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Most market observers think the Fed came up with the idea of impregnating their balance sheet, but that is incorrect. In 1998 the Bank of Japan embarked on the first real QE operation in the modern era, which can be seen in the first upward zigzags in the blue line here. The Federal Reserve unofficially started QE in late 2008 by taking in all kinds of illiquid debt instruments, the markets for which had vanished at the time. Officially, QE operations in the U.S. Treasury and mortgage markets began in early 2009.

What I am worried about is that central bankers may get cocky, as so far their monetarist maneuvers have not broken the financial system. While quantitative easing isn’t necessarily real debt monetization and outright printing in the U.S. as the Fed swaps one interest-bearing asset Treasurys) for another (excess reserves), it is that interest on excess reserves has purposefully always been above the fed fund rate that stops them from producing hyperinflation. This higher rate stops excess reserves from entering the fed funds market and in effect stops the credit multiplier of the fractional reserve banking system.

In essence, the U.S. version of QE was the most profitable carry trade in the world where the Fed paid 0.25% (the interest rate on excess reserves for most of QE’s tenure, rising to 0.50% on Dec. 17, 2015) to buy assets that had yields of 2% or higher, in effect remitting the difference to the Treasury.

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