[CraigJPerry]

>> Quantitative easing" means issuing new money

Issuing new reserves not new money. New money can then be issued by the counterparties of the Fed’s open market operations The counterparties are the “primary dealer” banks (theres around 30 of them), these are the banks whose reserve accounts at the fed get topped up in exchange for the assets the fed wishes to buy. This is the US model, the UK model is a bit simpler (replace the entire faux market with the BoE’s asset purchase facility or APF).

>> replacing … bonds … with money

this is basically the effect and you did say you were describing a model not necessarily the actual system but i’d be remiss not to point out the model you describe is not faithful to how the system operates

>> The result has been an unprecedented increase in private cash balances

This is a function of both private debt (150% GDP) and public debt (125% GDP) in the US. Private debt in the US is more of less ignored by many economists but we know from history that this is a mistake regardless of the kinds of stories certain macro economists prefer.

>> The result has been a gradual decrease in private cash balances

Too early to say yet. There are signs private credit growth has continued despite increased interest rates, in which case cash balances could be higher.

[cs702]

Reserves are money -- they are the key component of the monetary base, included in all money aggregates.

Yes, the Fed trades with the rest of the world only via its primary dealers. But note that these dealers are non-US-government entities (specifically, they're for-profit businesses, part of the private sector), or trade with the Fed acting as intermediaries for other non-US-government entities (businesses, individuals, etc., also part of the private sector). Thus, newly issued money with which the Fed pays to purchase instruments in open-market transactions ends up in the hands of... non-US-government entities -- mainly domestic businesses (e.g., mutual funds), domestic organizations (e.g., pension plans), domestic individuals (e.g., day traders), etc., all part of the private sector.[a] The newly issued money ends up as private cash balances.

[a] For simplicity, I'm excluding foreigners from this mental model. I'm also excluding the so-called "multiplier effect" of bank lending.

[CraigJPerry]

> “Quantitative easing" means issuing new money

>> Issuing new reserves not new money

>>> Reserves are money

Reserves can be cash, but the reserves issued through quantitive easing are not cash. They are not a form of money that can be spent in the economy.

>> Thus, newly issued money with which the Fed pays to purchase instruments in open-market transactions

Newly issued reserves, not money. The reserves go to the primary dealer banks. The mechanism by which this results in the banks being prepared to issue new money (for spending in the economy) is not direct. Empirically shown through the muted money creation in response to the enormous reserves injections of QE.

The reasons for this lethargy are many but it’s fair to say capital requirments are the main one. Lending operations (the mechanism by which QE is supposed to ultimately inject real money to the economy) are not reserve constrained. Since Basel, they’re capital constrained.

[cs702]

As I mentioned in my comment, the Fed's primary dealers can and do act as intermediaries for the rest of the private sector. If you sell a treasury bond you own in your brokerage account, it could well be the Fed buying it on the other side, through one of its dealers -- and vice versa.

Otherwise, I agree with you that banks are capital constrained in their ability to make loans. But as I mentioned elsewhere on this thread, I left bank lending (and its impact on higher-level monetary aggregates) out of this mental model for simplicity.

[throw0101c]

> Reserves are money -- they are the key component of the monetary base, included in all money aggregates.

Money exists on a spectrum. Reserves are money-like in some aspects, but so are bonds and equities, as is gold. These are all stores of value and media of exchange.

QE is creating new reserves (which is money-like) and buying other types of assets (which are money-like): basically an asset swap. The balance sheet often stays exactly the same.