Proof of How QE Works – Fed to Primary Dealers, to Markets, To Money

There’s so much confusion out there about how money gets from the Fed into the stock and bond markets. I see the comments in my Twitter feed. People are clueless. Like how M1 is causal. Or how the Fed pumps money into the banking system and that doubles back somehow to speculative bubbles.

This post was originally published for Liquidity Trader subscribers last week. I am posting it here in full now for everyone. If you would like to regularly receive and support this research, please subscribe

The amount of ignorance out there is epic. Few people seem to have any interest in the facts about how monetary policy works- the nuts and bolts aspects. And yet, the process is direct, and much simpler than everyone realizes.

Welcome to today’s world of propaganda overload, particularly Wall Street propaganda. There’s an ocean of free “information” out there, and most of it is worth what it costs.

So, let’s talk about the confusion around QE cause and effect, with financial bubbles and money supply. And let’s get to the point — the proof of how QE actually enters the banking system AFTER it gets pumped into the markets, not before.

The point is that the Fed is deliberately pumping up the markets first, as a lever to accomplish whatever it is that it wants to accomplish. Which I surmise is to keep their clients from going bust. Which they should have, many times over. But the Fed keeps them on permanent life support.

This article was originally published for Liquidity Trader subscribers. I am making it public because of my desire to inform and help more people thrive in the markets, through a clearer understanding of how this money works to boost asset prices. In the long run, that’s not a good thing, but in the long run we’re all dead. In the short run, we need to survive, and hopefully, prosper.

Subscribers, click here to download the report in pdf format.

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Fed Assets and Money Supply – How Money Gets Into the System

Fed Assets on the chart below are its Total Securities and Loans. The securities are held in the System Open Market Account (SOMA).

The Fed publishes this data every week in its weekly H41 balance sheet statement. I have been  reporting it to you here every month for the past 19 years. The H41 is probably the most important financial publication in the world. And nobody publishes anything about it regularly. Go figure. But I do. I publish it and illustrate it with charts, for you.

But let’s start with M1, which is from a different weekly Fed publication. Because this is where much of the confusion starts. I want to show you how M1 relates to QE.

M1 on this chart is total bank checking account deposits, plus paper money in circulation, which is a minuscule portion. It’s mostly bank checking accounts. Assets on this chart are the Fed SOMA.

M1 Money Supply and Fed Balance Sheet

M1 Money Supply and Fed Balance Sheet

M1 is not the cause of all the speculation in the markets. IT IS A MEASURE OF THE EFFECT. The cause is that the Fed first deposits the money into the accounts of the Primary Dealers at the Fed. The Fed does that to pay for the Treasury and MBS securities it buys from the dealers in executing monetary policy.

They call these trades between the Fed and the dealers, Open Market Operations (OMO). But let’s not hide behind fancy monetary policy terminology. Let’s call them what they are, “trades.” The Fed does trades with Primary Dealers. It buys Treasury notes, bonds, and bills from the dealers. It buys MBS from the dealers.

Once the Fed pays the dealers for these trades, the dealers then use that money to buy more securities inventory. That’s their job. They are dealers. They buy inventory, mark it up, and distribute it at a profit. At least that’s the goal.

So the Fed imagines money into existence by paying the dealers for the securities it buys from them. Once credited to the dealers’ accounts, that money that did not previously exist suddenly becomes very real.

The dealers then use that new money to buy more inventory. They buy some of it from the US Treasury at the weekly auctions. But mostly they buy it from a multitude of third parties. Those third parties are other dealers, banks, investment firms, hedge funds, you and me, if we’re trading. In those next trades, the dealers pay the newly imagined money that the Fed just paid them, to their millions of customers and other counterparties.


I feel like Vic DiBitteto, aka Ticked Off Vic. Google him if you’ve never seen his videos. Warning- Strong language.

A Message for Non Subscribers

I want to have a word with Liquidity Trader non-subscribers. You don’t want to pay for great information and data that will help you to better understand the markets, and be a more successful investor?

