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St Louis Fed Explains Why The Fed Has Cornered Itself Between Deflation And (Hyper) Inflation
In its September Monetary Trends letter titled "The Monetary Base and Bank Lending: You Can Lead a Horse to Water…" the St Louis Fed analyzes the phenomenon that has all monetarists up in arms, namely the surge in the monetary base and the very muted increase (and outright alleged drop in the case of the M3) of monetary stock, going back to the core topic at every debate over hyperinflation/deflation: the money multiplier, and its current reading of well below 1. What is the reason for this discrepancy: as the St Louis Fed explains: "The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers. A deposit is created when a bank makes a loan. Ordinarily, bank loans—and hence deposits—increase when the Fed adds reserves to the banking system. How ever, despite an increase in reserves of over $1 trillion, total commercial bank loans were some $200 billion lower in May 2010 than in September 2008. Banks added to their holdings of securities, which resulted in a modest increase in deposits and the money stock, but many banks were reluctant to make new loans." And herein lies the rub: if and when the economy ever picks up, and at this point that looks like an event that may well never happen, "Many economists worry that bank lending and monetary growth will eventually surge and, ultimately, cause higher inflation." The backstops offered by the Fed looks increasingly more brittle: reverse repos and IOER. The longer ZIRP continues, the more aggressive the Fed will have to become if and when the money multiplier finally shoots higher. If prior examples of hyperinflation are any indication, this will not be a seamless or smooth process, which is why aside from the traditional calls for hyperinflation as a result of a collapse in the faith of the monetary system as a whole, many are also calling for this outcome should the Fed, paradoxically, stabilize the economy. And it is about to get worse: the Fed's balance sheet is likely about to grow by another $2 trillion as soon as QE 2 is announced. Which means that by the time the economy needs to remove excess liquidity, the Fed will need to find a way to remove not $2Bn, but probably double that number. The simple conclusion is that the longer the Fed fights deflation, the greater the likelihood for (hyper) inflation as the final outcome once it ultimately rights the economy. We tend to think that Odysseus was faced with an easier choice.
From the St. Louis Fed:
The Monetary Base and Bank Lending: You Can Lead a Horse to Water…
In its response to the worsening financial crisis during the fall of 2008, the Federal Reserve took actions that dramatically increased the size of the monetary base (the sum of currency in circulation and depository institution deposits with the Fed) (see chart). Subsequently, the Fed purchased some $1.7 trillion of securities issued by the U.S. Treasury and federally sponsored housing agencies, which expanded the monetary base further. The base more than doubled in size between September 2008 and May 2010. Yet measures of the money stock, such as MZM, M1, and M2, increased far less. For example, M1 increased about 17 percent over these months; consequently, the ratio of M1 to the monetary base (measured by the St. Louis Adjusted Monetary Base), commonly referred to as the “M1 money multiplier,” fell from about 1.6 to 0.84.
Why was the increase in the money stock so small when the increase in the monetary base was so large? The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers. A deposit is created when a bank makes a loan. Ordi -
narily, bank loans—and hence deposits—increase when the Fed adds reserves to the banking system. How ever, despite an increase in reserves of
over $1 trillion, total commercial bank loans were some $200 billion lower in May 2010 than in September 2008. Banks added to their holdings of securities, which resulted in a modest increase in deposits and the money stock, but many banks were reluctant to make new loans. Partly this reflected weak loan demand, but it also indicated a diminished appetite for risk on the part of bankers. Further, a lack of equity capital (and a high cost of obtaining additional capital) constrained the lending of many banks (banks are subject to minimum capital requirements based on their outstanding loans and other assets).
Many economists worry that bank lending and monetary growth will eventually surge and, ultimately, cause higher inflation. Minutes of Federal Open Market Committee meetings indicate that Fed officials have discussed possible measures to discourage excessive growth in lending and the money stock. One option is to sell securities outright or under repurchase agreements, which would shrink the monetary base. Recent experience illustrates, however, that large changes in the base may be necessary to effect the desired changes in bank lending. Another option is to raise the interest rate paid to banks on their reserve deposits, which would raise the opportunity cost of lending and thereby tend to exert upward pressure on market rates generally and slow the growth of loans and the money stock. However, because the Fed has little experience with paying interest on reserves,
it is difficult to predict how much bank loans would change in response to an increase in the interest rate paid on reserve deposits. Hence, the Fed may resort to both options if monetary growth threatens to become excessive.
