gonegolfin
Member
Some may remember my note from last February (below) illustrating the plunge into negative territory w/respect to non-borrowed bank reserves (an aggregate number). 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 (and have recently stashed a level of excess reserves deemed prudent). What did the Fed get in return for collateral? Mostly a healthy helping of agency debt (Fannie/Freddie debt) and mortgage-backed securities. In other words, securities that the banks could not sell in the open market without steep losses. This is illustrative of the credit risk the Fed has been shoveling onto its balance sheet.
Going back ten years, non-borrowed bank reserves have typically hovered in the $40 to $45 billion range (yes, a positive value), despite a considerably smaller monetary base in those earlier years. Non-borrowed reserves were in this range as late as early December of last year. Then the Fed lending programs commenced. Non-borrowed reserves were an incredible -$158.341 billion two weeks ago after going negative late last December/early January. Banks borrowing to meet their reserve requirements (and store excess reserves for negative future events) increased dramatically in the last couple of weeks as non-borrowed reserves are now -$363.136 billion as of 10/8 (a negative increase of $205 billion in two weeks).
Meanwhile, as mentioned a couple of weeks ago, the monetary base is now increasing. You can consider the monetary base to be the bottom most layer of the money supply (the core). It is the base from which banks lend in our fractional reserve system. The monetary base consists of currency in circulation, cash held in bank vaults, and cash on deposit with the Fed as reserves. The Fed obviously has direct power over the monetary base, but only has indirect influence on fractional reserve lending by the banks (and thus the other monetary aggregates). This is why the Fed can "print" all of the money it wants (assuming that it can find treasuries in the secondary market to buy) and it will not have an impact on price inflation if the banks do not put it to use and instead maintain as reserves. Now, technically, the Fed could monetize any asset (and this scenario would be different), but would need to "discount" that asset. But we have not gone down that road yet.
Through 9/10 of this year, the monetary base had only increased 2.4% since the beginning of the credit crisis (August of last year) for the reasons cited in earlier missives. The monetary base (not seasonally adjusted, not adjusted for changes in reserve requirements) increased as expected to $989.774 billion in last Thursday's report (through Wednesday 10/8). This is about a 7.5% increase in the past two weeks and about 14.1% since the Fed began appreciably creating new money on 9/10. The monetary base is up about 16.2% since the credit crisis became more mainstream back in August of last year.
Keep in mind that deflation is the problem at present. The recent new money being thrown at these problems (and borrowed by the banks) is piling up as reserves on deposit with the Fed. Price inflation will not come of this until the deflationary forces are defeated and the banks regain confidence in the financial system and use these reserves to begin lending in mass ... using the newly increased monetary base as the fuel in our fractional reserve lending system. The Fed may attempt to drain these reserves from the system when the Fed is convinced that deflation is no longer the primary problem (assuming we make it this far and deflation does not reign). But by then, it is usually too late. The result of the Fed being too late in draining these reserves is a nasty bout of inflation (expansion of the broader money supply aggregates) and price inflation (including another TBD asset bubble). Inflation and possibly hyperinflation is a potential outcome of all of this (but not a given at all as this could go the other way).
Brian
On Wed, Feb 6, 2008 at 11:57 PM, Brian wrote:
The following is an update from the economist John Williams and his site Shadow Government Statistics. I have had a subscription to his site for over a year now. He publishes detailed and comprehensive economic updates once a month and maintains updates on all manner of economic figures according to the formulas that were once in use by the US Government. He also continues to publish the M3 money supply figures, which the Federal Reserve ceased reporting last year. Anyone interested in learning more about the economy should visit his site. You do not need to be an economist to understand what he is saying. Shadow Government Statistics - Home Page
Anyhow, the attached is an enlightening article that discusses what the Federal Reserve is doing to keep the banking system solvent. In particular, it discusses the negative level of non-borrowed bank reserves and the plunge in these non-borrowed bank reserves since the beginning of December. These 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. These borrowings now exceed total reserves and thus the non-borrowed bank reserves in this country constitutes a negative number! As I have stated in the past, the bank borrowing from the Fed to maintain adequate reserve levels once required sound collateral (US Treasuries) to be held by the Fed until the repurchase agreement is reversed (reverse repo or the unwinding of the loan). Since the credit crisis noticeably erupted last summer, the Fed has been allowing significant amounts of lower grade collateral such as Mortgage Backed Securities and Agency Bonds (Fannie Mae, Freddie Mac, Sallie Mae) in return for cash loans with increasing terms to maturity (some more than a month, whereas one day is the norm). Also, as I predicted in December, it does not look like the Fed's new way to provide troubled banks even more loans (The Term Auction Facility or TAF) is going away anytime soon.
