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And In The Meantime, The Adjusted Monetary Base....

Tyler Durden's picture





 

...is up by $51 billion in two weeks. But, once again, before people freak out that this is some crazy scheme to flood the market with money (nothing crazy about that scheme: it has been going on for 2 years), keep in mind: this is merely the delayed catch up of the SFP program unwind and the ongoing increase in Treasury holdings by the Federal Reserve Capital, ULC. Nonetheless, it is disturbing that the gradual phase out in the build up of the Adjusted Monetary Base, exclusively due to the rise in Excess Bank Reserves, is still proceeding at a 100%+ CAGR.

The variance between the accumulation in Excess Reserves (Fed liabilities) and Security Holdings (Fed assets) since the start of QE2, can be seen on the chart below. Whereas two months ago reserves were lagging the build out in assets by up to $170 billion, this has since flipped and there has been a dramatic build out in reserves to the tune of $74 billion more than assets.

Once again, there is little mystery here: the question is how much will the market discount these electronic 1 and 0s eventually entering the market, and being an inflationary force, and secondly, just how effective will an IOER hike be in order to prevent $1.7 trillion in excess reserves at the time of QE2 end (on $970 billion of currency in circulation) from becoming a hyperinflationary juggernaut.

Where there is mystery, however, is what actually comprises the Fed's "Other Assets" account which in the last week hit a new all time record of $123 billion.

 

 


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Thu, 04/07/2011 - 19:36 | Link to Comment FOC 1183
FOC 1183's picture

The IOER will work if they're ahead of the curve....which they're already behind.

Fri, 04/08/2011 - 01:16 | Link to Comment Popo
Popo's picture

The central planner is dangerous, ruthless and very much in the pockets of the oligarchs.   Bernanke is a traitor to his country, and an extraordinarily dangerous enemy of the State.   He works exclusively for the international banking cartel, whose interests directly conflict with the interests of the American people.

It's time to regard him as a hostile, non-governmental force who directly threatens and endangers Americans.

You call that chart up there the "Adjusted Monetary Base" if you want, I call it the annihilation of the elderly, and the padding of the pockets of the super-rich.

Fri, 04/08/2011 - 02:06 | Link to Comment GoinFawr
GoinFawr's picture

Well said.

Fri, 04/08/2011 - 06:09 | Link to Comment tomster0126
tomster0126's picture

Hear, hear.  I study gerontology and vehemently hate Bernanke and what he's done.  Let's get this mofo out as soon as we can.

 

www.forecastfortomorrow.com

Thu, 04/07/2011 - 19:33 | Link to Comment NOTW777
NOTW777's picture

"Where there is mystery, however, is what actually comprises the Fed's "Other Assets" account which in the last week hit a new all time record of $123 billion."  obama fund???

Why is it that no one including the MSM even attempts to explain obamas position on the budget? What is it?  He wants more spending? more waste? more war?

Thu, 04/07/2011 - 19:37 | Link to Comment FOC 1183
FOC 1183's picture

It's the POMO premium to par.

Thu, 04/07/2011 - 19:37 | Link to Comment NOTW777
NOTW777's picture

so obama and ben can use pomo to wipe out the national debt?

Thu, 04/07/2011 - 19:46 | Link to Comment FOC 1183
FOC 1183's picture

More like recycle. As in the greatest financial circle jerk in history. The Treasury is borrowing from the Fed. When the Fed loses money on those loans (trying to sell Treasuries back into the market) it will create a 'negative liability' account for the Treasury...which is a (illegal) way of saying that it is borrowing from the Treasury...which at the time will still be borrowing from the Fed via QE714.

Thu, 04/07/2011 - 19:50 | Link to Comment NOTW777
NOTW777's picture

the foundation of our economic strength - ponzi

Thu, 04/07/2011 - 20:34 | Link to Comment Vagabond
Vagabond's picture

Pyramid schemes work, I swear!

Thu, 04/07/2011 - 20:36 | Link to Comment EscapeKey
EscapeKey's picture

In Egypt they did.

Thu, 04/07/2011 - 20:27 | Link to Comment I think I need ...
I think I need to buy a gun's picture

On World NEWS TONIGHT McDonalds is hiring 50,000 MCJOBS!!!!!!!!! And they insist these are move up the ladder jobs.

