How The Fed Holds $2 Trillion (And Rising) Of US GDP Hostage

Tyler Durden's picture

When it comes to the real measure of a nation's economic output, one can rely on "flexible", constantly changing definitions of what constitutes the creation of "goods and services" as well as transactions thereof, goalseeked to meet the propaganda of constant growth no matter what (and which it appears will now, arbitrarily, include intangibles such as iTunes), or one can go to the very core of "growth" (just ask the anti-Austerians for whom debt and growth are interchangeable) which is and has always been a reflection of the increase (or decrease) in broad and narrow liquidity or money supply, which in turn means how much money is created through loans, either via commercial banks or the central monetary authority, also known as the Federal Reserve.

This is best shown by the following chart which shows the near unity (on the same axis) between US GDP and total liabilities in the US commercial banking system (traditionally the primary source of loan creation) as reported quarterly by the Fed's Flow of Funds statement (combining statements L.110, L.111 and L.112)

The chart above implies one simple thing: if there is loan creation, and thus injection of liquidity in the system, there is growth. If there is no liquidity injection, there is no growth, at least growth as defined by GDP-tracking economists.

And here we run into the problem.

A quick look at just loan and lease creation in the US commercial bank system reveals something very troubling: at $7.290 trillion as of the week of April 17 (a decline of $12 billion from the week before) there has been exactly zero loan creation in the US commercial bank sector, conventionally the primary locus where money demand translates into new loans as the Fed itself defines it in Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion, since the failure of Lehman brothers. Specifically, in October 200/ total loans and leases outstanding in the US were $7.323 trillion. This means that loans, historically the biggest asset on bank balance sheets by far and whose matched liability is deposits, have been responsible for negative $30 billion in GDP growth in the past five years (source).

And yet, as the first chart above shows, total US bank liabilities have grown by $1.6 trillion since the failure of Lehman (from $13.6 trilion at December 2008 to $15.3 trillion as of the end of 2012) which means bank assets have also grown by a comparable amount, resulting in a matched GDP growth of roughly $2 trillion. How is this possible if commercial bank loan creation has been dormant at best, and in reality - negative, and no incremental matched liabilities could have possibly been created?

Simple: Presenting "Exhibit A" - the Federal Reserve, which has created $1.8 trillion in incremental reserves since the failure of Lehman, bringing its total balance sheet to $3.3 trillion.

The chart above shows that far more than merely goosing the market to record levels based on nothing but hot potato chasing by Primary Dealers loaded to the gills with record liquidity, and momentum-escalating High Frequency Trading algorithms, the Fed's "out of thin air" created excess reserves (a liability for the Fed) have come home to roost on the balance sheets of banks in the US (including foreign banks operating in the US) as positive carry (at the IOER rate) assets.

It also means that the Fed's excess liquidity, at least from an accounting identity standpoint, has manifested itself purely in the form of consumer and corporate deposits held at US banks ($9.351 trillion as of April 17), which as the chart below shows, used to track loans on a one to one basis, until QE started, and have since then surpassed total loans by just about the amount that the Fed has injected into the system.

Of course, the sad reality of what happens to the economy when the Fed pushes not only reserves into banks, but forces "deposits" into the hands of consumers and corporations, is precisely the one we have witnessed for the past four years: no real growth apart from the propaganda, with occasional spurts of growth driven by confusing the surge in the stock market (which is more than happy to absorb the record liquidity and where JPM and other banks use the excess deposits over loans to buy stocks and other risk assets) with a push higher in the economy. In the meantime, the middle class evisceration continues, the real unemployment is 11.6% or unchanged since 2009, US households on foodstamps are at a new record high every month, core CapEx spending is imploding to a pace not seen since 2008,  corporate earnings and revenues are stagnant at best, while companies continue to get stigmatized for daring to keep excess cash on their books instead of investing it (that the rate of return on such "investments" would be negative according to the corporate executives themselves is apparently entirely lost on the propaganda media and political talking point pundits).

But at least the S&P is at record highs, and corporate and sovereign yields are at record lows.

Sadly, since there never is a free lunch, what the above data tells us is that due to the persistent refusal of banks to take over from the Fed as lender (and money creator) of main resort over four years into the "recovery", that $2 trillion of the $16 trillion in US GDP is now held hostage by the Fed. In other words, if it wasn't for the Fed's "narrow liquidity", "low power money", whatever one wants to call it, creation, US GDP would be 12% lower, or at June 2007 levels. It also means that virtually every incremental dollar of US GDP "growth" comes solely courtesy of Ben Bernanke's narrow money spigot.

