Current Analysis of Bank Reserves, Money Supply, Money Velocity, and Monetization

[gonegolfin]

Current Analysis of Bank Reserves, Money Supply, Money Velocity, and Debt Monetization

Gaining insight into where the economy and financial markets are heading requires, among other things, some knowledge of the monetary system, the various indicators and statistics published on a periodic basis, and the ability to interpret the actions of the Federal Reserve, Treasury, and government in general. Particularly in this environment where the markets are in turmoil and the banking and financial industry is in shambles ... and particularly in an environment where the Fed and Treasury have taken over roles that should be held by the private sector. That is, the undue influence of the Fed and Treasury in these times requires investors to pay particular attention to their actions, whether they are up front and center or they require a bit of unearthing. Several of these types of items were discussed in my essay published last month (included below).

I have discussed non-borrowed reserves on several occasions, the last time being in October when they were heavily negative reaching over -$360 billion. Non-borrowed reserves are simply the total reserves of all the depository institutions (banks) in the Fed system minus the total borrowings of these same institutions from the Fed. A negative reading means that on the whole, banks actually have negative real reserves. To meet reserve requirements, banks have borrowed vast sums of money from the Federal Reserve in the past year. But the plummeting of non-borrowed reserves took place when the Fed was sterilizing most of its monetary injections (see below article). Now with the Fed engaged in quantitative easing, net reserves are being added to the banking system (new money is being created). The result is that non-borrowed reserves have turned positive, in fact significantly so. Non-borrowed reserves turned positive in December and are $338.633 billion (not seasonally adjusted) as of 1/14, while total borrowings from the Federal Reserve have actually declined modestly to $562.358 billion. The result is a pile of excess reserves held in aggregate by the banking system. Reserves that the Fed feels are required to keep the banking system afloat.

All of these newly created reserves (remember that only the Fed can create bank reserves) have led to an explosion of the monetary base, discussed here several times in the past. Total reserves of the banking system as of 1/14 are $900.991 billion, with excess reserves totaling $843.508 billion. The result is a monetary base that continues to rise and is now $1.752007 trillion (more than double what it was in September). Meanwhile, the M1 and M2 money supply aggregates are beginning to grow in the last several months, but not alarmingly so. M1 has grown about 7.5% since the beginning of September while M2 has grown 6.6%. The banks are sitting on a pile of reserves, which are needed to cushion their deathly ill balance sheets. Banks are lending, just not near the recent peak levels. Aggregate lending is down, but still near 2006 levels. Real Estate lending has been hardest hit, but loans are still taking place at about early 2004 levels (peak was in 2006). There is also less incentive for the banks to lend at present (also discussed in the article below). It is worthy to note that the monetary base has now exceeded the M1 money supply. This tells us that the money multiplier has been decreasing and is now less than 1. So while lending in aggregate is still happening, lending relative to the amount of bank reserves is extremely low.

Lending is not the only way the money supply can grow. The Fed can encourage investment of these excess reserves ... such as in treasury bills and bonds (which in this case is lending to the government). But I suspect this will only happen when the Fed unplugs the drain (ceases to pay interest on excess reserves held on deposit with the Fed). I suspect that the Fed intends to encourage treasury investment (by the banks using these excess reserves) when it comes time to float more treasury debt. With the size of the stimulus package and other bailout provisions being discussed by our political leaders, this time will be soon in coming.

But also a key component in the reversal of falling prices and declining economic output is the velocity of money, which has been declining. Money velocity is the frequency with which a given unit of money is spent, measured in a specified period of time. A typical measure of money velocity can be found in the equation P = M * V. Here, P represents Gross Domestic Product (GDP), M represents a given money supply aggregate (say M1, M2, or TMS), and V represents the velocity of money. Hence, with the velocity of money dropping, a similar increase in money supply is necessary to achieve a constant level of economic output. Money supply has been growing modestly while GDP has been falling, thus the velocity of money has also been falling (at a greater clip than money supply has been growing). Troubling inflation is typically the result of governments attempting to extricate the economy from a deflationary downturn (which we are certainly experiencing). The harder the downturn, the greater the risk of problematic inflation in the subsequent cycle as governments will be more aggressive and typically overreach. Should the banks increase their lending and investment (fueled by their mountain of bank reserves) and money velocity picks up once again, the Fed will suddenly have a serious inflation problem on its hands (in addition to the inflation potential represented by massive amounts of US Dollar reserves being held overseas). Accurate Fed timing in the draining of reserves from the banking system (while not crushing the banks) will be crucial in managing this inflation ... something with which the Fed has had a poor track record. It usually goes like this ... 1) Horses stampede out of the barn 2) Farmer closes the barn door. With the banking system arguably insolvent at present, the Fed may have little option other than keeping the barn door open.