My advice is to move near your location because you may spend you first and last hour of earnings driving to and from

Fri, 04/08/2011 - 02:39 | Link to Comment Troublehoff
Troublehoff's picture

and the rest eating there 

Fri, 04/08/2011 - 06:09 | Link to Comment tomster0126
tomster0126's picture

Mickey D's, coming thru in the McClutch with the McJobskis, what a story.  At least it's something, but the last thing we need is more chubby kids running around.  Just sayin'

 

www.forecastfortomorrow.com

Thu, 04/07/2011 - 19:35 | Link to Comment tellsometruth
tellsometruth's picture

TYLER,

http://www.lse.ac.uk/resources/podcasts/publicLecturesAndEvents.htm

download the mp3 of The Economic Outlook and Financial Industry Challenges
Speaker: Thomas M Hoenig
Chair: Dr Philippa Malmgren
This event was recorded on 30 March 2011 in Sheikh Zayed Theatre, New Academic Building

 

I ask Mr Hoenig about market manipulation of PM markets at the 55.30 mark!!! And I shook his hand afterward... this is what we need real debate and discussion, peacefully and see if can change the BS that has been going on.

 

please circulate or call me a dumbass I do not care I will stay my course, but I want more free open questioning and debate

 


 

Thu, 04/07/2011 - 20:15 | Link to Comment Cindy_Dies_In_T...
Cindy_Dies_In_The_End's picture

This is what we need real debate and discussion, peacefully and see if can change the BS that has been going on.

 

Real debate and discussion, eh? I hear ZH readers laughing hysterically every where.

 

Thanks for the laugh though.

Thu, 04/07/2011 - 19:38 | Link to Comment EscapeKey
EscapeKey's picture

Totally cancelled out by the deflation in housing. In fact, CPI is negative because of this.

I feel dirty writing this, even if it's meant sarcastically.

Thu, 04/07/2011 - 20:09 | Link to Comment mynhair
mynhair's picture

Since when is truth sarcastic?  Reserves are getting wiped out by cruddy debt.

Thu, 04/07/2011 - 20:18 | Link to Comment EscapeKey
EscapeKey's picture

So how does "reserves" figure into the average consumer bill, and how is this an issue according to the CPI again?

Thu, 04/07/2011 - 20:29 | Link to Comment mynhair
mynhair's picture

Those reserves not yet destructed go onto the casino table.

Behold the beauty of The Bernake!  Flood the zone.

Thu, 04/07/2011 - 20:28 | Link to Comment EscapeKey
EscapeKey's picture

That's a sustainable solution if I ever heard one.

Thu, 04/07/2011 - 20:45 | Link to Comment mynhair
mynhair's picture

'Sustainable' has never been a necessary and sufficient criteria for goobermint.

Thu, 04/07/2011 - 20:32 | Link to Comment FOC 1183
FOC 1183's picture

+1. But your point is still valid. Implied rents are bogus. And the two indices they remove for core, food & energy, are ironically the two which have the highest correlation with consumer confidence. And that would include the conference boards consumer confidence - an input to the LEI. Go figger'

Thu, 04/07/2011 - 21:28 | Link to Comment Caviar Emptor
Caviar Emptor's picture

Don't forget cost of homeownership. Even if home prices are down, that acts as a serious counterweight to any hope of a price rebound. And it impacts consumer spending. 

Thu, 04/07/2011 - 19:37 | Link to Comment baby_BLYTHE
baby_BLYTHE's picture

We're going into a Depression!

Welcome to world wide Benocide.

Thu, 04/07/2011 - 20:13 | Link to Comment disabledvet
disabledvet's picture

In the year of the scavenger the season of the bitch/Sashay on the Boardwalk, scurry to the ditch/Just another future song, lonely little Keats/ there's gonna be sorrow, try and wake up tomorrow.

Young girl they call them The Diamond Dogs.

Thu, 04/07/2011 - 20:29 | Link to Comment baby_BLYTHE
baby_BLYTHE's picture

what if there is no tomorrow? You ever ponder that?

We know one day we are just going to blow each other up. Countries have nukes for a reason and they won't sit idle forever.

This all ends with the destruction of, at the very least, 75% of humanity wiped off the earth. It is inevitable.

The human race is a f_cking failure.

http://www.youtube.com/watch?v=BwVap8x64As

Thu, 04/07/2011 - 20:46 | Link to Comment Strike Back
Strike Back's picture

The ENTIRE human race?  You a eugenicist?

