balance sheet from 28 September 2017 to 27 September 2018 was a little surprising:
View attachment 1321778
Source data: https://www.federalreserve.gov/releases/h41/
The Fed's bond holdings had run down as expected, but the total balance of reserve deposits released back to the banks was a greater amount.
Over the last twelve months the reversal of QE appears to have
injected cash into the US banking system. If spent, this $115 billion should provide a stimulus for the US economy, the reverse of the dire predictions on which the "taper tantrum" was founded.
Where did this money go? I doubt that it has been used for consumption spending. It almost certainly has been used to fund further bond purchases and can be classed as "savings".
What does this mean for the price of gold? On current form it appears that the reversal of QE will not crash the US economy, destroy the US dollar or send the price of gold to the moon. It shouldn't have much impact at all.
All the best.
DDP