Fine. I get it. I don’t like to pay for information either. Most of what’s out there really is useless, or worse, dangerous. But this is how I try to make an honest living in this world, and I recognize that that’s the case with some other people whose thoughts are worthwhile. So I cough it up when I think I might learn something useful. True, it’s not very often, but I do it, because I like to learn, and in the search for truth, sometimes the best information costs money.

I put this report out there for free because I hope that some people might feel the same way. That you might think that there’s something worthwhile here.

I’ve been publishing these reports for 20 years, and indeed, some folks have found these reports worthwhile for the entire 20 years. Others have found Liquidity Trader in the last few years and have stuck around too. Some people got to know me when I built David Stockman’s Contra Corner and worked with him on publishing that for a few years. Some discovered my work at Money Map Press, when I produced Sure Money Investor for them. And some of you stumbled upon me at the Wall Street Examiner, or even before that at, the message board I built so that bearish traders might have a little fun with the markets.

Now, after over 20 years of publishing this work on the web, I invite you to come on in and check it out for a few months! 

If you choose not to, then go right on being misinformed and clueless. Feel free to wander in  Wall Street’s cesspool of stupidity and misinformation that it feeds you through its captured propaganda channels; media like the execrable CNBC, Wall Street Journal, and the godforsaken hellhole that thinks its hoity-toity City of London shit don’t stink, the Financial Times. As bad as the WSJ and CNBC are, and they rise to individual heights of unparalleled badness,  FT is broadly the worst of the noxious, financial word salad out there.

WSJ as part of Dow Jones, is literally part of a propaganda media company. It’s a co-subsidiary with News America Marketing, whose name speaks for itself, and

I’ll let Bloomberg off the hook, because they occasionally have redeeming social value. I will especially let Reuters off the hook, even though they are also literally owned by a Wall Street PR firm. They actually publish useful news and information more often than not, which always amazes me.

But I digress. Let’s get to the crux of this.

The Fed Uses Monetary Policy to Manipulate Markets DIRECTLY

So here it is again. The facts. About how the Fed uses QE to DIRECTLY MANIPULATE THE MARKETS. Not indirectly. DIRECTLY.

There’s only one way that the Fed transmits monetary policy to the financial markets. It’s not some nebulous, amorphous process. The Fed doesn’t sprinkle money seeds into the banking system dirt where it grows the money supply (M1 and M2) and somehow, through some magical mystical mystery tour, it gets into the markets.


The Fed buys Treasuries and MBS from the dealers. The Fed pays for those securities by instantly depositing newly imagined money into the accounts of the dealers. One instant before that trade THE MONEY DID NOT EXIST. The next instant it existed IN THE ACCOUNTS OF THE PRIMARY DEALERS AT THE FED. ONLY AFTER THEY EXECUTED SUBSEQUENT TRADES DID IT ENTER THE BANKING SYSTEM.

In the NAME OF JAYSUS (Powell)! PRAISE THE LORD! Let there be stock price inflation, said the Lord. Let there be low bond yields, said the Lord. Let the conservative savers be made poor, so that the rich and powerful may inherit the earth, said the Lord. Now, let us trade therefore upon the straw people. Upon them, they shall be anointed the Primary Dealers.


Primary Dealers Have Deposit Accounts At The Fed And The Fed Publishes It

The Fed even has a line item on its H41 weekly balance sheet showing those transactions. It’s called Other Deposits, and it fills the gap between Fed Assets, and Deposits of Depository Institutions at the Fed (aka bank reserves). Those reserve deposits are the mirror of the cash assets of all the commercial banks in the US. The Fed also reports these, every single week ,in its H8 release.

But let’s stick with the Primary Dealers’ deposits at the Fed.

Primary Dealer Deposits At the Fed

Primary Dealer Deposits At the Fed

Here’s what the Fed tells us about this line item.