Recent Fed actions indicate that bank reserves will continue to grow. The Fed recently (1/5) commenced purchases in its Agency Mortgage-Backed Securities (MBS) Program (New York Fed Begins Purchasing Mortgage-Backed Securities - Federal Reserve Bank of New York). That is, the Fed is now monetizing agency backed mortgage-backed securities (Fannie Mae, Freddie Mac, Ginnie Mae, and Federal Home Loan Bank). This shifts more risk from the lending institutions to the Fed ... and by extension our currency. Through 1/21, $52.627 billion in MBS purchases have been made by the Fed (Agency Mortgage-Backed Securities Purchase Program - Federal Reserve Bank of New York) and this number will be growing as the program cap is $500 billion. These are outright purchases (permanent open market operations) where the Fed creates new money by crediting the selling primary dealer reserve account held at the Fed (Federal Reserve Bank of New York - Permanent Open Market Operations). These are not part of one of the Fed lending programs (Ex. TAF), nor are they temporary open market operations that will shortly be unwound. The Fed feels this is necessary due to a significant drop in foreign ownership. China has been a net seller of agency debt and agency mortgage-backed securities in recent months, although total US Dollar reserves held by the Chinese continue to increase.

Finally, there have been rumors that the Fed may shortly begin the outright purchase of longer dated US Treasury bonds. This would be the Federal Reserve monetizing the debt of the Treasury. The Fed has not monetized treasuries during this financial crisis (in fact, it has sold treasuries from its portfolio). It has merely accepted treasuries as collateral in its various lending facilities and in temporary open market operations. The outright purchases of mortgage-backed securities and treasuries adds these specific assets to the asset side of the Fed balance sheet, thus increasing bank reserves and the monetary base. As for the targeting of long term treasuries, 1) the Fed is under more pressure to keep a ceiling on long term interest rates and 2) will likely need to support large amounts of newly issued treasury debt in the near future. Its goal is to keep mortgage lending cheap and these programs would do just that, though in an artificial manner that devalues the currency once this money works its way into the economy. This pressure comes as there is evidence China is de-emphasizing long term US treasury debt in its US treasury holdings. While overall Chinese purchases of US treasuries continue to rise, the increases are coming at the short end of the yield curve. Meanwhile, China has recently been a net seller of longer dated treasury bonds as they fear a fall in the value of the long bond. This may force both the Fed and the banks to purchase longer dated treasuries (more purchases in the case of the banks) to cover the shortfall. Might the average maturity of outstanding US Treasury debt held by foreign official institutions be declining in the future? I think it will.


Reference statistical releases:
FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 22, 2009
FRB: H.3 Release--Aggregate Reserves of Depository Institutions--January 22, 2009
FRB: H.6 Release--Money Stock and Debt Measures--January 22, 2009
FRB: U.S. Reserve Assets and Foreign Official Assets Held at Federal Reserve Banks--December 2008
Agency Mortgage-Backed Securities Purchase Program - Federal Reserve Bank of New York
Federal Reserve Bank of New York - Permanent Open Market Operations
FRB: G.20 Release--Finance Companies--December 23, 2008
FRB: H.8 Release--Assets and Liabilities of Commercial Banks in the US--January 23, 2009
Institutional - Announcement & Results Press Releases


Previous essay ...
http://www.usmessageboard.com/economy/66033-interpreting-fed-policy.html#post947243

Brian

 

[Toro]

Brian

Excellent article, thanks. Please continue commenting in the future on what you are seeing in the Federal Reserve System. I usually don't learn much of consequence in forums, but these posts are certainly substantive.

A few things. First both gold and silver continue to act well. Gold appears to be running into resistance at these levels but silver appears to be forming a good base. This may be indicative of future inflation.

Also, I thought I had read in Grant's recently that Chinese reserves were declining, though perhaps I am remembering incorrectly.