Thu, 04/07/2011 - 21:05 | Link to Comment baby_BLYTHE
baby_BLYTHE's picture

the complete opposite actually.

It is BECAUSE OF eugenics that I do not support movements such as Zeitgeist.

Thu, 04/07/2011 - 21:10 | Link to Comment EscapeKey
EscapeKey's picture

I don't support Zeitgeist because there is nothing new about any of their proposals, and they simply don't work. It's communism, plain and simple.

Thu, 04/07/2011 - 21:35 | Link to Comment baby_BLYTHE
baby_BLYTHE's picture

Exactly!

The United States (I know your in the UK) has a Constitution, problem is no one follows it.

We don't need a new system/a total remake of society to accomplish this.

Let us start with a Simple things

1) End the FED. Put back Glass Stegall. Put the US dollar on a 35% Gold Backing to give legitimacy to the currency before it is rejected world wide.

2) Simplify the Tax code, end the IRS. Make it simple. Let it be that people that save are rewarded not punished. We need capital formation.

3) Allow 0% credit for internal improvements such as water systems, alternative sustainable energy solutions + infrastructure projects, etc. New Deal lite without the massive growth of government. Better to employ people here than hand out two years of money to be mostly wasted.

Many other changes are needed, but those I believe are some of the most important

Thu, 04/07/2011 - 22:03 | Link to Comment Yen Cross
Yen Cross's picture

You realize some of your ideas are good? It's all in presentation! ( think about it)

Thu, 04/07/2011 - 23:04 | Link to Comment baby_BLYTHE
baby_BLYTHE's picture

I don't get it, but thanks.

Fri, 04/08/2011 - 01:14 | Link to Comment Yen Cross
Yen Cross's picture

I'm shopping a Midnight Bizzare! Any particular wood stain, and Coffin Dress of your Liking?

Fri, 04/08/2011 - 00:19 | Link to Comment RockyRacoon
RockyRacoon's picture

None of that toothpaste is going back in the tube.

Fri, 04/08/2011 - 02:17 | Link to Comment GoinFawr
GoinFawr's picture

Heh, like trying to shove a marshmallow into a coin slot.

Thu, 04/07/2011 - 22:02 | Link to Comment Incubus
Incubus's picture

Nothing wrong with democracy or communism—we're just not sufficiently advanced as civilizations to handle those types of governments.

We call call it whatever the hell we want to call it, really—but in the end, we're only really good at exploiting one another and killing people that we can't [or won't] understand.  As soon as western civilizations are forced to tighten their belts a bit more, you'll see the true face of things.  Always rely on conflict to shine light on what we really are. 

As far as my stance goes, I believe that humans can do some pretty impressive stuff, if we're prepared for it.  I see so much wasted potential—wasted lives; people spending their lives persuing goals they've been conditioned to believe have any value.

I don't believe we'll ever become capable of maintaining any form of advanced government.  Seems like the time spent on this planet is just time spent in a variant of a purgatory.  I don't believe in anything religious, at anyrate; just sitting here, wasting away life because we're all so fucking stupid.

Thu, 04/07/2011 - 22:32 | Link to Comment Strike Back
Strike Back's picture

Too many here are giving into defeatism.  Adopting the viewpoint of TPTB necessary and difficult, but adopting their attitude is to lose.

Thu, 04/07/2011 - 21:30 | Link to Comment Caviar Emptor
Caviar Emptor's picture

Even if we blow ourselves up the HFT bots will keep on trading with each other using backup energy. All people would be dead but the market would close green daily. An ironic twist of fate, no? 

Thu, 04/07/2011 - 22:19 | Link to Comment savagegoose
savagegoose's picture

i hear they did a risk ananlysis of if Cern would destroy the universe when it was switched on.

they came up with 600 triilion cash units. as the economic cost of the destruction of the universe.

I would like to take that bet, pay me $1000  a week, and if the universe is ever destroyed by cern ill pay up 600 trill

Thu, 04/07/2011 - 22:08 | Link to Comment sgorem
sgorem's picture

Hope it's a little higher percentage 'cause I always wanted to be KING!

Thu, 04/07/2011 - 19:41 | Link to Comment max2205
max2205's picture

So that's why the markets up so much. Thanks

Thu, 04/07/2011 - 19:50 | Link to Comment Rainman
Rainman's picture

The AMB chart reminds me of Sundance.....' use enough dynamite there, Butch ? ' 

Thu, 04/07/2011 - 20:09 | Link to Comment FOC 1183
FOC 1183's picture

As he chewed his Levi Garrett. Indeed one of the greatest lines ever.

