Fed Creating $4 Billion in New Money Each Day, Helping to Rig Stock Market
By Charles Biderman
There’s been a lot of talk about the Federal Reserve rigging the stock market. If you’ve been wondering, as I have, how it is being done, here’s some terrific insight from our own David Santschi. David wrote in this week’s TrimTabs Weekly Liquidity Review, “The Fed is exchanging about $4 billion in newly created money every business day for various types of bonds. All else being equal, the Fed’s bond buying puts more money in investors’ hands to buy other assets, including stocks.”
I had thought that the major bond dealers sold back to the Treasury the bonds that they bought from the Treasury, making it pretty much of a wash transaction. What I had not realized, until I saw what David wrote, is that major bond traders when they sell Treasuries back to the Fed on the same day then buy other bonds from other bond dealers. And as this buying and selling goes down the chain, Voila. Apparently some of the Fed’s newly created money ends up in the equity market.
Here is what happens, as I see it now. Every day, Federal Reserve traders are buying about $4 billion in long term treasuries and mortgage bonds from major trading houses. How does the Fed pay for those purchases? Simple. The Fed gives the seller a credit on their Federal Reserve statement. Remember , the Fed is a bank that can legally give away money. Meanwhile, the seller of bonds to the Fed can then withdraw some or all of that money, or leave it on deposit with the Fed.