 

[editec]

Current Analysis of Bank Reserves, Money Supply, Money Velocity, and Debt Monetization

Gaining insight into where the economy and financial markets are heading requires, among other things, some knowledge of the monetary system, the various indicators and statistics published on a periodic basis, and the ability to interpret the actions of the Federal Reserve, Treasury, and government in general. Particularly in this environment where the markets are in turmoil and the banking and financial industry is in shambles ... and particularly in an environment where the Fed and Treasury have taken over roles that should be held by the private sector. That is, the undue influence of the Fed and Treasury in these times requires investors to pay particular attention to their actions, whether they are up front and center or they require a bit of unearthing. Several of these types of items were discussed in my essay published last month (included below).

I have discussed non-borrowed reserves on several occasions, the last time being in October when they were heavily negative reaching over -$360 billion. Non-borrowed reserves are simply the total reserves of all the depository institutions (banks) in the Fed system minus the total borrowings of these same institutions from the Fed. A negative reading means that on the whole, banks actually have negative real reserves. To meet reserve requirements, banks have borrowed vast sums of money from the Federal Reserve in the past year. But the plummeting of non-borrowed reserves took place when the Fed was sterilizing most of its monetary injections (see below article). Now with the Fed engaged in quantitative easing, net reserves are being added to the banking system (new money is being created). The result is that non-borrowed reserves have turned positive, in fact significantly so. Non-borrowed reserves turned positive in December and are $338.633 billion (not seasonally adjusted) as of 1/14, while total borrowings from the Federal Reserve have actually declined modestly to $562.358 billion. The result is a pile of excess reserves held in aggregate by the banking system. Reserves that the Fed feels are required to keep the banking system afloat.

Why does the FED want to keep banks afloat? The ONLY people the FED should be keeping afloat are the DEPOSITORS in those banks. FDIC style.

All of these newly created reserves (remember that only the Fed can create bank reserves) have led to an explosion of the monetary base, discussed here several times in the past. Total reserves of the banking system as of 1/14 are $900.991 billion, with excess reserves totaling $843.508 billion. The result is a monetary base that continues to rise and is now $1.752007 trillion (more than double what it was in September).

A monetary base that isbeing put into the WRONG HANDS.

Meanwhile, the M1 and M2 money supply aggregates are beginning to grow in the last several months, but not alarmingly so. M1 has grown about 7.5% since the beginning of September while M2 has grown 6.6%. The banks are sitting on a pile of reserves, which are needed to cushion their deathly ill balance sheets.

The banks should be OOB, their depositors should be protected. That's ALL the Feds should do.

Banks are lending, just not near the recent peak levels. Aggregate lending is down, but still near 2006 levels. Real Estate lending has been hardest hit, but loans are still taking place at about early 2004 levels (peak was in 2006). There is also less incentive for the banks to lend at present (also discussed in the article below). It is worthy to note that the monetary base has now exceeded the M1 money supply. This tells us that the money multiplier has been decreasing and is now less than 1.

So while lending in aggregate is still happening, lending relative to the amount of bank reserves is extremely low.

Of course the mulptplier is low, they're giving money to people who won't spend it, and who cannot loan it, either, because then they won't have reserves they need to stay solvent...which they weren't UNTIL the FED GAVE them money.

They fucked up, and now they expect the FED to bail them out.

Lending is not the only way the money supply can grow. The Fed can encourage investment of these excess reserves ... such as in treasury bills and bonds (which in this case is lending to the government). But I suspect this will only happen when the Fed unplugs the drain (ceases to pay interest on excess reserves held on deposit with the Fed).

NOw the ABOVE is extremely informative. Are you telling me that the banks, having been given money by the FED, to be held BY the FED and now being paid interest BY THE FED, NOT to lend the money?

Did we fall through the looking glass or something?

I suspect that the Fed intends to encourage treasury investment (by the banks using these excess reserves) when it comes time to float more treasury debt. With the size of the stimulus package and other bailout provisions being discussed by our political leaders, this time will be soon in coming.

Okay I'm confused. That's offical, BTW.

But also a key component in the reversal of falling prices and declining economic output is the velocity of money, which has been declining. Money velocity is the frequency with which a given unit of money is spent, measured in a specified period of time. A typical measure of money velocity can be found in the equation P = M * V. Here, P represents Gross Domestic Product (GDP), M represents a given money supply aggregate (say M1, M2, or TMS), and V represents the velocity of money. Hence, with the velocity of money dropping, a similar increase in money supply is necessary to achieve a constant level of economic output. Money supply has been growing modestly while GDP has been falling, thus the velocity of money has also been falling (at a greater clip than money supply has been growing).