Thu, 04/07/2011 - 19:53 | Link to Comment NOTW777
NOTW777's picture

if the gov shutdown occurs, fed workers will qualify for unemployment through the states but paid for by the fed - perverse

Thu, 04/07/2011 - 20:37 | Link to Comment johnnynaps
johnnynaps's picture

Ironically, gas prices have a much smaller affect on the unemployed. It's a good time to be collecting!

Thu, 04/07/2011 - 21:03 | Link to Comment NOTW777
NOTW777's picture

yes get paid by the gov to stay home - its green, saves gas - buy NFLX and obama prayer rug

Thu, 04/07/2011 - 19:57 | Link to Comment Dr. Porkchop
Dr. Porkchop's picture

Change you can believe in!

...anyone got change for a trillion dollar bill?

Thu, 04/07/2011 - 20:55 | Link to Comment Clockwork Orange
Clockwork Orange's picture

+1

Thu, 04/07/2011 - 19:57 | Link to Comment chump666
chump666's picture

it's mind boggling, a wave after wave of inflation will hit Asia.  Bernanke and the FED are insane.  If the US goes into shutdown, all we need is China saying enough of this BS and sell off some UST's...crunch Treasury and rattle US markets

Thu, 04/07/2011 - 20:00 | Link to Comment chump666
chump666's picture

shutdown+china UST sell off = a true SHUTDOWN

Thu, 04/07/2011 - 20:58 | Link to Comment chump666
chump666's picture

that's  why Gross is selling and Japan will stop buying and China will do the dump.  Remember dildos you got a net importer of oil (China) and the oil barron's have drawn a line under a 100.

UST sell off coming...May flash crash redux

Thu, 04/07/2011 - 21:32 | Link to Comment Caviar Emptor
Caviar Emptor's picture

Flash Crash! What a feeling....

Thu, 04/07/2011 - 22:00 | Link to Comment chump666
chump666's picture

what else...remember last year markets correctred 20% in 10mins.  Gonna happen again, maybe MAy again

Thu, 04/07/2011 - 20:30 | Link to Comment ATrillionSavedI...
ATrillionSavedIsATrillionEarned's picture

Other Assets:

Critically important to the financial industry ( bailout so as not to fail )

Not important enough to regulate.

Derivatives?

Thu, 04/07/2011 - 20:07 | Link to Comment Yen Cross
Yen Cross's picture

Any chance we can get a Baltic Dry overlay?

Thu, 04/07/2011 - 20:11 | Link to Comment EscapeKey
EscapeKey's picture

Baltic Dry Primer (according to reddit economists)

BDI goes up = strong economic rebound.

BDI goes down = increasing shipping capacity.

Thu, 04/07/2011 - 20:23 | Link to Comment Yen Cross
Yen Cross's picture

Thanks for the junk. I wanted the overlay to compare inflation.

Thu, 04/07/2011 - 20:31 | Link to Comment EscapeKey
EscapeKey's picture

Don't assume. I only junk when someone says something monumentally stupid, which I didn't consider yours to be.

Thu, 04/07/2011 - 22:05 | Link to Comment Yen Cross
Yen Cross's picture

I respectfully apologize.

Thu, 04/07/2011 - 20:24 | Link to Comment disabledvet
disabledvet's picture

first index to go to zero since the DJIA after it crashed in '29.

Thu, 04/07/2011 - 20:07 | Link to Comment Misean
Misean's picture

"Other Assets"? Why, used toilet paper, bubble gum wrappers that say "I.O.U. 1Billion moni3z", RMBS circa 2007...you know, quality, tuff to price, highly marketable paper...

Thu, 04/07/2011 - 20:10 | Link to Comment mynhair
mynhair's picture

"Free at last!  Free at last!  They're shutting down, we're free at last!"

I, too, have a dream....

Thu, 04/07/2011 - 20:13 | Link to Comment mynhair
mynhair's picture

Why is the EURUSD dropping?

Thu, 04/07/2011 - 20:15 | Link to Comment Misean
Misean's picture

Meh...why not?

Thu, 04/07/2011 - 20:18 | Link to Comment mynhair
mynhair's picture

Are you implying the rate increase will be reversed tomorrow? 

