The logical basis for these operations is that if the Central Bank increases/decreases the amount of Reserves held by banks, then banks will in turn loan more/less of these Reserves out into the economy. In doing so, the Central Bank influences economic growth and manages the level of inflation.

But, if Fractional Reserve Banking does not work because banks do not lend Reserves, doesn’t that mean Central Bank policy, i.e. QE, does not work as advertised?

Unfortunately for all of us, the answer to the above question is Yes.

Take a moment and consider the ramifications of this – that 1) Central Banks do not understand how money is created, or 2) they do understand it but are not tailoring their policies to reality.

If 1) is true, then what good are these QE loving Central Banks doing?

If they do not understand the very basics of how the system they are overseeing works, that means all their future monetary policies are dead on arrival, not to mention the decade(s) already gone.

If 2) is true, then it begs the question – Why?

A possible reason is that Central Banks feel the need to be actively doing something, which is after all a very normal emotional reaction all humans have in times of crisis. After the rubicon of implementing QE for the first time is crossed, each subsequent iteration then becomes easier to implement; it becomes a convenient solution of sorts. 

There is of course, an even scarier reason. Central Banks actually think that QE works. Inflation and the labor market will beg to differ. Of course, stock markets and other risk assets won’t!

Although, it must be asked, if QE works… then why are Central Banks doing it for a 2nd, 3rd, 4th… nth time?