Money, whether it's fiat dollars given to banks to save them from bankruptsy, or money the bank had to begin with, sitting in the books has ZERO velocity.

Troubling inflation is typically the result of governments attempting to extricate the economy from a deflationary downturn (which we are certainly experiencing).

If the aggregate amount of fiat dollars injected into the economy goes ONLY TO THOSE WHO INVEST IT INTO THE SUPPLY SIDE, then inflation of the stock markets and investement instruments will of course happen AGAIN.

The harder the downturn, the greater the risk of problematic inflation in the subsequent cycle as governments will be more aggressive and typically overreach.

They're giving it to the WRONG PEOPLE...again.

Should the banks increase their lending and investment (fueled by their mountain of bank reserves) and money velocity picks up once again, the Fed will suddenly have a serious inflation problem on its hands (in addition to the inflation potential represented by massive amounts of US Dollar reserves being held overseas).

Of course...they're start giving the PEOPLE loans (the same people who gave them the money I note..via the FED) and then these usefless fucking bankers will expect not only the money paid back but with interest, too.

And the whole insane system starts over again, doesn't it?

Accurate Fed timing in the draining of reserves from the banking system (while not crushing the banks) will be crucial in managing this inflation ... something with which the Fed has had a poor track record. It usually goes like this ... 1) Horses stampede out of the barn 2) Farmer closes the barn door. With the banking system arguably insolvent at present, the Fed may have little option other than keeping the barn door open.

Screw the bankers, shoot the bankers and tell the bond holders to go fuck themselves.

I cannot go on.

This macroecon game is so twisted to the benefit of the banking and investments class, that trying to make sense using their own INSANE RULES which serve them ALONE, makes no sense whatever.

 

[RodISHI]

The banks should be OOB, their depositors should be protected. That's ALL the Feds should do.

Of course the mulptplier is low, they're giving money to people who won't spend it, and who cannot loan it, either, because then they won't have reserves they need to stay solvent...which they weren't UNTIL the FED GAVE them money.

They fucked up, and now they expect the FED to bail them out.

They're giving it to the WRONG PEOPLE...again.



Of course...they're start giving the PEOPLE loans (the same people who gave them the money I note..via the FED) and then these usefless fucking bankers will expect not only the money paid back but with interest, too.

And the whole insane system starts over again, doesn't it?

Accurate Fed timing in the draining of reserves from the banking system (while not crushing the banks) will be crucial in managing this inflation ... something with which the Fed has had a poor track record. It usually goes like this ... 1) Horses stampede out of the barn 2) Farmer closes the barn door. With the banking system arguably insolvent at present, the Fed may have little option other than keeping the barn door open.

Screw the bankers, shoot the bankers and tell the bond holders to go fuck themselves.

I cannot go on.

This macroecon game is so twisted to the benefit of the banking and investments class, that trying to make sense using their own INSANE RULES which serve them ALONE, makes no sense whatever.

It is falling on deaf ears ed.

The final solution you have there though is an interesting one. If we can be patient enough though this too will come to pass. That is if the people do not rise up in the mean time.

 

[Neubarth]

The Fed can move money all it wants. What we need is to put people to work so they can spend their paychecks. One program that I can see would work would be to employ a million ORCS.

Whatsa ORC you say?

An ORC is a ten dollar an hour laborer who is responsible for Outside Refuse Control. Just like in Mexico, they can be given a 50 gallon can with wheels on it, a welded handle so the can can be moved down the street like a dolly. The individual would then have a street broom and a flatblade shovel (Coal Shovel), and they would be tasked with sweeping the streets in a specified ten block area. If they can not keep the streets clean in their ten block area, they will be fired, but if they are doing a good job, they can receive regular bonuses of a dollar an hour for each year of service up to $15 an hour.

That should keep a million people at work and get our cities a lot cleaner while we try to work our way out of this looming Depression..

 

[editec]

The Fed can move money all it wants. What we need is to put people to work so they can spend their paychecks. One program that I can see would work would be to employ a million ORCS.

Whatsa ORC you say?