And since the US has to "grow", since US GDP has to be spoonfed to the masses as increasing at a ~1.5% annualized rate every quarter, and since US banks continue to not lend (and in fact their eagerness to not lend is further cemented by the far easier returns they can generate courtesy of the Fed in chasing stocks, and not take on NPL risk in exchange for meager 4-5% annual returns, which means a feedback loop is created where more QE means less bank lending means more QE means less bank lending), can all trivial and absolutely meaningless discussion over whether the Fed will halt QE (now or ever) finally end? It absolutely never will, until everything one day comes crashing down.

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buzzsaw99's picture

If the big banks would go back to making shoddy loans everything would be just peachy. [/sarc.]

McMolotov's picture

Exactly! Where's the next bubble that will "save" our asses? Seems like everything's going directly into the market, which helps almost no one but the people at the top, and they'll get out before it goes pop. It makes for good headlines and that's it. That retard who said the other day that Krugman had "won the argument" looks like a complete jackass in light of the facts presented above.

Tyler has pooped the debt=growth party with this article. Ending QE translates to pulling the plug at this point. That means the patient effectively dies, but I'm ok with that because the patient isn't worth saving.

Ham-bone's picture

but I thought we were having a discussion of how the Fed exits QE and normalizes its balance sheet?  Not self sustaining recovery?  No escape velocity?  Green shoots, no?  Animal spirits, dis-spirited?  Housing recovery, manufacturing rebirth, energy game changer???  We're not winning?

Jack Napier's picture

There is no next bubble when the current bubble is the currency itself. It's different next time, but of course never this time.

LetThemEatRand's picture

It is important to remember that Ben and virtually everyone who has a chance of taking over when he leaves the Fed believe that WWII was the ultimate cure of the depression.  When your model depends on endless growth, it is necessary to prune the tree from time to time.  This is how they think, and most of the people who run the show could give a rat's ass if a few hundred million people have to die to reset the system that is at the root of their power and wealth.

ratso's picture

All of this is not exactly correct.  Much of the Fed's money is going to shore up the losses in the shadow banking sector that are still being unwound and will continue to be unwound for years.  The seemingly excess funds keep the bank sector functioning during a time when it would be contracting if the funds were not there.  The Fed is essentially preventing a financial contraction and deflation while the economy is correcting.

TreeTrunk's picture

Ratso--that is the best explanation for the current condition of the world economic system ever articulated.
It is remarkable that TPTB have been able to hold the system together as long as it has.
Many of us expect a violent reset aka the Fourth Turning. Others hope for a controlled and civilized unwinding and a sensible reset.

francis_sawyer's picture



No it isn't... It's the fucking stupidest, weasly, excuse for THIEVERY ever articulated...

Here is the CORRECT statement [from above]

"There is no next bubble when the current bubble is the currency itself."

Which, when the Jeckyl Island crew got together, probably KNEW was the eventual destination... I doubt that even THEY could have ever imagined the ponzi could go on for this long...

But now it's over... & they know it's over... So right now they're just printing themselves joobux for free & skimming physical goods off the top while the public stays distracted with bread & circuses, & junking francis_sawyer comments [because he said joobux], whilst keeping the system alive for extra nanoseconds because they're Y-chromosomes make them so fucking greedy that they can't resist the temptation to even leave a zinc penny to get flattened in peace on the pavement by the oncoming steamroller...

TreeTrunk's picture

Well sure Francis. Except for that, it is the best description articulated.

Your explanation sounds much more rational.

Thanks for the sound effects DV.

disabledvet's picture

your welcome. here's the musical variant: for all us mathematically challenged folks.

francis_sawyer's picture

Let's dissect it, shall we?


"Much of the Fed's money is going to shore up the losses in the shadow banking sector that are still being unwound and will continue to be unwound for years.  The seemingly excess funds keep the bank sector functioning during a time when it would be contracting if the funds were not there.  The Fed is essentially preventing a financial contraction and deflation while the economy is correcting."

I actually agree 100%... technically... with the comment... That's EXACTLY what's happening [so on that plane of existence, you're correct]... But it conveniently steers itself around the reason as to WHY it is being done [& who benefits from that ~ which is another way of saying "Who is responsible for orchestrating & profiting from all this bullshit"]... If you don't have the balls to ask that question, you're a BLUE PILLer...