—David C. Wheelock
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Why so small when the President's Stimulus Package is so Huge? CNBC personnel have been quietly asking themselves this same question for some time.
http://furfag.com/z/files/Small%20Penis%20Guy.jpg
LMAO that must be Cramers boyfriend.
Bunch of liars. They set up a Fed-to-Fed carry trade and then claim to be oblivious to the fact that their money is being deposited at the Fed for a profit? Hooey. Take away interest bearing deposits at the Fed and you will see change.
The whole things carry trade. The corporations are cash rich becuase the fed owes them money. The FED is rich because the corporations owe them money. It's the fractional reserve monetary system all over the place. Borrowers are lenders and lenders are borrowers. With half of it being securitized by social security loaning money it doesn't have to people who can't pay it back.
OR, is it another one of Leo's Chinese solar stock chart boners?
If you take a look at what the stimulus money has been used for, you will find much of it was for pork, thus much of the stimulative effect was never realized.
Are all my increases in money stock so small?
Cornered Itself Between Deflation And (Hyper) Inflation
Rock and a hard place
In a fireworks factory with a lit cigarette
Standing below a crumbling dam with backpack full of rocks on its back
ZH's please add more to this list.
For a few Fight Club references:
A space monkey smoking next to the ether storage room.
Or firing a gun at his imaginary friend next to a thousand gallons of nitro-glycerin.
There is a plan. The question is whether they will be able to see it through before something goes wrong and it all blows up in their face. Even if we're all nuts, if we make enough of a ruckus, we'll set that shit off right in their faces.
Maybe more fight club is needed- 'Fuck Martha Stewart, shes polishing the brass on the Titanic! I say let it all implode, fuck these space monkeys Geithner, Bernanke, Obama, all the rest of these idiots, lets EVOLVE! In death, you have a name!
Attempting to surf a tsunami on a belly board
By introducing moral hazard ("counterfeiter of last resort") and by being a tool of the pillaging bankster cartel, the Fed has always been cornered between Deflation and Hyperinflation. They are apparently just now realizing it. Or, perhaps, they have always known this would be the outcome and just don't want to admit it.
Speaking as an electronics Engineer, this reminds me of trying to fix an OpAmp problem: Input looks fine but the ouput is sitting at ground -- ya try cranking up the gain adjustment -- nothing. Crank the adjustment the other direction nothing (unbeknownst to you, a small solder splash is shorting the output to ground). After a physical examination of the circuit, you see the small solder splash and scrape it off (wrong move, because while the OpAmp has internal short-circuit protection from grounding, the adjustment you made to the gain control will send the output to the positive supply rail, and there's NO protection in the OpAmp for that!). So you go back to the output and see the output pegged to the positive supply rail, while smoke and a feeling of FAILURE seep out of the now-ruined OpAmp. Only solution left now: Power down, remove and replace the OpAmp and re-adjust the new chip into proper operation.
We're at the waiting for the smoke to come out phase...
Austrian bitchez!
Even corporations that are sitting on cash will start buying gold if the Fed loses control.
If?
They are not in cash... they are in cash equivalents-treasuries
Even worse.
I am going to laugh my ass off when some Austrian economist reads the riot act to somebody like Steve Jobs and, in the interest of his shareholders, he starts a run on treasuries.
That's not how gold works any more. Corporations are too full of shit and too big for their britches to run to gold. If they tried to do it they would get a COUNTRY pissed off at them. They have to stick with economic system and all it's bullshit until the retrenching consumer and gold bugs just freaking pants them.
Haven't seen too many big corps. where credit agreements list gold as an allowable asset purchase in the covenants.
Wonder why?
