How the Fed manipulates the money supply

Welcome to the weekly mailbag edition of The daily cut.

This is where we analyze our analysts’ responses to the questions you sent us.

So if you have a burning question for Teeka Tiwari, Jeff Brown, Nomi Prins or anyone else on the team, email us at [email protected].

Last month, the US central bank raised rates by three-quarters of a percentage point. It’s the steepest jump since 1994.

And bank boss Jay Powell says he is open to another three-quarter point hike when the Fed meets again this month.

The goal is to stifle spending by making borrowing more expensive.

The Fed is also resorting to quantitative tightening (QT). This is the process of winding down quantitative easing (QE), the bank’s stimulus program. The Fed hopes QT will calm record inflation.

But how does it work? And what does this mean for your heritage?

For insight, we turn to Nomi Prins.

She is an expert on how central banks affect the economy and markets.

Twenty years ago, she quit a seven-figure job at Goldman Sachs (GS). Now, she’s helping ordinary investors profit from the wealth-building strategies she learned on Wall Street.

It does this by following the flow of the trillions of stimulus dollars that governments and their central banks have created.

This helps him identify the best investment ideas to protect and grow your wealth, even when markets move as they do now.

Nomi is also a bestselling author. She has written two books which expose the influence of central bankers on our lives – All Presidents’ Bankers and Collusion: how central bankers rigged the world.

Today, one of his readers wants to know more about how Fed policy works.

reader question: Hi Nomi. Thanks for your insightful articles. [your daily e-letter,] Inside Wall Street with Nomi Prins. I am also and appreciate your Distortion ratio advisory.

The Fed prints money or creates bank reserves while it does QE. what is the difference between both? And how do they affect the monetary influence on the economy?

Now the Fed is doing QT. I am confused as to how it destroys money, credit or bank reserves.

I’m sure many other readers are also confused about this and would sincerely appreciate your in-depth explanation.

– Baku P.

Nomi’s response: Hello, Baku. Thanks for writing.

The Fed does not print money. The Bureau of Engraving and Printing prints US dollar bills, also called Federal Reserve Notes. And the US Mint is responsible for the currency.

But the Fed electronically creates dollars in the form of bank reserves.

Commercial banks have two types of accounts with the Fed. They have reserve accounts to settle transactions with other banks. And they have securities accounts, where they hold treasury bills.

When the Fed performs QE, it buys Treasury bills from commercial banks (debits their securities accounts) and credits their reserve accounts by an equal amount.

Since the 2008 financial crisis, the Fed has used QE to buy nearly $9 trillion in Treasuries.

Commercial banks use their reserves to support loans to hedge funds, private equity funds or other speculators. This helps explain why the S&P 500 has risen more than 350% since the Fed’s first QE program in 2008.

QT is the opposite of QE. The Fed resells Treasury bills to commercial banks (credits their securities accounts) and debits their reserve accounts by the same amount. Even if it balances out on paper, it reduces the money supply.

Right now, the Fed just lets the bonds it has on its books “collapse” as they come due. Commercial banks therefore do not have to buy them back.

The Fed knows that tightening too quickly would hurt stocks too much. And the stock market is the Fed’s ultimate master.

If stocks continue to fall, it’s only a matter of time before the Fed starts cutting rates and doing more QE.

Next, we turn to the crypto market and a question about bitcoin miners.

As you probably know, the crypto market has crashed.

Bitcoin (BTC) has fallen 68% since its peak in November. And Ethereum (ETH), the second most valuable crypto asset in the world, is down 74% from its peak.

Bitcoin mining stocks fell again.

The average loss for bitcoin mining stocks recommended by his colleague Teeka Tiwari is 76%.

Bitcoin miners provide computing power to secure the bitcoin network. In return, they receive newly minted bitcoins.

This is why Teeka is so optimistic in the long term. As he told his readers…

As demand for bitcoins from credit card rewards, an influx of millennial capital, and even central bank purchases increases…we will see prices rise again. This will increase the profits of bitcoin miners.

But one reader has a question about the long-term profitability of miners.

Bitcoin has a hard cap of 21 million coins in total. When we hit that cap, the rewards miners get in the form of newly minted bitcoins will dry up…

reader question: Once every bitcoin is mined, what will happen to the mining companies?

They all seem to be investing millions in mining rigs [warehouses full of high-powered computers] when mining will end in the next few years.

-David M.

For an answer, we turned to Teeka analyst Michael Gross. He has just published an in-depth analysis of what is happening among bitcoin miners to Palm Beach Infinite the subscribers. (Infinite members can catch it in full here.)

Michael’s response: Thanks for writing, David. These are excellent questions.

The new bitcoin supply is halved roughly every four years in a process known as the halving.

Currently, 328,500 new bitcoins come into circulation every year. After the next halving, in 2024, this will drop to 164,250 new bitcoins per year.

This process goes until the last bitcoin is mined in 2140. That’s 118 years from now. So we don’t have to worry about bitcoin mining ending in our lifetime.

But after each halving, the block rewards the halves. This is the reward miners get for each new block – or group of transactions – they verify and add to the bitcoin blockchain.

So over time, miners will earn less and less per block. But the price of bitcoin will increase as demand increases and new supply of bitcoin decreases. This means that the fiat value of miner bitcoin rewards will likely be much higher than it is today.

What will happen in 118 years when every bitcoin has been issued?

The economic model of mining will have to change.

Bitcoin miner revenue is made up of two parts: block rewards and transaction fees.

Transaction fees are how miners are paid after block rewards are completed.

Transaction fees are based on the size of the transaction and how quickly the person making the transaction wants their crypto added to the blockchain. Currently, transaction fees represent about 1% of miners’ earnings.

After 2140, we will still need miners to verify each new block of transactions and add them to the blockchain. But mining revenue will only come from transaction fees.

As bitcoin adoption increases over time, the demand for transactions on the network will also increase. Fees will increase to compensate miners as they can only confirm a certain number of transactions every 10 minutes.

The more transactions there are in the future, the more traders will have to pay if they want them to be confirmed in the same amount of time.

Conclusion: Teeka and I expect miners to still be around and making money even after global rewards end in 2140.

We end today with some good news from followers of sales assistant Larry Benedict. To his opportunistic trader advisory, he gave them the chance to make almost a 149% return on his trading recommendations so far this year.

In yesterday’s To cutLarry revealed how he was able to book massive gains for his readers even in the most bearish markets.

Today, we give the floor to some readers of Larry who contacted us to thank him for his advice…

Reader’s Comment: Glad to let you know we’re making money. Thank you for helping us achieve our financial goals and our freedom.

–Raj K.

Reader’s Comment: I’m new to investing, but I’m absorbing all the knowledge I can. I really appreciate your analysis and your newsletters. Thank you for providing this education to those of us who are following closely during these uncertain times.

-Barbara S.

Reader’s Comment: Your information is always clear, precise and relevant. I appreciate your updates. They are refreshing and useful. Thanks.

– Sally B.

That’s it for this week’s post.

If you have a question for a member of the Legacy team, be sure to send it to [email protected].

Have a good week-end.


Chris Lowe
July 8, 2022

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