An ORC is a ten dollar an hour laborer who is responsible for Outside Refuse Control. Just like in Mexico, they can be given a 50 gallon can with wheels on it, a welded handle so the can can be moved down the street like a dolly. The individual would then have a street broom and a flatblade shovel (Coal Shovel), and they would be tasked with sweeping the streets in a specified ten block area. If they can not keep the streets clean in their ten block area, they will be fired, but if they are doing a good job, they can receive regular bonuses of a dollar an hour for each year of service up to $15 an hour.

That should keep a million people at work and get our cities a lot cleaner while we try to work our way out of this looming Depression..

Giving money to people who DO SOMETHIGN USEFUL for it make a hell of a lot more sense than giving it to people who do nothing but leand it AT INTEREST to people who plan on doing something useful with it, don't you think?

The banker class, as it is currently set up, is a class of PARASITES.

It fucking amazes me that we bitch and whine about welfare mothers when the real recepients of welfare are the banking class which screwed up our economny.

And it fucking amzes me even more that those same assholes are being saved when giving them more momney doens't put ANYBODY to 3
work, too.

WORKING PEOPLE ARE THE SOURCE OF ALL REAL WEALTH.

Not money in banks, the work of people is what makes the world go round.

The bankers have so bamboozled most of you that you honest think MONEY is wealth.

Sheer fucking nonsense, of course.

Money is a way keep score, at best.

 

[gonegolfin]

Brian

Excellent article, thanks. Please continue commenting in the future on what you are seeing in the Federal Reserve System. I usually don't learn much of consequence in forums, but these posts are certainly substantive.

Thanks Toro. That is kind of you.

A few things. First both gold and silver continue to act well. Gold appears to be running into resistance at these levels but silver appears to be forming a good base. This may be indicative of future inflation.

The resistance I have been watching in Gold is the $888 -> $890 level. I think that if we can close above that level for a few days, Gold will break further to the upside. It is above all of its major daily and weekly moving averages. It will have some resistance to deal with at the $930 level.

I agree that Silver seems to be forming a base. It decisively broke out over the $11.50 level that has been giving it trouble for a couple of months. There is some good resistance at the $13.50 level.

The interesting thing is that Gold and Silver have been performing well in the last week or so amidst a strongly rising Dollar (and falling equity markets). My best guess here is that there has been more flight to safety and more bets that the stimulus and bailouts will be inflationary in the not too distant future (I have been of the opinion that we will be mired in a downturn for a while). And now, flight to safety has been including more precious metals in addition to the typical short term treasuries.

Also, I thought I had read in Grant's recently that Chinese reserves were declining, though perhaps I am remembering incorrectly.

I did not read Grant's. But everything I have been reading for a while has the Chinese trade surplus growing as their imports are declining much faster than their imports. Chinese holdings of agency debt and agency MBSs have certainly been falling. But the Chinese have drastically stepped up their short term treasury purchases to cover this shortfall as well as the declining purchases of long term treasuries. I think that if you look at the 10-year and 30-year recently, it makes sense.

Brad Setser (economist for the CFR that previously worked for Roubini) covers this extensively on his blog as he specializes in international money flows.

Brad Setser: Follow the Money

A particular article of interest that covers money flows through November (before a significant rise in long term treasury yields) ...
http://blogs.cfr.org/setser/2009/01/16/a-few-quick-words-on-the-november-tic-data/#more-4509


Brian

 

[editec]

I think that if you look at the 10-year and 30-year recently, it makes sense.

I thought we stopped issuing 30 year T-bills.

Or am I not understanding what you're talking about or are you talking about the secondary market for those that are extant?

 

[gonegolfin]

Why does the FED want to keep banks afloat? The ONLY people the FED should be keeping afloat are the DEPOSITORS in those banks. FDIC style.

Because the banks are the Federal Reserve System.

NOw the ABOVE is extremely informative. Are you telling me that the banks, having been given money by the FED, to be held BY the FED and now being paid interest BY THE FED, NOT to lend the money?

Yup. But I would not say "given". The Fed purchases assets from the primary dealers (at discount based on the quality of the collateral) and credits the proceeds in the reserve account of the selling primary dealer at the Fed. This is how bank reserves are created. As for the interest being paid on excess reserves, this is another form of sterlization that the Fed utilizes. See my December essay again (linked at the bottom of this essay) which discussed this. You may have missed it the first time around.

I think the Fed is attempting to get the bank balance sheets healthy by adding massive reserves to the banking system (which is not inflationary in and of itself). I think they are also attempting to recapitalize the banks while minimizing inflation. These disincentives prevent the banks from lending and investing immediately and in mass (which would cause severe inflation). I also think that they want to time it such that these reserves are used to purchase tremendous amounts of treasury debt that must be purchased in upcoming auctions. Especially in light of waning foreign participation.