Thu, 04/07/2011 - 20:22 | Link to Comment tekhneek
tekhneek's picture

Are you implying the poor, poor dollar might be in twubble?

Thu, 04/07/2011 - 20:23 | Link to Comment mynhair
mynhair's picture

What's a dollar?

Thu, 04/07/2011 - 20:47 | Link to Comment Yes_Questions
Yes_Questions's picture

1/3 daily ration of Soylent Green.

Thu, 04/07/2011 - 20:49 | Link to Comment Strike Back
Strike Back's picture

1/39th an ounce of Ag.

Thu, 04/07/2011 - 21:12 | Link to Comment FLIP THAT BOND
FLIP THAT BOND's picture

I can't wait to be a millionaire..measured in troy ounces.

Thu, 04/07/2011 - 20:29 | Link to Comment Yen Cross
Yen Cross's picture

And eur/jpy. I shorted usd/jpy and another trade 36 hours ago. Good call mynhair.

Thu, 04/07/2011 - 20:20 | Link to Comment tekhneek
tekhneek's picture

*cough* HYPERINFLATION.

LOL I KID I KID.

Thu, 04/07/2011 - 20:24 | Link to Comment Azwethinkweiz
Azwethinkweiz's picture

I think the "other assets" might be Charlie Sheen's stash of cocaine

Thu, 04/07/2011 - 20:43 | Link to Comment Yes_Questions
Yes_Questions's picture

Is his and the Goddesses nightly usage eligible capital depreciation?

 

Tax season and all..

Thu, 04/07/2011 - 20:26 | Link to Comment SwingForce
SwingForce's picture

OTHER ASSETS is BANK STOCKS. The account balance peaked the week of Feb 16 (had to raise cash- S&P top) and fell for 2 weeks after, then by March 1 the balance was rising (cash deposits) and the market bottomed the day before WSJ leaked Banks could resume dividends, then the buying of BANK STOCKS resumed. Funny thing though, the BKX only made it to 50% retracement of its fall, whereas DOW is 100%+ and S&P is close to 100%. Anybody listening? THIS IS THE PPT'S TRADING ACCOUNT!

Thu, 04/07/2011 - 20:29 | Link to Comment disabledvet
disabledvet's picture

synthetic CDO's, synthetic CDO's.  hmmm.  and what is a "derivative" a "derivation of" anyways?

Thu, 04/07/2011 - 20:43 | Link to Comment Yes_Questions
Yes_Questions's picture

I remember in the 90's people were told to stay the FUCK AWAY from derivatives.

 

Now, we are coping with the derivations..

Fri, 04/08/2011 - 01:01 | Link to Comment Yen Cross
Yen Cross's picture

I remember in the 90's when investing in foreign securities was done as a (CBO- ETF) and considered exotic!

Thu, 04/07/2011 - 20:31 | Link to Comment gwar5
gwar5's picture

Per Jim Rickards, at this rate the Fed balance sheet will soon be large enough to generate enough cash flow to float the next QE, without calling it QE.

Thu, 04/07/2011 - 20:48 | Link to Comment Shameful
Shameful's picture

Nope sorry.  He seems to ignore the whole redemption problem, in so much that the treasury must get the money to redeem by issuing more debt.  So the Fed can ROLL the debt they have as matures or swap it out, but I fail to see how they can man up and buy 70%+ of the new issuance and roll what they have.  You tell me how that math works, without resorting to more printing that is.

It only works if there is a balanced budget or foreigners (other investors) eat up all the issuance.  Now that could happen, just like Scarlett Johanson could show up to my apartment tonight naked with a pizza...but I gotta think it's unlikely.

Fri, 04/08/2011 - 02:27 | Link to Comment GoinFawr
Thu, 04/07/2011 - 20:47 | Link to Comment mynhair
mynhair's picture

More leverage, baby!

Fri, 04/08/2011 - 01:37 | Link to Comment Double down
Double down's picture

He does not understand cash flow.  Been explained previously.

Thu, 04/07/2011 - 20:54 | Link to Comment mynhair
mynhair's picture

And here comes the EUR.......

and fades in the backstretch.  Patience.

Thu, 04/07/2011 - 21:06 | Link to Comment FOC 1183
FOC 1183's picture

When you're going a mile and an eighth, you should be 5 back on the stretch. Go to the rail coming out of the far turn. And don't use your stick until you're a furlong from the photo.