Buying WHAT gold, Spitzer? Now even Bob Chapman is out trying to peddle his bullshit paper gold stocks, theres not enough gold already so where are the new tonnes coming from?
I would not be so quick to jump to the conclusion that the FED can stimulate us out of this Depression, and improve the money multiplier. There is the probability that the economy is debt saturated.
Sitimulus wont take the USA out of this Depression, but that wont stop prices from rising.
This explians why prices can raise even in a recessionary environment (as it has happened serveral times in history): http://www.pbs.org/nbr/blog/2010/08/idle_resources_-_they_dont_sto.html
Saturated? Well, that's only because my credit limit is too low, and the interest rate on my credit-card too high!
Give me the tools that fedgov has, ZIRP and an ever increasing debt limit, and I promise, I'll stimulate so much, that I'll wipe out the last of the seed corn.
Better yet, how 'bout I just write checks, and everyone else can use them as currency instead of cashing them. Hell, I'll even pay some of my debt down from time to time.
Surely that'll help!
From Richard Koo
It took the US 30 years to normalize
interest rates after 1929
Exactly. Without generous bankruptcy reform, this will drag on for decades. If the government is trying to print & distribute money, they should be paying off people's mortgages & credit cards.
They have already guaranteed enough to pay off every mortgage in the country.
I think a major factor in slowing down consumers was the 2005 bankruptcy reform.
The answer is obvious. They will nationalize the banks.
They did that in Sept 2008
True. Next time they will make it official to complete the ongoing consolidation of Central Planning.
No they did not. The same group of criminals and thugs are still running things. If it was nationalized, there would be a different group of criminals and thugs in charge.
Maybe, maybe not......
Nationalize the banks that have privatized the government?
The zombie banks that were not nationalized will come out to bite Ben and timmy when they sell off their Treasuries.
Yep, it's a wacky system we have.
If wacky = criminal, agreed.
"If and when the Fed rights the economy . . ." Anybody think that is going to happen?
A currency collapse is not hyperinflation because the currency goes to zero. That's when people look to alternative money. Anybody got pesos and loonies?
I like those little airline bottles of booze. They are real assets not paper.
Online link for 'When Money Dies'
http://prudentinvestor.blogspot.com/2010/07/when-money-dies-by-ferguson-can-be-read.html
bitchin! thanks strannick
Marching Towards a Yo-Yo Depression
(inflation then deflation then inflation then...?)
Hah! At our house the term "Yo-Yo" is the acronym for Yer On Your Own.
My children get that alot and it will serve them well in the long run.
Thanks
Why do people never question why it is that bankers - who generally HATE low interest, AAA lending - are so eager to change their mix of assets to low-yielding, AAA securities?
Of course we know why:
1.) When banks fill their balance sheets with fraudulent credit instruments - written to generate fees rather than interest on real, economic returns - of course they are going to favor AAA credits with new deposits. Their portfolios are a nightmare.
2) They just don't want to do the hard work of re-financing the economy. All that due diligence is very tiring and not exciting. Bankers hate to live like, well, bankers.
seems to me during the lost decade the BOJ had to resort to parking cash in MM accounts to keep their system going, and periodically they would mop up that money. Since we have already had a MM moment, (when a dollar isn't really a dollar, the NAV connundrum) it may be they want to avoid another such event, but as the Fed waves it magic wand, the market gets very sleepy, very sleepy, your eyes are getting slantly, very slanty. There now you will sleep through the next decade and wake up refreshed. Thank you Dr Bernanke
Looks like a scenario in Simcity 3000:
Chose financial option:
Deflation
Hyperinflation
Press ENTER to proceed
Reminds me of the time my daughter played with "The Sims". Somehow the kitchen caught fire and her sim's parents died in the blaze. It went downhill from there. I still josh her about it!