Did we fall through the looking glass or something?

Some time ago, yes.

Okay I'm confused. That's offical, BTW.

You crack me up sometimes.

To attempt to unconfuse you ... I am sure that you realize that the Treasury will need to auction significant amounts of debt in the coming months to fund the remainder of the TARP (for the parts that have not been funded by auction yet) as well as the stimulus bill and any other bailout provisions. The Treasury needs buyers, else interest rates will soar. Foreign official institutions such as China are already beginning to net sell their longer dated maturities (treasuries). The 10-year and 30-year bonds are down significantly since the middle of December (yields are up significantly).

The $850 billion in excess reserves constitute a nice pool of cash with which the banks could use to invest in treasury bonds (with the implicit promise by the Fed that they will also work to keep intermediate to long term interest rates low by monetizing debt as needed). This would give the banks additional yield with which they could use to recapitalize. As opposed to riskier lending to the consumer. But to encourage the banks to do so, they would need to lift the free yield the banks are getting on their excess reserves (which was instituted last Fall).

Brian

 

[gonegolfin]

I think that if you look at the 10-year and 30-year recently, it makes sense.

I thought we stopped issuing 30 year T-bills.

Or am I not understanding what you're talking about or are you talking about the secondary market for those that are extant?

Yes. 30-year treasury bonds trade in the secondary market and are held by foreign official institutions.

BTW, the 30-year treasury bond was brought back in February of 2006. For obvious reasons ...

Brian

 

[RodISHI]

Why does the FED want to keep banks afloat? The ONLY people the FED should be keeping afloat are the DEPOSITORS in those banks. FDIC style.

Because the banks are the Federal Reserve System.

NOw the ABOVE is extremely informative. Are you telling me that the banks, having been given money by the FED, to be held BY the FED and now being paid interest BY THE FED, NOT to lend the money?

Yup. But I would not say "given". The Fed purchases assets from the primary dealers (at discount based on the quality of the collateral) and credits the proceeds in the reserve account of the selling primary dealer at the Fed. This is how bank reserves are created. As for the interest being paid on excess reserves, this is another form of sterlization that the Fed utilizes. See my December essay again (linked at the bottom of this essay) which discussed this. You may have missed it the first time around.

I think the Fed is attempting to get the bank balance sheets healthy by adding massive reserves to the banking system (which is not inflationary in and of itself). I think they are also attempting to recapitalize the banks while minimizing inflation. These disincentives prevent the banks from lending and investing immediately and in mass (which would cause severe inflation). I also think that they want to time it such that these reserves are used to purchase tremendous amounts of treasury debt that must be purchased in upcoming auctions. Especially in light of waning foreign participation.

Did we fall through the looking glass or something?

Some time ago, yes.

Okay I'm confused. That's offical, BTW.

You crack me up sometimes.

To attempt to unconfuse you ... I am sure that you realize that the Treasury will need to auction significant amounts of debt in the coming months to fund the remainder of the TARP (for the parts that have not been funded by auction yet) as well as the stimulus bill and any other bailout provisions. The Treasury needs buyers, else interest rates will soar. Foreign official institutions such as China are already beginning to net sell their longer dated maturities (treasuries). The 10-year and 30-year bonds are down significantly since the middle of December (yields are up significantly).

The $850 billion in excess reserves constitute a nice pool of cash with which the banks could use to invest in treasury bonds (with the implicit promise by the Fed that they will also work to keep intermediate to long term interest rates low by monetizing debt as needed). This would give the banks additional yield with which they could use to recapitalize. As opposed to riskier lending to the consumer. But to encourage the banks to do so, they would need to lift the free yield the banks are getting on their excess reserves (which was instituted last Fall).

Brian

In essence you are saying that the bankers own it all because they say they do.

The American public has to pay multiple million dollar salaries to be ripped off by the banking thugs.

TARP money does not have to be accounted for.

Banker words of "Standard Banking Practices" of "guessing", "guestimating" and "blue sky" is the normal procedural practices that everyone should get accustom too as they are finacially raped by this corrupt out of control system.

 

[Paulie]

Why does the FED want to keep banks afloat? The ONLY people the FED should be keeping afloat are the DEPOSITORS in those banks. FDIC style.