Includes deposits held at the Reserve Banks by international and multilateral organizations, government-sponsored enterprises, designated financial market utilities, and deposits held by depository institutions in joint accounts in connection with their participation in certain private-sector payment arrangements. Also includes certain deposit accounts other than the U.S. Treasury, General Account, for services provided by the Reserve Banks as fiscal agents of the United States.

That’s a lot of words. The ones I have highlighted are the Primary Dealers. How do I know that? A long time ago I asked someone at the Fed who told me that indeed the dealers were included in this line item.

In addition, designated financial market utilities noted in the definition are all of the major clearing firms for securities trades. So they too would reflect the flows of funds through Primary Dealer accounts in third party trades after they had sold bonds to the Fed. All of these transactions happen quickly. This money moves through these accounts only in the time it takes to settle trades, a couple of days.

But there’s plenty of circumstantial proof too. I will show you that.

Here’s the thing. Prior to the inception of QE 1 in 2009, this account held less than ONE billion dollars. No QE. No money in the Other account line item. Now it averages $200 billion! When did this start? It started with QE1 in 2009, when this line item first surged to $40-50, even $68 billion per week.  Which was, indeed, right in line with the amount of weekly Fed QE purchases.

As you go through these charts it will become apparent to you that virtually all of this is the money the Fed pays the dealers for the paper it buys from them every week.

Want more proof? Below is a current chart of the weekly change in Fed Assets overlaid with the change in Other Deposits.

With the exception of the March-April QE surge when the Fed pumped a trillion into the market in a month, the lines match almost perfectly. The discrepancy in April was because the dealers turned the money around and got it into the system between the Wednesday closings of the weekly statement periods, before it could be reflected on the H41.

But as you can see in the second chart, zoomed in since July, as the injections become orderly and constant, the changes line up.

Change in Fed Balance Sheet vs. Primary Dealer Deposits at Fed

Change in Fed Balance Sheet vs. Primary Dealer Deposits at Fed


Change in Fed Balance Sheet vs. Primary Dealer Deposits at Fed

Change in Fed Balance Sheet vs. Primary Dealer Deposits at Fed – Zoomed View

Ladies and gentlemen of the jury. This is evidence, circumstantial evidence to be sure, but overwhelming evidence that the Fed is guilty of direct financial market manipulation, through its anointed shell proxies, the Primary Dealers.

While the rest of the world scratches its head wondering how QE moves financial markets, you know the truth. Out there, the public sees a lag between the Fed’s balance sheet expansion and M1, and think there’s a magical money mystery tour. We know that it’s simply because, when the Fed pumps QE, it pays the dealers for the notes, bonds, and bills it buys from them. The payments first go into dealer accounts at the Fed. As the dealers transact business with third parties, then it goes into regular bank deposits and shows up in M1.

In addition, the dealers also use a big chunk of the money that the Fed injects into their accounts to pay the US Treasury in purchase of more Treasury bills, notes, and bonds every week. These are often quick transactions that don’t show up in either the Other deposits or depository institution deposits on the H41. They go into into the US Treasury account, via the dealer accounts, between the Wednesday H41 statement closings.

This is nothing more than indirect central bank monetization of the Federal debt. The dealers are just acting as strawmen in this transaction between the US Treasury and the Federal Reserve. They get a nice, guaranteed skim in the process, because the Federal Reserve gods so anointed them “Primary Dealers.”

During the initial weeks of the pandemic panic the Treasury took $1.4 trillion out of the banking system. It raised the money via debt sales, and didn’t spend it. The money’s there in the Treasury’s account at the Fed.

US Treasury Cash Account at the Fed

US Treasury Cash Account at the Fed

They’re getting ready to spend $1.5 trillion of it by August as required by law. We weren’t sure if they were going to use it to pay down debt, or for economic stimulus. We now know that it will be spent on stimulus.

I cover the Treasury data in greater depth in other reports. For now, let’s keep the focus on the dealers. It’s where the action is, and where the danger to the markets lie.

I’ll get to that in Part 2 of this report.

The rest of the story.

Primary Dealers are Already Dead

Primary Dealers are Dead – Part 2 – Springtime Coming for Hibernating Bears

Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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