The only steps the Fed will take will those that serve to further the destruction of the dollar. The age of a global currency may in fact be not far off...
http://www.imf.org/external/np/pp/eng/2010/041310.pdf
Now, I'm not an economist, but the paper is blatantly exploring the weaknesses of the dollar as the standard reserve currency. My guess is that it probably wouldn't take much movement from the Fed to piss off the holders of the 64% of the world's dollars in reserve. If that were the case, I'm sure that resistance to the institution of a global currency would be a much easier sell, especially if it were a currency ostensibly based on the SDR.
Just as corporate mergers are nothing new, the bankster scum have most likely decided that their stranglehold can be kept far more efficiently if they just consolidate their operations some more.
Maybe that scenario sounds like a tinfoil-hat routine, but...I can hardly find another context into which the actions of the Fed and the other central banks of the world fit, except for abject stupidity.
To a large extent, though, the answer being either scenario is pretty much irrelevant. Global conspiracy or catastrophic idiocy...either way, the rest of us get fucked, plain and simple.
+1
Commentators always assume that banks unwillingness to lend is the sole cause of the collapse of the Money Multiplier and the Velocity of Money. Decreased credibility of borrowers is definitely a factor, but willingness is not the only factor. Ability to lend is a major factor that has not been given enough play in the media. The massive expansion of the Fed's balance sheet was to plug the negative capital that resulted from the loans made going bad, not new money on top of existing healthy capital bases. So that money created is being used just to stabilize prices, b/c without it we would be deep into deflation right now. So commercial banks are now sitting on this new reserve base and buying securities to rebuild their capital base. Borrowing at close to zero and lending to what is the closest thing to a risk free borrower (US Govt) and making a 275 - 325 basis point spread, which can be levered, is more attractive than lending to riskier borrowers at very little excess yield to compensate (mtg rates at all time lows & corp yields are low as well - IBM just borrowed 3yr money at 1% annual coupon). So with little to no margin of error the commercial banks will be content to simply take their free money from the still high spread carry trade and rebuild their capital bases.
The other major factor, not discussed by most commentators, is that there is not demand for loans like there was in the past. This is a classic occurence in a debt deleveraging period - people want less debt, not more.
There are numberous papers authored by the Fed on the Japan situation - they all indicate that the Fed would rather maintain an anti-deflation stance for longer than may seem optimal and risk some inflation rather than the alternative. They can always raise rates and suck out liquidity if things begin to pick up, and a little inflation would be good for the country as it would lessen our debt load.
As for hyperinflation, we are not even close to that and talks of hyperinflation ignore what the requirement is for hyperinflation - i.e. being shut out of the bond market. On a relative basis, the US is not in terrible shape compared to the other major developed nations and is still the global reserve currency with the #1 military and #1 economy in the world.
Near term, I think we should be more worried about the magnetic reversal of the poles that is mythically supposed to happen in 2012 than hyperinflation.
Debt saturation. Borrowers have had enough and in the wake falling asset prices are not going to have an appetite for debt for quite some time. In a largerly consumer driven economy where small businesses (which are suffering) drive 70% of employment, this means trouble. Likewise, average debt levels will take years and years to deleverage, especially in an environment of higher taxes, higher energy costs, higher healthcare costs, higher commodity prices (i.e. food), etc.
My big issue here is how is the Fed going to suck the liquidity out of the system by raising rates in face of current unemployment and debt-saturation? The cost to service the debt would skyrocket for most and finish off the consumer for good. It just isn't that easy in this situation to combat inflation. The fed is between a rock and hard place, and they know it. And, in the process creating a bubble in the bond market - which very well could be the primer for a hyperfinflationary run.
Good comments.
Perhaps you guys can help me with a question I've been wondering about: Is capital actually destroyed after a reverse repo?
I understand that the bank's usable capital is diminished when they exchange it for some asset from the fed, but does the fed then effectively destroy that capital? Thus reducing the overall money supply?
Also, with a reverse repo, the Fed has agreed to buy back the asset with interest, so the capital goes back to the bank eventually, does it not? So what capital does the Fed use for this? Does it just print some more, and wouldn't that just replace the capital it destroyed after the repo?
It's the fractional reserve confidence game. The capital only exists on a ledger, and there is nothing to create or destroy. The end game or purpose of these machinations is to gain control by title of actual physical assets.