Because the banks are the Federal Reserve System.


Yup. But I would not say "given". The Fed purchases assets from the primary dealers (at discount based on the quality of the collateral) and credits the proceeds in the reserve account of the selling primary dealer at the Fed. This is how bank reserves are created. As for the interest being paid on excess reserves, this is another form of sterlization that the Fed utilizes. See my December essay again (linked at the bottom of this essay) which discussed this. You may have missed it the first time around.

I think the Fed is attempting to get the bank balance sheets healthy by adding massive reserves to the banking system (which is not inflationary in and of itself). I think they are also attempting to recapitalize the banks while minimizing inflation. These disincentives prevent the banks from lending and investing immediately and in mass (which would cause severe inflation). I also think that they want to time it such that these reserves are used to purchase tremendous amounts of treasury debt that must be purchased in upcoming auctions. Especially in light of waning foreign participation.


Some time ago, yes.

Okay I'm confused. That's offical, BTW.

You crack me up sometimes.

To attempt to unconfuse you ... I am sure that you realize that the Treasury will need to auction significant amounts of debt in the coming months to fund the remainder of the TARP (for the parts that have not been funded by auction yet) as well as the stimulus bill and any other bailout provisions. The Treasury needs buyers, else interest rates will soar. Foreign official institutions such as China are already beginning to net sell their longer dated maturities (treasuries). The 10-year and 30-year bonds are down significantly since the middle of December (yields are up significantly).

The $850 billion in excess reserves constitute a nice pool of cash with which the banks could use to invest in treasury bonds (with the implicit promise by the Fed that they will also work to keep intermediate to long term interest rates low by monetizing debt as needed). This would give the banks additional yield with which they could use to recapitalize. As opposed to riskier lending to the consumer. But to encourage the banks to do so, they would need to lift the free yield the banks are getting on their excess reserves (which was instituted last Fall).

Brian

In essence you are saying that the bankers own it all because they say they do.

The American public has to pay multiple million dollar salaries to be ripped off by the banking thugs.

TARP money does not have to be accounted for.

Banker words of "Standard Banking Practices" of "guessing", "guestimating" and "blue sky" is the normal procedural practices that everyone should get accustom too as they are finacially raped by this corrupt out of control system.

There is no excuse for not accounting for where the TARP money goes and informing the public, but you can't just assume the banks are just full of "thugs" and that somehow we're all being screwed JUST because the banks are being given the leeway. Not every single person making decisions at the banks lack ethical standards. All we can really do is exercise some of that Obama hope, that the right people will make the right things happen.

And "guessing" is all econ really is, ultimately. It's a psychology.

 

[RodISHI]

Because the banks are the Federal Reserve System.


Yup. But I would not say "given". The Fed purchases assets from the primary dealers (at discount based on the quality of the collateral) and credits the proceeds in the reserve account of the selling primary dealer at the Fed. This is how bank reserves are created. As for the interest being paid on excess reserves, this is another form of sterlization that the Fed utilizes. See my December essay again (linked at the bottom of this essay) which discussed this. You may have missed it the first time around.

I think the Fed is attempting to get the bank balance sheets healthy by adding massive reserves to the banking system (which is not inflationary in and of itself). I think they are also attempting to recapitalize the banks while minimizing inflation. These disincentives prevent the banks from lending and investing immediately and in mass (which would cause severe inflation). I also think that they want to time it such that these reserves are used to purchase tremendous amounts of treasury debt that must be purchased in upcoming auctions. Especially in light of waning foreign participation.


Some time ago, yes.


You crack me up sometimes.

To attempt to unconfuse you ... I am sure that you realize that the Treasury will need to auction significant amounts of debt in the coming months to fund the remainder of the TARP (for the parts that have not been funded by auction yet) as well as the stimulus bill and any other bailout provisions. The Treasury needs buyers, else interest rates will soar. Foreign official institutions such as China are already beginning to net sell their longer dated maturities (treasuries). The 10-year and 30-year bonds are down significantly since the middle of December (yields are up significantly).

The $850 billion in excess reserves constitute a nice pool of cash with which the banks could use to invest in treasury bonds (with the implicit promise by the Fed that they will also work to keep intermediate to long term interest rates low by monetizing debt as needed). This would give the banks additional yield with which they could use to recapitalize. As opposed to riskier lending to the consumer. But to encourage the banks to do so, they would need to lift the free yield the banks are getting on their excess reserves (which was instituted last Fall).

