A Record $220 Billion "Deposit" Injection To Kick Start To The 2013 Market

Tyler Durden's picture

When people talk about "cash in the bank", or "money on the sidelines", the conventional wisdom reverts to an image of inert capital, used by banks to fund loans (as has been the case under fractional reserve banking since time immemorial) sitting in a bank vault or numbered account either physically or electronically, and collecting interest, well, collecting interest in the Old Normal (not the New ZIRPy one, where instead of discussing why it is not collecting interest the progressive intelligentsia would rather debate such trolling idiocies as trillion dollar coins, quadrillion euro Swiss cheeses, and quintillion yen tuna). There is one problem, however, with this conventional wisdom: it is dead wrong.

As we explained in "Dear Steve Liesman: Here Is How The US Financial System Really Works", in a day and age when i) the Fed has to step in and fill the void of deposit creation left by traditional bank lending, which has been dead for the past 4 years, via reserves, and ii) commercial banks like JP Morgan can step in and use this deposit excess (i.e., direct fungibility of excess reserves) for investment purposes, a surge in deposits means one simple thing: the banks have more dry powder to invest as they see fit.

Don't believe us? Believe the Federal Reserve of the United States instead:

[B]anks are required to maintain reserves equal to only a fraction of their deposits. Reserves in excess of this amount may be used to increase earning assets - loans and investments.


Deposit expansion can proceed from investments as well as loans. Suppose that the demand for loans at some Stage 1 banks is slack. These banks would then probably purchase securities. If the sellers of the securities were customers, the banks would make payment by crediting the customers' transaction accounts; deposit liabilities would rise just as if loans had been made. More likely, these banks would purchase the securities through dealers, paying for them with checks on themselves or on their reserve accounts.

Source: "Modern Money Mechanics", Chicago Fed, 1961

We realize that this is diametrically opposite to what the general public has been indoctrinated by the Fed and its explanation of how excess reserves are used by banks, not to mention by an insolvent federal deposit insurance corporation, because imagine the panic that would ensue if people were to realize that the money they dutifully earn and save, and then deposit in a bank in a checking or savings account where it is assumed to be safe, is actually used as funding for ultra risky trades by firms like JPM's London-based Chief Investment Office (as JPM itself showed precisely happened), for example allowing a bank like JP Morgan to buy the stock or bonds of a bank like Goldman Sachs?

And after all, when one strips away all the different schools of meaningless philosophic thought, and the quasi-religious monetary dogma, in this modern age all money (and reserves), whether low-powered, high-powered, M1, M2, is really just electronic 1s and 0s in some mainframe, resulting from credit creation, either by commercial banks, or by the Fed, either under traditional or shadow bank conduits, which can be repoed, re-repoed, hypothecated, re-hypothecated at a whim, and a moment's notice.

Yes folks: this is money, it is not a philosophy textbook, and money will do whatever it is told, not what some archaic monetary school of thought allows it to do.

So when one puts all of this together, what does it mean from a fund flow perspective?

Simple: the Fed purchases assets on an unsterilized bases, as it started doing with QE3 but especially following the expiration of Twist when it is now adding $85 billion to its balance sheet on a monthly basis, the result is excess reserves, which appear on bank books as excess deposits over loans. Then commercial banks take a hint from the JPM CIO (which in turn was simply caught doing what banks have always down with excess reserves throughout history, and especially since 2008) and use the funds to buy risk assets.

Period. End of story.

Certainly the story that claims "money is on the sidelines" when talking about bank deposits: absolutely incorrect - money sitting in deposits is used by the banks to ramp the market, courtesy of the unwind of Glass-Steagall.

Which is why tracking deposit flow data is so critical, as it provides hints of major inflection points, such as when there is a massive build up of deposits via reserves (either real, from saving clients, or synthetic, via the reserve pathway) which can then be used as investments in the market.

And of all major inflection points, perhaps none is more critical than the just released data from today's H.6 statement, which showed that in the trailing 4 week period ended December 31, a record $220 billion was put into savings accounts (obviously a blatant misnomer in a time when there is no interest available on any savings). This is the biggest 4-week total amount injected into US savings accounts ever, greater than in the aftermath of Lehman, greater than during the first debt ceiling crisis, greater than any other time in US history.

So the next time someone asks you how it was possible with retail investors fleeing the market in droves (see relentless, 24 week straight outflows from domestic equity mutual funds) and putting their money in other assets, or money markets, or, alas, in the "safety" of bank accounts, that the market experienced its biggest move higher ever to start the new 2013 year, now you know.

Oh and thank Bernanke for creating $85 billion in 'deposits' each month which will be used by banks to, what else, buy stocks.

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VonManstein's picture

85 billion isnt enough for the 30YR. Bens gonna have to get his act together in late january. The big ones coming

caShOnlY's picture

Wait for it...


(sorry it took so long)

Thomas's picture

That does indeed help explain for me the dichotomy of investor withdrawals and ramping markets. I think the FOMC folks should be in leg irons.

caShOnlY's picture

Is there anymore clear of a reason why anyone, in their right mind, after reading this and now realizing the manipulation is not only confirmed but the channel exposed, would invest in anything other than survival supplies, guns, ammo, gold and silver?   I can't help but think that this absolutely has to stop but won't until the whole damn blows. 

