What Inflation?

naufalsanaullah's picture

Sure, stocks are rising and the dollar is tanking. But we don't have inflation. Yet.

Yes, the Fed's balance sheet has ballooned to the joke it is today, holding more than $2.1 trillion in assets. But what about the liabilities soaking up these assets?

Currency in circulation is only up 9.7% YoY, while the assets are up 80.5% in the same period.

So if all of this printed money is being used by the Fed to purchase toxic assets, where is it going?

Excess reserves, of course. Counting for $833 billion of the Fed's liabilities, the reserve balance with the fed has skyrocketed almost 9000% YoY. Excess reserves, balances not used to satisfy reserve requirements, total $733 billion, up over 38,000%!

Excess Reserves of Depository Institutions

The Fed pays interest on these reserves, and with an interest rate (return on capital) comes opportunity cost. Banks hoard the capital in their reserves, collecting a risk-free rate of return, instead of lending it out into the economy. But what happens as more loan losses occur and consumer spending grinds to a halt? The Fed will lower (or get rid of) this interest on reserves.

And that is when the excess liquidity synthesized by the Fed, the printed money, comes rushing in and inflates goods prices.

Right now, we have a case of a $2.7 trillion move in equity market capitalizations corresponding with an only $400 billion decline in money market funds. QE funneled through fractional reserve leverage into bank reserves is where the bank algos get the buying power to make up the difference (that, and AIG counterparty bailout funds). But this is purely liquidity. And with the forward-pulled demand thesis attempted three times before, the US govt at the debt wall, and no consumer credit in sight, the market is going to go right back down.

To get an inflationary bull market, the printed money/excess liquidity can't be exclusive to equities. Equities are where the QE's "inflation" has been seen of late, but it is little more than a Ponzi scheme, as the funds haven't entered the real economy (as the equity prices would suggest), and until excess reserves are unsequestered, there is no inflation, there is no nominal growth, and there is no bull market (however fallacious and inflationary to begin with).

The excess reserves will be released when the Fed/Tsy have no more bailouts/stimuli on their agenda and everything they wanted has been fully authorized and set into action. Until then, it will be a game of letting the market correct itself (ie Paulson allowing Lehman BK to crash stocks last year), spending months using that as political capital to issue unprecedented deficit spending/bailouts, fend off Congress/taxpayers as the panic mode wears off and they realize what they allowed via ultimatum/MAD, and crash the markets again when you run out of ammo to raise new political capital. And with Barney Frank stating HR 1207 will pass this October (something that cannot be allowed if the Fed/Tsy want to continue their shenanigans), the fall equity selloff I've been calling for seems all the more likely.

POMOs end September 2, until further notice and the Clearinghouse Association has already begun the MAD talk again...

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ghostfaceinvestah's picture

Good thesis, though I think the timing may be off, the Fed still needs to pump liquidity into MBS to keep that market solid.  Though I admit I could be wrong - the Fed may even stop the MBS buying early, and let the market tank, if threatened.  It is like trying to predict the actions of a caged animal.

Don't forget too the external forces at work - the FCBs are getting cash for their agency clunkers, and are turning that cash into hard assets, which also puts upward pressure on prices.  They've been trying to talk down the markets so they can trickle in the commodities and get lower prices, but if the xs-reserve money comes flooding in, it will up the urgency of the FCBs to get rid of their own dollars, turning into a vicious cycle of dollar unloading.

This could get real ugly real fast.

Anonymous's picture

i believe that the fcbs are ploughing their
cash for mbs into treasuries...if they are not
then that is an inflationary leak...

the chinese are trying to shift into commodoities
but that process will take a while...and given
large losses they have suffered in commodity trading
i am not sure to what extent they are willing
continue there....

handsfree's picture

That might help to explain the run-up in these insolvent companies.

Anonymous's picture

The Fed banks are paying 0.25% on "required and excess reserves" (as of the Dec08 FOMC statement).

6month UST notes yield 0.24%.

Didn't Sweden push thier reserve rate negative? ie. force member banks to loan out excess by charging interest on the reserves.