Brian

In essence you are saying that the bankers own it all because they say they do.

The American public has to pay multiple million dollar salaries to be ripped off by the banking thugs.

TARP money does not have to be accounted for.

Banker words of "Standard Banking Practices" of "guessing", "guestimating" and "blue sky" is the normal procedural practices that everyone should get accustom too as they are finacially raped by this corrupt out of control system.

There is no excuse for not accounting for where the TARP money goes and informing the public, but you can't just assume the banks are just full of "thugs" and that somehow we're all being screwed JUST because the banks are being given the leeway. Not every single person making decisions at the banks lack ethical standards. All we can really do is exercise some of that Obama hope, that the right people will make the right things happen.

And "guessing" is all econ really is, ultimately. It's a psychology.

I agree no reason for billions to not be properly accounted for.

"Guessing" at the accounting is "standard banking practices". It appears it is now a regular habit of this countries fearless (choke, choke) leaders.


The quotes comes from court proceedings, "blue sky" from a bank rep (trained by the bank of course), "guessing" comes from the bank accountant, "guestimating" from the bank underwriter, "standard banking proceedures" from the bank attorney.

I am sure I can go through transcripts and find more goodies but those are the quickest and very easy to recall.

Those phrases happen to be from one of the larger banks. Is it a coincidence that a leader of that bank is now a biggie in the federal reserve? I doubt it.

 

[gonegolfin]

Current Analysis of Bank Reserves, Money Supply, Money Velocity, and Debt Monetization

Gary North has this essay (along with the December essay) on his website, entitled ... "Is the Federal Reserve Pushing on a String?"

Gary North -- Specific Answers

Brian

 

[gonegolfin]

Brian

A few things. First both gold and silver continue to act well. Gold appears to be running into resistance at these levels but silver appears to be forming a good base. This may be indicative of future inflation.

The resistance I have been watching in Gold is the $888 -> $890 level. I think that if we can close above that level for a few days, Gold will break further to the upside. It is above all of its major daily and weekly moving averages. It will have some resistance to deal with at the $930 level.

As a followup, this is what we have been seeing in the last couple of weeks. Gold broke the resistance area of $888 -> $890 and has been trading from this new support level to about the $930 resistance level I cite above. I have executed three profitable trades thus far taking advantage of this range (two long and one short).

Brian

 

[wimpy77]

very nice information from you brian. i have a question for you. do you see the dollar collapsing like peter schiff does? and also how long before the banks healthy again?

 

[gonegolfin]

very nice information from you brian. i have a question for you. do you see the dollar collapsing like peter schiff does? and also how long before the banks healthy again?

Thank you.

At the present levels of debt, Fed/Treasury intervention in the markets, as well as size and quality of the Fed balance sheet, no ... I do not see the Dollar collapsing. The situation will need to get considerably worse for that to happen. But that does not mean it will not get considerably worse.

I think the likely scenario, assuming reflation is successful short term, is price inflation reaching 15% to as much as 40% levels. If reflation is not successful, we will likely go through a hard period of declining or neutral economic growth and flat to declining prices with high levels of unemployment. And given the government's track record, they will be attempting reflation throughout this entire affair ... which will make it worse in future years.

Schiff does not understand the difference between monetary base and money supply. Nor does he understand velocity. Schiff has been screaming loudly since December 2007 that the Fed was "printing money like crazy". They were not. The Fed was engaging in debt swaps with the banks. They were not increasing the monetary base (also the Fed does not directly control the money supply, the banks do). But they were reducing the quality of the Fed's balance sheet. Since September of last year, the Fed did begin "printing money". But this printing of money is not the increasing of the money supply. It is the increase of bank reserves. Yet Schiff is still confused why we are not experiencing inflation.

We cannot answer the question concerning the health of the banks until we have an idea of what is on their balance sheets. I suspect that we are still in for some very rough sledding. Declines in bank lending and investments (and hoarding reserves paying only 0.25% of interest) is a clue that many balance sheet problems remain.

Brian

 

[Toro]

I would also argue that the dollar cannot collapse as argued by Schiff et. al. since it has to collapse against something, and if it were to fall dramatically against the euro or the yen, it would destroy the economies of Europe and Japan, as well as almost every other country on earth.

It may collapse against gold and other real assets however. I imagine that one day, gold might top $2000.