The latest version of QE calls for the New York Fed (the central bank's trading arm) to buy $45 billion of U.S. Treasuries and $40 billion of mortgage- backed securities a month from dealers and banks .
The Fed then intends to "sterilize" these purchases by selling 1- to 3- year bonds through the end of the year - until it runs out of short- term paper to sell. A "sterilized" intervention is one that doesn't increase the money supply.
But beginning in 2013, the Fed plans to continue doing the same thing - effectively continuing "Operation Twist," but without the sterilization, because it has no more short- term paper to sell.
In plain terms, this means the Fed will monetize nearly 50% of the entire U.S. budget deficit in 2013. That will boost its balance sheet from the current $2.8 trillion to approximately $4 trillion - or 24% of U.S. GDP - by the end of the new year.
The idea is that, flush with cash and with fewer opportunities for higher returns, the banks will take on more risk and boost their lending to businesses and consumers.
Businesses would use the cheap money to expand their operations, make capital purchases, produce more and hire workers to make it all happen. Firms are expected, according to the model, to build inventory in anticipation of the higher demand to come.
Then there are the consumers, who in good times account for 70% of what makes the U.S. economy go.
That hiring, in turn , puts additional money in consumer wallets, which accelerates spending, and starts the whole cycle anew.
Consumers are also expected to invest in housing. The Fed presumes both are the result of more or better wages ahead.
The Fed's grand plan is also supposed to benefit the stock and bond markets. The yield-starved, zero-interest-rate environment the Fed is deliberately creating will force businesses and consumers to turn to stocks, bonds, capital purchases, and other assets in pursuit of higher returns.
Here's the real issue - the one thing that terrifies these massive institutions.
They're afraid of each other.
That's right ... they're so afraid of each other, and of the potential implosion of the $648 trillion derivatives playground that they created and have now handcuffed themselves to that they're forced to forever watch one another, and to hoard capital for that future "what if" day of reckoning.
Estimates suggest there's only one "real" dollar in the system for every $10 they've created .
And nobody knows who's got it.
Apple Inc., for example, is sitting on more than $117 billion in cash, 63% of which is offshore. Berkshire Hathaway is sitting on $162 billion. General Electric Co. has $122 billion tucked away.
Companies of all sizes are holding down costs, delaying investments as long as possible, and are hiring only when absolutely necessary.
Having been badly burned by an orgy of easy credit and profligate spending, consumers have had enough, too . They're deleveraging. Many don't want debt - even if it's free.
Everyone is Washington is focusing their energies on making sure it happens on someone else's "watch."
Visto en Money Morning
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