Thu, 04/07/2011 - 22:24 | Link to Comment mynhair
mynhair's picture

10:24 pm EST - bedtime, taking profits.

Thu, 04/07/2011 - 20:59 | Link to Comment chump666
chump666's picture

Is there a Obama fanclub freak junking people on here?

Thu, 04/07/2011 - 21:00 | Link to Comment PhotonFanatic
PhotonFanatic's picture

$123 Billion in other assets? Gold, of course. 

Thu, 04/07/2011 - 21:04 | Link to Comment chump666
chump666's picture

on wires:

Japan is at breaking point

*3 megabanks and 4 trust banks--had received a total of over JPY8 trln in requests for loans and credit lines by April 7 since the March 11 earthquake/tsunami disaster. Over Y6 trln, excluding Y2 trln for Tepco, amounts to 10 times more than usual.

Thu, 04/07/2011 - 21:07 | Link to Comment chump666
chump666's picture

US shutdown looming

*CNN: Federal officials braced for a possible government shutdown as congressional negotiators worked Thursday to reach agreement on a spending plan for the rest of the fiscal year that includes more cuts. After meeting with Pres Barack Obama at the White House, House Speaker John Boehner and Senate Majority Leader Harry Reid announced Thursday afternoon that negotiators were unable to strike a deal.

Thu, 04/07/2011 - 21:19 | Link to Comment George Costanza
George Costanza's picture

the next key topic is the velocity of money, which I believe has been dormant for 3 years.   If the velocity accelerates, the Fed will lose control, which is inevitable.  In fact our dollars are moving overseas and velocity accelerating there, USA to follow = inflation.

Thu, 04/07/2011 - 21:33 | Link to Comment tarsubil
tarsubil's picture

The Cornell Chemist brought it up in his year in review and it made me crap myself. I would compare it to a balloon that was inflated with air beyond its ability to hold it in and it sprung a leak. Bernanke replaced the lost air with water but there is still a leak. Once things heat up water converts to steam, then what? Wonder if there is a delay like a boiling point for money velocity. Once it starts, the only way to fix is with ice (gold?). Maybe I'm taking this too far...

Thu, 04/07/2011 - 21:24 | Link to Comment delivered
delivered's picture

Here's my take on the current situation. As long as the "reserves", which are liabilities to the Fed (owed to banks) and assets for the banks (due from the Fed), are under the control of the Fed, they can control the flow of currency and manage the build in M2. The key is whether they really are going to turn these reserves loose and drive currency velocity to "infinity and beyond". Here's what I'm thinking will play out:

- QE3: Won't happen, at least not publicly through a direct announcement. Rather, the Fed will use the banks as proxies or fronts to buy US debt with their excess reserves. QE3 will happen in an indirect fashion via this strategies but the masses will not realize it. The US Government debt will be monetized but not by the Fed (wink, wink), rather its the banks and other financial institutions loaded with cash that will do the job.  

- Fed Exit Strategy: Easy. Take the securities they own and give them to the banks in exchange for the reserves held. Instead of receiving cash back, they receive securities (primarily UST's and some MBS's). One big circle jerk back to the start of this mess in 2008. So in effect, the creation of cash never really hits Main Street as it is recycled between the Fed, Banks, and the Government. As long as the Fed controls the reserves, they have an exit strategy.

- Gov't Funding Requirements: I would expect in a normal environment, the Gov't would need funding of about $500 to $700 billion a year (about 4% GDP or 15 to 18% of annual gov't spending) which the market can support. We're at $1.5 trillion so a gap of say around $900 billion is present. Cram down some debt of about $200 billion to unsuspecting foreign markets or let the Fed MBS portfolio unwind naturally and you're left with a void of about $700 billion a year. The Fed funded this amount this year but can't risk another year (on the political front). So they had to make sure enough capital is available to support $700 billion a year for at least two years before the next QE is announced. Here comes the banks which will load up on US debt in one way or another over the next two years.

The Fed has numerous tools in their arsenal to manage the build in M2, a number of which are non traditional or borderline illegal (e.g., influence banks underwriting standards to make credit even harder to obtain thus pushing the banks to purchase even more US debt, place political pressure on the banks by influencing capital deployment decisions, etc., etc., etc.). If and when the Fed wants this liquidity to move into Main Street, it will do so. But for now, the Fed has stacked the investment community with enough liquidity to purchase US debt for another couple/three years (to ensure this market is not disrupted and an interest rate shock is realized which would bring the house down).