GLOBAL FINANCIAL and ECONOMIC collapse.  It's gauranteed!! 

TruthInSunshine's picture

The Federal Reserve has now gone "all in" on a bet that their "put" can keep equity markets propped up long enough to allow for a real recovery with real economic growth of sufficient quality and quantity that allows them to step off the accelerator that they're using to gun the equity bubble.

So, what happens when that real recovery fails to transpire...and fails to transpire...and fails to transpire? (There can & will be no recovery since the Fed is not only pushing on a string, but has created a negative feedback loop whereby their "stimulative" monetary policy is creating aggregate demand destruction-- they can now only report positive GDP as stated due to inflation, not consumption/aggregate demand-- i.e. all current reported GDP expansion is purely nominal).

Worse yet, what happens when that recovery not only fails to transpire, but the real economy actually begins to contract again (as it already has begun to do), despite the trillions in fiat the Fed has directly or indirectly pumped into equity markets?

We are witnessing the biggest, most leveraged bet in the history of the world: The Bernanke "Virtuous Circle" bet.

(When has any fractional reserve central bank been able to forever keep a bubble inflated? They all have a historical, lifetime batting average of ZERO in this regard.)

When I see Charles Biderman appearing flummoxed in one of his presentations essentially stating that the Fed is literally propping up the equity markets, since retail investors have done nothing but flee continuously from "stocks" since 2008, I can't help but to understand his exasperation-- not exasperation that he somehow doesn't understand what'su truly happening in terms of the forces responsible for the equity market ramp job of the last 3 years, but exasperation that so few people understand the plain and unambiguous reason for this manipulated move.

What we have here is yet another intentionally blown and massive bubble, that's the direct result of Federal Reserve lunacy. The legacy of the Federal Reserve is one of inflating asset bubbles, one after the other, in the wake of the last bubbles popping, in an attempt to prolong our fractional reserve fiat economic structure that is built on pillars of sand.

The kicker is that Bernanke & Company have managed to produce one of the largest equity AND bond bubbles the world has ever seen, SIMULTANEOUSLY.

So, this isn't the dot.com bubble of the late 90s...and this isn't the housing/real estate bubble of the 2000s.

This is a MONSTER bubble that makes the dot.com and housing ones look positively diminutive by comparison, spread across so many asset classes that it dwarfs any other bubble since...well, take your best guesses, because I can't recall a bubble this large in nominal or real terms.

When this monster of all bubbles blows, game over (I'd sure love to hear some rebuttals as to how the vaporization of the nominal and absolute amount of paper wealth that will occur if I'm correct about this being a bubble ecosystem can be handled in an orderly way, that doesn't literally implode what is left of the real, actual economy, given the level of leverage now being utilized by central banks the world over).

SamAdams's picture

Agreed!  Oh, and I just checked my savings accont.  None of this $220B has showed up yet.  Maybe there is a problem? 

Papasmurf's picture

That does indeed help explain for me the dichotomy of investor withdrawals and ramping markets. I think the FOMC folks should be in leg irons.

Retail investors are conservative about the use of leverage.  Central bankers, not so much.  A dollar saved is ten dollars bet.

spastic_colon's picture

which will help explain the reserve releases next week during the major bank earnings reports that will push ES to 1500

BullionBoy's picture

buy some silver, bitchez

time is drawing short

and yes you can change your IRA into physical silver and put it under lock and key at delaware depository.




bobthehorse's picture

No explosion is coming.

We're in a deflationary death spiral.

Want to know the future?

Look at Japan.


Mr Pink's picture

Who the hell would put money in a savings account?

Seasmoke's picture

i do......Pillows and Mattress Savings and Loan

Lost Wages's picture

I got so much interest from my credit union this year they had to issue a 1099. ($8.73)

ClassicalLib17's picture

I was going to ask you what credit union you banked with until I realized your windfall was due to the fact that you had a larger account than me.  Interesting how this financial world works

Bulleri's picture

I prefer the bank of Sealy Posturepedic...

nmewn's picture

I prefer Sandy Bottom Savings & Loan ;-)

MeelionDollerBogus's picture

Boating Accidentz, bitches!

When the most likely party to find your gold is Patrick Starfish you'll probably be just fine.

centerline's picture

To compliment the Tyler(s) message, this time of year is normally when savings gets drawn down.

nmewn's picture


Early IRA-401k withdrawls?

centerline's picture

Plus holidays, tax payments, insurance, HOA payments, vacations which tend to rotate summer/winter, etc.  Lot's of things cycle at year end and cause draw down!

401K drawdown stuff I speculate is increasing now.  Even at my office I know a few people who have "awakened" and yanked thier money.

nmewn's picture

I know I finally did, just counted out 25% for "Vito" to be paid before the 15th.

villainvomit's picture

 Dammit, I have been saying I was going to do this but how do you avoid the 10% penalty ?  No Dis, no first time home buyer, no systematic year over year withdrawal, no medical expense, no college ex......F the IRS,,,,,,,,what do you guys do, just eat the 10%????  I realize you still have to pay tax, but damn!