It's a difficult concept to get your mind around because of it's scope and it would be un-pc to point fingers at the actual culprits.
Historically, this crap continues until the host dies and the parasite moves to another host.
As any surgeon will tell you, the only cure for a gangrenous limb is amputation, NOT simply placing a bandage over it!
Deflation, hyperinflation, stagflation, depression, I just think 'Mad Max', define it however you like! And good luck fighting off the biker musclefags with machettes and Uzis!!
There is no corner, all you lemmings are going to be flattened. It's wishful thinking there is a corner to hide in. The Fed has no ability to stop what is going to occur, more wishful thinking. There is no Wizard of Oz, all you people thinking the helicopters are coming to save you are in for one rude ass awakening.
Expand>Peak>Fail To Expand>Collapse>Liquidation of the Non-performing Liabilities>Choice:Up till now Rinse and Repeat
But what about the flying monkeys? They are coming, right?
That would be what the wackos would want you to think. :)
Clearly, you have not yet met Johnny "Gold is going to plummet from $1220!" Bravo.
Imagine, if you will, adjustments to monetary conditions are like Dams controlling a river's flow, with an irrigation canal system further downstream and reservoirs to pool the difference, eventually running off into mangroves. Now, we have bank lending as the irrigation canals (the crops as the economy, corny, yes) - the reservoirs are full, but so are the feeder canals: water is flush, which will run down to the sea in course. Yet the fields are either dry or waterlogged... furthermore, everyone now seems to think that so much water has been used that there won't be enough for next year.
There are only a few problems here, but they're distinctly different:
1. a monolithic dam-system of controlling the flow of water which is useful for macro-scale issues but slightly inefficient for day-to-day activities.-conversely, the reservoir system works fine.
2.money is not being used by the economy, either that is because the canal operatora are charging an uneconomic price for it, or because the economy does not want to pay the banks an economic price for it. -mismatched expectations, from one stage to the next.
The FED can arbirtrate in the case of some of those price expectations, but not all. The more granular the employment concerns, the further away from Fed jurisdiction it is. The Fed is only responsible in that enough water should be in the system at any one time.
For example, if the Fed decided to virtually phase out the ten year note, the value of those in circulation would rise simply for being the risk instrument it is.
And Goldman continues to be very bearish on the dollar, for one simple reason: "Our expectations for sizeable additional QE by the Fed will only add to the Dollar negative mix towards the end of the year." Tyler Durden
When you are the mouthpiece for the Federal Reserve Bank, as Goldman is, you can make news anytime you want on MarketWatch, Bloomberg, and even Zero Hedge.
For instance, in today’s bear market climate, with more and more observers suggesting the double dip, existing house sales just plunged 27.2%, a record drop. Knowing this report was coming (the Fed’s mouthpiece would have that advance information, of course), a little news item to meet the market day would keep the election year Dow Jones Average above 10,000.
And so Goldman Sachs, the mouthpiece, outlines its “harsh QE expectations” (translation: actual central bank plans to be announced later). So on the floor of the exchange as the Dow dives on housing blues, brokers suddenly pause in their despair to reflect: Hey, wait a minute, Goldman says the big bucks are coming. Ah, not to worry! Ben’s back to feed the bull.
Nevermind, of course, that the Fed's actions are creating dire economic imbalances, including the destruction of savers and wages and the dollar and, in the end, the financial sector and America’s status as holder of the world’s reserve currency.
Instead, Bernanke, a wild-eyed professor trying out his Depression experiments on the public by throwing money at the crisis, administers another dose of fiat poison in the face of the biggest collapse the American economy has experienced since the Great Depression. All the while ignoring that consumer income is a key factor to this worsening crisis
I think it’s fantastic the way ZH effectively uses GS’s self-serving material; there’s probably no savvy investor left that doesn’t know GS is the voice of the private owners of the Fed. In future, instead of Bernanke going before the banking committee to testify, why not get it straight from the horse’s mouth, Lloyd Blankfein?