And one final note, one needs to look no further than the large European Banks that are loaded with large amounts of sovereign debt (which is highly debatable as having any value remaining) to see how this will play out. Spanish banks loaded with Portugal debt, French banks loaded with Spanish debt, and so own. If one country of size fails, the entire system comes down. Enter the ECB which has stepped in an done the same thing as the Fed, monetize Europe debt.

My thinking is that the US banks are headed down the same road with increased holdings of government debt consuming their balance sheets in the years to come (which will eventually create enough stress to produce a new, improved, and much bigger financial crisis). What a clever way to get the public to buy the US debt as rather than require retirement accounts to be comprised of X% of US debt (remember when the politicians were toying with this idea), just make the banks do it with customer deposits. No set macro level directive or regulation but rather a series of "suggestions", "slight policy changes", etc., all adding up to increased US government debt purchases.

Thu, 04/07/2011 - 21:50 | Link to Comment Caviar Emptor
Caviar Emptor's picture

You might think that the Fed has it all under control. Picture Ben on 60 minutes, sweaty and nervous as he tried to go down amongst the people. 

But finance is not always a linear science. And all the variables are not under Fed control. There's politics, both internal and external. There's natural events. And ultimately the Fed has entrusted people with financial weapons of mass destruction. People. Greed is good. 

So just when things seem to be following the equations cooked up by the quants, suddenly an inflection point is reached and things go quadratic, then factorial, then exponential. 

The financial history of the post-gold standard US has been characterized by periods of confidence in adherence to Fed policy punctuated by dramatic and unexpected breaches of that faith and financial crises. That alone would be complex enough to deal with, but I believe there's a cumulative effect which is why the last crisis was nearly armageddon and is still a depression on main street

Thu, 04/07/2011 - 21:41 | Link to Comment Humpty Pundit
Humpty Pundit's picture

+1

Thu, 04/07/2011 - 21:45 | Link to Comment ShankyS
ShankyS's picture

Just pull it.

Thu, 04/07/2011 - 22:04 | Link to Comment Wm the Shrubber
Wm the Shrubber's picture

Banks recycling excess reserves into UST purchases via various initiatives of moral suasion or otherwise seems as plausible an out as I've heard proposed.  And, it is wholly in keeping with the themes of playing for time and keeping the public in the dark about the goings-on behind the curtain.  It is the next stage in the ponzi, yet it too will ultimately fail.

Thu, 04/07/2011 - 22:25 | Link to Comment Johnk
Johnk's picture

Pelley: Can you act quickly enough to prevent inflation from getting out of control?

Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.

Pelley: You have what degree of confidence in your ability to control this?

Bernanke: One hundred percent.

Thu, 04/07/2011 - 22:31 | Link to Comment Yen Cross
Yen Cross's picture

You are suggesting the OPEC club recycling USD into EUROS? It's been on for 3 months. They just bounce their liquidation cycles around. Right now it looks like early ASIA. and then burn into mid NY!

Fri, 04/08/2011 - 01:42 | Link to Comment Bansters-in-my-...
Bansters-in-my- feces's picture

Bernanke is a comulsive liar.

Like Benjy Nutty Yawho...from Israel.

Fri, 04/08/2011 - 01:46 | Link to Comment Bansters-in-my-...
Bansters-in-my- feces's picture

Hey...! Someone stole the P out of the word compulsive
in my last post.
I bet it was Nutty Yawho.

Fri, 04/08/2011 - 05:21 | Link to Comment twinshot
twinshot's picture

Debits are either assets or expenses. Other Assets is a Debit account on the balance sheet. Therefore I would suggest that this other asset could in fact be losses on their security holdings parked in the balance sheet under the title other assets. Accounting Trickery 101.

Fri, 04/08/2011 - 05:32 | Link to Comment Yen Cross
Yen Cross's picture

I Suggest truth.

Fri, 04/08/2011 - 07:32 | Link to Comment dootyfree
dootyfree's picture

"flood the market with money" - learn the system.  banks are never reserve strained.  they can always lend and get reserves after the fact.  more reserves does not equal "flood the market with money".  there is no money multiplier at the current time meaning banks are not lending because there is no demand for loans

Fri, 04/08/2011 - 10:13 | Link to Comment Rock N Roll Det...
Rock N Roll Detective's picture

This feels like building 7 all over again.

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