The way all dollar denominated asset classes are getting bid up makes me think asset inflation is well along. Getting a rise in CPI will take a while.

Anonymous's picture

Swiss Franc time for me. Dollar gonna lose it's "superiority"

Nolsgrad's picture

Swiss Franc for me, USD "superiority" is over

RobotTrader's picture

From Spock (aka Rasputin) at Prudent Bear Chat:

"Last year at approximately this time, this Vulcan posted a number of
missives describing our imminent scroomage due to the implosion of
Fannie/Freddie/FHLBs.

And in fact he went so far as to infer
that perhaps we actually were sliding into the depths of deflationary
debt and derivatives collapse.

Below, please find a long excerpt
from one of his posts on the subject. Clearly you will see that his
bias at the time was toward deflation, with the caveat that if the Fed
and Uncle Sugar got serious about fighting the collapse, then all bets
were off.

Here is the post, made on September 29th, 2008 (posted as "Ras", and with "Spock" present-day comments following thereafter):

"...over
the last three weeks we have seen the acceleration of the systemic
failure of the entire planet's financial system, which includes (as
excerpted from the latest "Rasipedia"):

1. Fannie Mae failed ($2.5 tril.)

2. Freddie Mac failed ($2.5 tril.)

3. FHLB system failed ($1.3 tril)

5. Merril failed ($.8 tril)

4. Lehman failed ($.7 tril)

5. AIG failed ($500 bil. in CDS)

6. Goldman Sachs effectively failed ($2 tril)

7. Morgan Stanley effectively failed ($1.5 tril)

8. WaMu failed ($300 billion)

9. Wachovia failing, which is in talks to be married off shortly

Sub Total: Approximately $12.3 trillion

But also vaporized, were virtually every:

1. Hedge fund
2. Pension fund
3. Insurance fund
4. Mutual fund
5. Money Market fund
6. Bank

...both in the U.S. and in all other major countries, worldwide.

And all of which are toppling over left-and-right.

Sub Total: Who knows? Probably trillions more


However, ALSO vaporized--and even more dangerously so were:

1. Some percentage of the $62 trillion credit default swaps market

2. Some percentage of the $650 trillion overall derivatives markets

Sub Total: Who knows? I don't even want to guess anymore.

(Ras Summary):
At the risk of alienating those die-hard inflationists who insist that
because a gallon of milk is near four fiatscos, we are experiencing
"Weimar meets Zimbabwe", the above set of facts show that the world is
rapidly falling into the abyss of deflation.

Massive, worldwide deflation, that is.

Which
is consuming everything in its path, and has already swallowed the
approximately five-trillion fiatscos TPTB have thrown at it and hasn't
even stopped growing, much less slowing down or reversing.

Now,
this doesn't mean that central banks and governments WON'T ultimately
throw the "Hyperinflation Switch" and literally create another
ten-to-twenty trillion fiatscos in a last-ditch attempt to mitigate the
deflationary damage, but so far they have not.

It will be
interesting to see how the "Infinite Fiat" provision of the latest (but
perhaps NOT the last) bailout bill is funded. Here are some scenarios:

1.
If the U.S. debt enablers continue to step up and buy the preponderance
of the trillions of fiatscos of bonds issued to attempt to resurrect
the failed financial system, then that appears to be deflationary as
the U.S. might actually have to EARN their way out of the mess
(assuming we don't default outright which would be too horrid to
contemplate at this moment, even for me!).

2. If taxes on U.S.
citizens are also raised to help pay for the bailout, then that also
would be deflationary as fiatscos are vaccumed out of the wallets of
the poor working proles.

4. However, if the Federal Reserve
decides to monetize the bailout debt, then we MIGHT be looking at a
hyperinflationary scenario as the fiatscos filter through the federal
government and into the general economy. But hyperinflation horror
would ONLY ensue if the U.S. populace would begin to lose faith in
their fiatscos and start furiously flinging them at any and everything
in order to get rid of the rapidly-diminishing-in-value currency.