It's a tug of war with a billion Mac trucks on each side. Watch out when the rope (dollar) breaks.
Just do it already - $5 Trillion Global QE. Stop messing around.
They'll only act when we are in a free-fall as usual. By then the damage is 10 times greater to repair.
Where do these guys get their degrees? Oh yeah Harvard, Yale, Stanford, Princeton, Wharton.
Hahaha, I thought they all got their degrees from Cracker Jack Boxes, or perhaps the rollback shelf at Wal-Mart.
""The answer centers on the willingness of depository institutions (banks) to lend and the perceived creditworthiness of potential borrowers."
God damn it! these people are idiots!..
For the last F'ing time.. it's not that banks don't want to lend.. it's that no one wants to borrow.
you can't make people borrow money.
That's probably why our current debt-driven economy sucks ass. When borrowers are keen to the fact that the lenders exist for no other purpose than to farm them for their future growth, people get fucking sick of it. Do I really want to borrow some money to blow on shit right now so as to prop up some assholes who are drawing a salary off of my work? Hell no...never again. At least if I were to blow money on a hooker, I'd get an actual service out of it. Taking my money over the long term to pay for the privelage of spending someone else's in the short term sounds like a real shit deal to me.
You're right-on with that. That's also why all these large companies are flush with cash.
You are absolutely correct, but they're not necessarily idiots. What they are are liars. If no one is buying what you're selling, you turn it around and say you don't want to sell, to create, foster and perpetuate the notion that you are in charge, when you're not.
Look for M3 to drop, and for this depression to deepen and become apparent to all but the most fatally infected of CNBC mouthpieces.
Zero Hedge has been on this since day 1. The lies have never ended but at least someone is questioning the lies.
You're right about them not necessarily being idiots, at least in the context of how they manipulate things to their own benefit. The idiocy only really becomes apparent on the long term, in which it's extraordinarily disadvantageous to leverage so hard against the future for today's spoils, but that's basically the nature of greed anyway.
We're definitely going to punch through the bottom, whether the glossy numbers to which most of the public pay attention reflect that deterioration or not. Through QE and PPT, the Fed is doing nothing more than putting lipstick on a pig to try to keep everyone from freaking out en masse. A controlled decline is just that...controlled, and leaves a longer time frame in which to convince the public that we're just "readjusting to new lows" and continue to manipulate the system in such a way that even more control is asserted. An out and out panic would probably be too fast for the banksters to handle. Sometimes, I wonder if maybe the system that they've built and abused for so long hasn't become something that's only tenuously within their control.
What a fucking mess...
I think on this sub-thread you are making one of the most salient observations on the current situation.
Here in the UK, I as a credit-worthy borrower, am being utterly *bombarded* with invitations from banks, credit card companies, car companies, supermarkets, some bloke on the bus I once gave a cigarette to - to borrow money. Meanwhile the government is bleating on and on about the need for banks to lend more. These are institutions that made (for a time) huge amounts of money on lending at 5-6% when the BOE interest rate was between 3 and 4%.
That they can't make money now with much meatier margins (most borrowing rates for Joe-Punter are still > 6% or much more vs a BOE rate of 0.5%) tells you all you need to know. Who *would* borrow - you can't make returns in anything that would cover the interest - the only people who would *need* to borrow, rather than want to, are suddenly seen as a lot more high risk than they used to be.
Nobody else wants to participate.
... I've made damn sure I don't need to borrow from any of them - the usurious fucks. Dropping money from helicopters is one thing - Ben, (and Mervyn) are going to have to step out of their whirlies and start ramming money into peoples mouths to get this joke started again. In other words - they do - hyperinflation - they don't - deflation.
Me - I reckon deflation - it suits indebted corporations worse - but rich individuals better. Guess which of these two really matter to the boys in Washington and London.
Must be web/blog sweeps week with all the hyperinflation articles popping up...
Banks don't want to lend for two reasons:
1) People don't want to borrow for fear of asset price reductions,
2) Banks don't want to lend for fear of asset price reductions.