August's picture

That 10% is a tough nut, indeed.  I'm 62, and just completed the total distribution of my retirement plans, writing the tax payment check to the "US Treasury" a few hours ago.  35% hurts, and 45%... I'd rather not contemplate.

Personally, I found it helpful to enter into my financial/tax software, incrementally over many months, the amount of tax that would ultimately be owed.  When I wrote the painfully-large checks today, I simultaneously zeroed out the liability, and my displayed net worth remained unchanged.  Well, it worked for me.....

FWIW the "money" has (legally) departed these shores.

ebworthen's picture

I put money in my savings account.

Sold my house, and banked my 14 years of responsibility (equity) that is completely unappreciated by TPTB, and plan to buy a little Gold, Silver, and ZERO equities.

I'm going to wait out this shit storm, I'm not putting money into the casino (I don't care that I'm not earning interest - FUCK YOU FED and Wall Street!), and if I go broke waiting for the rule of law and sensible government to return to Wall Street and Washington I'll milk the shit out of every government/corporate cow I can lay my hands on.

And if that doesn't work out I will DIE under a freeway overpass before I support this fucking ponzi bullshit system that has been foisted upon the average good citizen.




Rainman's picture

What could possibly go wrong for equities with this amount of free play ? ...and the cards are marked. Bullish !

donsluck's picture

Right again, Rainman. But beware of your timing in the casino, 'cause if the debt ceiling isn't raised, lookout below!

AccreditedEYE's picture

http://youtu.be/jllJ-HeErjU   Not directed at you my good man, just a public service announcement.

Silver Garbage Man's picture


Unprepared's picture

I have (had*) the first two, but I'm not sure how I can get me the last 2.



Catflappo's picture

"retail investors flee the market"... but end up implicitly invested back in it in any case...

savagegoose's picture

watch for shorts on the FDIC

khakuda's picture

Thank you. This is all that needs be written on why the market is going straight up. We got a bubble in the late 90s with this crap and we are purposefully doing it again. Bernanke will be the King of creating a massive wealth divide between the speculators and everyone else.

Corrupt beyond words. It should scare someone that stocks CONTINUALLY outpace earnings. That NEVER ends well.

NoDebt's picture

Agreed.  This time will NOT be different.  I used to say that when there is excess liquidity sloshing around that some of those funds "sneak through the cracks" and find risky places to play, even though they are supposed to just sit there until somebody wants to take a loan out.  I was naive.  "Sneaking through the cracks" implies that only a litle bit of that money finds it's way outdoors.  I now know that those cracks are more like big mortar-blast size holes and that money POURS out and goes straight to the casino where it gets an 8-ball of coke, 3 underage hookers and a rack of chips so heavy it requires a cart. 

Just that this time it could possibly happen WHILE the Fed has their foot to the monetary accelerator.  Last time they had barely 2 years of rate increases before the house of cards collapsed (again) and they slammed the pedal back down (again).  What happens if some semi-major financial entity falls over TOMORROW and starts the dominos dropping WHILE we are already at 0% and still main-lining $88B/mo. in QE stimulus?  Or just a garden-variety recession comes along?  What policy bullets are they going to shoot at it?


fonzannoon's picture

How in the hell can a major financial entity fail when they can just call the red phone on Sunday night and have 17 digits in their account by morning?

It seems like this may go on for a long time. Or a very short time if they try the coin thing.


kchrisc's picture

God, Gold, Guns and Grub

MeelionDollerBogus's picture

no 'god' / 'gods' thanks - I find my guns 'n' gold last longer without any such fiction

max2205's picture

Soon to be seasonally adjusted

PUD's picture

The only incorrect statement here is the flight of individual investors from mutual funds....yes they have fled funds but they have plowed into etf like mother fuckers. And I do not mean just bond funds...spy has had more inflows than any other time in history. I saw the stats on this the other day but I'm sorry I did not save the link. The fact is they (individuals) have only shifted their vehicles not their lust for equity.

Tyler Durden's picture

No they haven't. The rate of outflows from mutual funds to inflows into equity ETFs is 2:1, and that's being generous. The bulk of the asset allocation continues to be out of stocks and into bonds and money markets.

Rainman's picture

you must tire of explaining this

PUD's picture

I will find the piece and post it for you as soon as I can.

CrashisOptimistic's picture

No, you won't.  I looked at this just a few days ago.

I tell Tyler he's wrong now and then and actually debate stuff in the comment threads with him, but he's not wrong here.

The flow is NOT into stock ETFs.  It's going to bonds.

Youngsters have forgotten that compound interest takes time and that defines who has the money.  Old folks are NOT GOING TO SWASHBUCKLE.  Your basic 80 year old distrusts new things like ETFs.

He's going to bonds, and frankly, he's not filled with a sense of safety there.  He is NOT going to stocks, or gold, or anything else that looks like it might destroy his retirement.

You think there's cash on the sidelines?  Maybe there is.  It's waiting to get into bonds.