Brian
Going back ten years, non-borrowed bank reserves have typically hovered in the $40 to $45 billion range (yes, a positive value), despite a considerably smaller monetary base in those earlier years. Non-borrowed reserves were in this range as late as early December of last year. Then the Fed lending programs commenced. Non-borrowed reserves were an incredible -$158.341 billion two weeks ago after going negative late last December/early January. Banks borrowing to meet their reserve requirements (and store excess reserves for negative future events) increased dramatically in the last couple of weeks as non-borrowed reserves are now -$363.136 billion as of 10/8 (a negative increase of $205 billion in two weeks).
Meanwhile, as mentioned a couple of weeks ago, the monetary base is now increasing. You can consider the monetary base to be the bottom most layer of the money supply (the core). It is the base from which banks lend in our fractional reserve system. The monetary base consists of currency in circulation, cash held in bank vaults, and cash on deposit with the Fed as reserves. The Fed obviously has direct power over the monetary base, but only has indirect influence on fractional reserve lending by the banks (and thus the other monetary aggregates). This is why the Fed can "print" all of the money it wants (assuming that it can find treasuries in the secondary market to buy) and it will not have an impact on price inflation if the banks do not put it to use and instead maintain as reserves. Now, technically, the Fed could monetize any asset (and this scenario would be different), but would need to "discount" that asset. But we have not gone down that road yet.
Through 9/10 of this year, the monetary base had only increased 2.4% since the beginning of the credit crisis (August of last year) for the reasons cited in earlier missives. The monetary base (not seasonally adjusted, not adjusted for changes in reserve requirements) increased as expected to $989.774 billion in last Thursday's report (through Wednesday 10/8). This is about a 7.5% increase in the past two weeks and about 14.1% since the Fed began appreciably creating new money on 9/10. The monetary base is up about 16.2% since the credit crisis became more mainstream back in August of last year.
Keep in mind that deflation is the problem at present. The recent new money being thrown at these problems (and borrowed by the banks) is piling up as reserves on deposit with the Fed. Price inflation will not come of this until the deflationary forces are defeated and the banks regain confidence in the financial system and use these reserves to begin lending in mass ... using the newly increased monetary base as the fuel in our fractional reserve lending system. The Fed may attempt to drain these reserves from the system when the Fed is convinced that deflation is no longer the primary problem (assuming we make it this far and deflation does not reign). But by then, it is usually too late. The result of the Fed being too late in draining these reserves is a nasty bout of inflation (expansion of the broader money supply aggregates) and price inflation (including another TBD asset bubble). Inflation and possibly hyperinflation is a potential outcome of all of this (but not a given at all as this could go the other way).
Brian
On Wed, Feb 6, 2008 at 11:57 PM, Brian wrote:
The following is an update from the economist John Williams and his site Shadow Government Statistics. I have had a subscription to his site for over a year now. He publishes detailed and comprehensive economic updates once a month and maintains updates on all manner of economic figures according to the formulas that were once in use by the US Government. He also continues to publish the M3 money supply figures, which the Federal Reserve ceased reporting last year. Anyone interested in learning more about the economy should visit his site. You do not need to be an economist to understand what he is saying. Shadow Government Statistics - Home Page
Anyhow, the attached is an enlightening article that discusses what the Federal Reserve is doing to keep the banking system solvent. In particular, it discusses the negative level of non-borrowed bank reserves and the plunge in these non-borrowed bank reserves since the beginning of December. These 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. These borrowings now exceed total reserves and thus the non-borrowed bank reserves in this country constitutes a negative number! As I have stated in the past, the bank borrowing from the Fed to maintain adequate reserve levels once required sound collateral (US Treasuries) to be held by the Fed until the repurchase agreement is reversed (reverse repo or the unwinding of the loan). Since the credit crisis noticeably erupted last summer, the Fed has been allowing significant amounts of lower grade collateral such as Mortgage Backed Securities and Agency Bonds (Fannie Mae, Freddie Mac, Sallie Mae) in return for cash loans with increasing terms to maturity (some more than a month, whereas one day is the norm). Also, as I predicted in December, it does not look like the Fed's new way to provide troubled banks even more loans (The Term Auction Facility or TAF) is going away anytime soon.
Brian