This asset bubble that Bernanke is hell bent on keeping inflated is what's causing velocity of money to stagnate. If he'll allow housing to correct, which it needs to and at much lower levels, then banks will start to lend again once prices are seen as truly bottoming. 'Till then, standoff.
It's not limited to housing. we had our chance to clean out the bad stuff in 2008, but Paulson, Geithner, Bennie Boy and others had a different ending in mind, one that did not require massive losses on the part of the very wealthy. This is all the end result of policies spawned in fall of 2008, and of course ratified by the current administration.
Amen. + 100,000. Or whatever you crazy kids do on here.
The banks *always* had an infinite supply of money as long as credit was in vogue.
Now, though... print as much as you like out of the FED and BOE - unless it's "given" and not "lent" its utility is zero. No borrower wants to borrow in a deflationary environment (you'll have to pay back much much more in real terms) - no lender wants to lend in an (hyper)inflationary environment (you'll get back much much less in real terms). Ergo - printing money doesn't increase the money supply as everybody is now pretty much in one camp or the other (and I'm not talking just ZHers here). Money supply in the real economy is screwed.
The only situation where any of this (shite) works is a mildly-inflationary environment - so called business-as-usual for governments of the last few years. That's the shocking fact I think....
a) that this was the only environment where fiat-money kind-of stays stable (but only for a few decades)
b) QE has been and gone - the worst patch was 2001-2006 (the era of low interest and demented borrowing) anything else Ben does is just twirls in the icing
c) any help governments can offer now is just to pick a vested-interest at a time (e.g. cash-for-clunkers) while defrauding another party of precisely the same amount (taxpayers). (Real) economic growth comes from satisfying real human needs in a way that requires less time and materials. All else is re-apportioning a fixed-wealth-pie - usually politically motivated - and usually dressed up as helpful - or "stimulus".
...deckchairs and titanic in other words.
While they'll never get there, at some point, parking it at the fed might become the best money maker.
Why hold bonds for 2 years at under .5, when you can just hold it with the fed and get the same? Any lower and you lose money by NOT parking it with the fed.
It probably blows before it, but the fed's deflation tools are about to cross themselves, making the ineffectiveness of both utterly complete.
Welcome to the recovery. Now go home.
What the heck is hyper-inflating at the moment?
Press releases on the issue.
Banking sector equities
The reason that the banks are not lending out the proceeds of QE1 is that the Fed initiated the practice of paying interest on excess reserves that banks hold at in their accounts at the Federal Reserve Banks at the beginning of QE1. So the banks are just letting the "money" (actually, until banks start lending it, it is just numbers in a computer) sit in their reserve accounts and pocketing the interest. So what the Fed is doing is kind of like safe sex: they released a lot of money, but at the same time they instituted a mechanism to prevent it from leaking into the economy.
However, if the Fed lowered the interest rate paid on excess reserves, or if interest rates rose higher than the the Fed's excess reserve interest rate, the banks would start lending it out and this could result in very high inflation.
The path to inflation will be through the treasury not the Fed. If the treasury keeps writing off debt while making credit whole then eventually this will lead to an excess of credit. The Fed's role is as an enabler of the treasury. If defaulting debt was allowed to destroy an equal amount of credit the whole mountain of debt and corresponding credit could slowly decrease together and stay somewhat in balance at a lower asset price level. But, if the destruction is always one sided an excess of credit will result with no place to go but T-bills. Somehow that came out sounding a lot like Japan.
Considering the high unemployment and sluggish GDP the fall off in year over year growth in the money supply figures is to be expected, especially after the bubbliciously high growth rates (11% and 16% respectively) just prior to the financial crisis. That is why one should look at both the nominal and the percent year over year charts.
There is certainly price deflation from slack aggregate demand fueled by stagnant wages and high unemployment, and it may get worse as the Fed and the government coddle their unreformed pet Banks, leaving the real economy and most Americans to twist in the wind. But there is no true monetary deflation yet, the kind which is supposed to stiffen the back of the dollar and all that.
