In 2008, the Fed was solving the problem of jammed-up liquidity. Velocity dropped vertically as cash assets of banks rose with little effect outside the interbank market. This was to avoid an even bigger crisis.

But the subsequent QE2 and QE3 ratcheting up of cash relative to the economy is a puzzle. It hasn’t affected inflation, as Krugman says, so it must have been to meet some new demand as the crisis receded and trust in banks improved as they were re-regulated.

With low interest rates, large global banks can’t make any money from net interest margins, so they have grown their fee/commissions/spreads businesses through investment banking and prime broking in the non-bank financial sector.

The US Federal Reserve is going to have to solve a problem of its own making.

Enormous risks remain as this involves leverage through derivatives and re-hypothecation chains (the demise of Archegos Capital is a small taste of what can…

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