(Note:
according to Doug Noland's latest "Credit Bubble Bulletin", the Fed has
increased its balance sheet by a whopping TWO-HUNDRED FORTY-SIX BILLION
fiatscos in the last TWO WEEKS alone!--over and above all the other
massive increases over the last year or so.
In addition, our foreign
debt-enablers have also "taken one for the team" and increased their
holdings of U.S. Treasuries/agencies to TWO-POINT-FOUR TRILLION
fiatscsos, so it is clear that the "Great Convulsion Celebrity Death
Match" between the forces of debt default destruction and
reflation/monetization is on in full force.)

(Ras Conclusion:)
At this juncture, our scroomage seems to be coming from the deflation
side and not the inflation side of hell. And, despite heroic efforts on
behalf of CBs and governments worldwide to pump five-trillion fiatscos
into the system to fight the debt destruction, they are not yet winning
the battle.

Perhaps we will see the momentum shift back toward
the inflation/hyperinflation side as the funding for the bailout bill
becomes more clear.

Yet, presently we are--and have been for the
last year or so--clearly and unequivocally descending into the depths
of deflation, despite the desperate attempts to fight it by TPTB."

Which explains why the "Flight to Money" (including the U.S. fiatsco, U.S. Treasuries AND gold) is underway.

So, "Shoot the messenger" if you wish, inflationists. but don't ignore his message."

(Spock Update):
So, Spockputin HASN'T been a 100-percent-all-the-time inflationist
after all, has he? Instead, he was definitely leaning toward the
deflation scenario but certainly was concerned about the Fed and Uncle
turning on the afterburners and again inciting the "Animal Spirits" in
the sheeple.

And that is where we are today. McMansion
flippers coming out of the woodwork, McAuto buyers enticed into another
round of debt, and of course the much-reported-on stock market
skying--all supplied by a massive flinging of fiat by central banks.

The Fed Politburo and Uncle Sugar are inciting "Animal Spirits" in all
asset markets--but ESPECIALLY in the mortgage market--simply because
they are the largest shareholders and bond holders of all the failed
financial gamblers who previously played in this particular pen.

So,
in order to protect, and even grow, their own stakes in Fannie,
Freddie, FHLBs, Ginnie, AIG, Citi, BofA, and other Ponzi Participants,
TPTB are providing "liquidity" for the gamblers to re-inflate these
previosly destroyed positions.

The Fed is also flinging fiat
toward "Algo/Igor/Robo" and allowing these monsters to pump up general
equity indices, with Oman2's "Trailer Trash Six" leading the pack.

This is the most glaring example of "Circular Reference" Fascism that a Vulcan has ever witnessed.

And
you can bet that the sheeple are cheering them on, and also furiously
punching their "buy AIG" F12 keys in order to participate in the hoopla.

So,
clearly NOTHING has changed. The same gamblers, the same Fed and Uncle
Sugar, the same sheeple and the same enablers ("Options 'R' Us" type
platforms) all romping around the same casino.

Heh, and people
wonder why this observer constantly reminds the board that "Wash,
Rinse, Repeat" and "Age of Infinite Fiat" continue unabated."



eggy123's picture

Holy shit that's scary. Especially scary because it's hard to argue with anything he says.

dcb's picture

they have to keep the shit locked up long enough to fool the americam people. this gets the capital out, then later on fed raises rates to help out dollar (if we are lucky). Although I do not believe the man who has fucked up things so much, bernake, despite what the press sas, can pull it it off.

Shell Game's picture

T.D., T.R. and Andy, this is why I'm here. You guys do better at 'keepin it real' than a south park rapper.

AN0NYM0US's picture

outstanding Robo

here's a link with same article

http://forums.wallstreetexaminer.com/index.php?showtopic=834541&hl=

thanks for the heads up on http://financialnewswatch.com/  great site though not too intuitive

Here is the link to their various forums

http://forums.wallstreetexaminer.com/

and to the BearsChat forum where the featured authors (Spock etc) post

http://forums.wallstreetexaminer.com/index.php?showforum=1

 

 

 

waterdog's picture

Nice and short naufalsanaullah, just like I need it.