There is also sufficient room for concern about the US dollar and its sustainability as the world's reserve currency. This would be familiar to most economists as Triffin's Dilemma. As the world shifts from the Bretton Woods II compromise to a less dollar specific regime the adjustment could be quite traumatic, especially to the financialization industry. Here is another description of the same phenomenon called the Seigniorage Curse. It is why I have called the US dollar and its associated bonds The Last Bubble.
True Money Supply is included for all you Austrian Economists, and it has enjoyed a bumper expansion under Bernanke's chairmanship. This is the money that is ready and able to be used as a medium of exchange, what the Austrians consider 'real money.' I am quite sure that Messrs Ludwig and Murray would be aghast at Bernanke's banking practices. ...
I am still comfortable with my forecast for a severe stagflation, considering both a protracted monetary deflation and hyperinflation as less probable 'on the tail' events that almost certainly would reflect fiscal and monetary policy errors. What also concerns me is the failure to reform and address the grossly imbalanced economy. I am less confident today however, that Bernanke and the Congress will not make these errors because of the blind greed of the oligarchy and their influence over the country.
http://jessescrossroadscafe.blogspot.com/2010/08/us-money-supply-figures-dude-wheres-my.html
Gotta love all these "when and if" abstract worries on money supply.. To get money supply to grow there actually needs to be demand for credit. Last time I checked the consumer is still delevering and is still a long way frmo completing the process, c&i loans are not expanding and s&p500 companies already sitting on $2trn cash that they dont know what to do with.. So sure, when there is demand for credit we will have to focus on money supply growth.. But that "when" might be years from now.. I fail to see any catalyst for credit demand in the forsseable future.. If anyone has a better idea - I'd lvoe to hea about it
Yet another dopey Fed piece pretending not to know why banks are holding so much reserves, and not increasing lending. Umm, might that be because the Fed is paying interest on reserves?
I'm not saying all the market reasons for banks to hoard cash don't matter. But if the Fed weren't paying interest on reserves, commercial banks would keep their cash on deposit at other commercial banks, not as excess reserves. The supply of money would meet the demand for money at a market price. The Fed was afraid that might result in a doubling of M2, in line with QE1's doubling of M0, and 100% inflation. So the Fed pays interest on reserves, specifically for the purpose of discouraging excessive expansion of credit and broad money. And then pretends not to understand what it's doing.
http://keynesianfailure.wordpress.com/2010/08/13/qe2-the-overblown-herohorror-stories-and-the-mediocre-reality/
So the solution then is to either increase the banks' willingness to lend (get rid of the insolvent banks), or increase the the creditworthiness of borrowers (write off the existing bad debt, causing deflation, causing prices to come down), or both. There, see how easy that was ? All these Fed self-manual auto-machinations that don't involve anybody but itself and the banks are blithering worthless and they'll go on forever if we let them. Fucking collapse he TBTF banks already.
Flawed Logic
By bailing out the banks, the economy will return to normal because the banks will have capital to lend again.
Reality
By bailing out the banks, the economy will slide into a depression while the banks sit on the cash reserves to make it through the difficult times.
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The Federal Reserve Act was created to give government sanction to a cartel of banks that would hold the power to print the nations currency. If at any time, these sacred cows of systemic importance became jeopardized by any outside influences (including the nautral consequences of competition) the central bank would inject liquidity into the necessary institutions. By printing unlimited amounts of money and selectively handing that money to only a few chosen sacred cows.
When the financial crisis hit. I knew something was wrong. As I've researched this topic, I realize that my laizze-faire attitude about politics and money that was institutionalized by free corporate media and a free public school system was intentionally developed in order to convince each generation of the benefits of slavery.
End the Federal Reserve System.
End Fannie and Freddie.
End the oligarchy of systemic stupidity that has crippled our nation.
Vote out the incumbents that voted in favor of TARP, confirmation of Ben Bernanke and Sec. Geitner. The only way to deal with the cancer of the banking system is to let it implode and die on itself. The rest of the world will be fine.
The only thing we have to fear ... is the banks.
Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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