I can't punch no hole in your post. It is not hard to withdraw the excess dollars from the money supply if it never was in the money supply.

Hey, how much of the reserve currency was exchanged by our embassies for a one year supply of currency of the country where the embassy is located?

RobotTrader's picture

Picture of deflation...

LOL....

mannfm11's picture

I contend that the liquidity wasn't liquidity at all, but a liquification of assets to restore bank capital.  By that I mean the money mentioned has already been destroyed when the capital losses of bad loans hit.  Banks don't have money, but pass credits between each other and these had already disappeared.  In any case, the Fed is acquiring assets in return for whatever their credit represents.  Those assets represent something people and entities on the outside have given up.  Banking has reached the region beyond where inflation can take place and bankruptcy is next. 

mannfm11's picture

Also, the rally is a phenomenon of the decline and is being funded by capers pulled by Bernanke and Goldman Sachs.  Remember the news is blamed for moving the market, but in reality the reason the market moves is totally made up.  The green shoots they mention are at best status quo.  Today I read that the consumer confidence numbers beat expectations, but showed a decline from the previous month.  Who are they kidding? 

handsfree's picture

I wish some of my stocks were up that much yoy

chinaguy's picture

So, in order to protect, and even grow, their own stakes in Fannie, Freddie, FHLBs, Ginnie, AIG, Citi, BofA, and other Ponzi Participants, TPTB are providing "liquidity" for the gamblers to re-inflate these previously destroyed positions.

 

That might help to explain the run-up in these insolvent companies.


dcb's picture

Aslong as fed is allowed to overpay for MBS the banks will have a place to put the capital. that will be into stocks. We the consumer a left holding the shit. America defaults, wall street happy. Maybe then the violent overhthrow can happen. until then we are just sheep

Anonymous's picture

"America defaults, wall street happy. Maybe then the violent overhthrow can happen. until then we are just sheep"

Sorry, too late by then. Prior to the "Great Default", Marshal Law will be declared, the internet shut down, Media censored, U.S. Troops guarding banks and government buildings, and local police going house to house searching for weapons. Then it will get bloody but far from an "overthrow", more like a "Civil War".

Anonymous's picture

From the commentary:

"But what happens as more loan losses occur and consumer spending grinds to a halt? The Fed will lower (or get rid of) this interest on reserves.

And that is when the excess liquidity synthesized by the Fed, the printed money, comes rushing in and inflates goods prices."

My take:

Why couldn't the Fed oscillate the rate to control the amount of reserves used to back new loans?

And with falling credit ratings, to whom would the new loans go?

Granted, the banks may drive commodity prices up through market speculation thereby increasing price inflation for essentials, but unless consumer credit can expand apace, the economy would simply collapse.

0.

Anonymous's picture

"America defaults, wall street happy. Maybe then the violent overhthrow can happen. until then we are just sheep"

Sorry, too late by then. Prior to the "Great Default", Marshal Law will be declared, the internet shut down, Media censored, U.S. Troops guarding banks and government buildings, and local police going house to house searching for weapons. Then it will get bloody but far from an "overthrow", more like a "Civil War".

aurum's picture

you do not account for external forces...your thinking on inflation assumes that the us is the only country that purchases anything...also you ignore the overvalued usd...you also ignore ridiculously cheap us energy (utility prices) that most have experienced over the last 20-30 years that is very soon to change..theres plenty more to the arguement than bank reserves in limbo...and to everyone the fed and fcbs will not let deflation occur. its a bankers worst nightmare..its that easy. print print print.

Arm's picture

Agree with all except the arguement that government could try printing trillions.  

When currency is thus brazenly debased, inflation follows for a bit, but afterwards the currency simply ceases to exist.  A fiatco that is no longer accepted is no currency at all; they can print all they want, but it is then Mononpoly money. 

What shape will this new reserve currency have?  I open the floor to discussion

Anonymous's picture

China recently became the world's largest gold market:

http://debtsofanation.blogspot.com/2009/08/debts-of-lenders-china-become...