In the end ~ It's just one of those 'half truths' designed to provide controlled opposition [for the lazy]... READY TO BE BROADCAST TO THE SHEEP ON THE EVENING NEWS... Together with:

- "Stocks are OFF THEIR LOWS" [cue applause]

- The 'Terrorist bombing suspect' is showing no signs of remorse

- A scary 5th grader brought a Swiss Army Knife [A SWISS ARMY KNIFE I TELL YOU] on a camping trip and was rightfully suspended

- Bad Palestinians threw rocks [ROCKS I TELLK YA] over a wall in the Gaza strip

- Barry & Moochelle had a cozy 'date night' at a local bistro at a Boston Beanery [owned & operated by a fallen soldier]...


While avoiding the summary of:

- Obama sent a drone strike which killed 100 women & children at a wedding, but the suspected leader of a terrorist cell was taken out [yay team ~ pray for our HEROES]...

NoDebt's picture

"- Bad Palestinians threw rocks [ROCKS I TELLK YA] over a wall in the Gaza strip"

We'll all be reduced to that soon. 

Or so goes the big threat.

Bitch all you want, but nobody is calling the banking sector's threat on this one.  If we let them sink we'll be living in caves and beating eachother over the head with rocks.  No matter the consequences of current policies they have to be better than THAT, right?

Everyone who matters has bought in on this premise.  They don't even care if you figure out what they're up to.  They will continue to do it anyway.  This will not end until it runs to it's natural conclusion.  Nobody on the "inside" is going to change it by stepping up and calling a spade a spade.  The emperor DOES have clothes on, you're just not imagining hard enough.


MiltonFriedmansNightmare's picture

FS, you,re one pretty fucking smart dude.

Tyler Durden's picture

Actually, while largely accurate (and the unwind of Shadow Banking has been a theme we have covered for years), your statement is not exactly correct. As the chart below shows, absent subsequent revisions in the Z.1., total shadow liabilities in the US grew for the first time in years in Q4, even if by a de minimus amount.

ratso's picture

Perhaps the 85 Billion/month is not enough.

Charles Nelson Reilly's picture

It's not and they will have to print moar, even if that means the Fed hawks wake up with a horses head in their silk sheeted beds.

disabledvet's picture

This article is like reading (yet again) the purile fantasy of a twelve year old. It is so far gone the it's really hard not to want to swing your arm around the young man and say "young man, let me tell ya something." GROW UP will ya????! There is no "special key that unlocks the secrets of the of the universe" okay? Sure...studying them is fine...but you really do have to "get in the game" to understand how everything is functioning and the world (I agree COULD have...probably SHOULD have) did not end. This incessant screaming of "your in big trouble Mister" would be sad if it weren't so hilarious. In any case...onto greener pastures America! We are invincible!

Saint Pitbull's picture

For all of you funsters out there that like economics, start reading the Hoisington Quarterly Reports (These guys run the Wasatch-Hopisington US Treasury Fund).  Yeah, they talk their book, but there's also tons of good stuff in their reports.  The 1st Qtr 2013 says the Fed can control Money Velocity no better than it can control anything else at this point.  I know, big surprise.  Also, in this "race to the bottom" and a delationary time period, they are telling their clients to get into "non risk" assets (if there is such a thing anymore).  Specifically long-term US Treasuries.  I think that they are slightly amiss.  There is some deflation, but there is plenty of inflation in the items that we NEED (i.e., food).  You might also like listening to John Hussman in his recent talk .

TeamDepends's picture

Not sure if it qualifies as a "bubble" but you can bet your sweet behind that the Obama Financial Goon Squad will be coming after your 401k real soon.  And the Krugmanites will be squealing:  It's for the children/common good!  The end-game of the Rothschild ponzi is upon us:  Lend them paper and yet more paper 'til they can't see straight then demand/confiscate/foreclose gold!  When the time comes, give 'em both barrels boys!!!

disabledvet's picture

the "Plan" is not coming from the Government but from Wall Street and it IS (as in the Plan has been effected...not some future thing) to create the biggest inequality this country has ever known. "this will pay for everything" (while paying handsomely for those that have effected said atrocity.) the more we fight against it the more we are drawn in. still...there are surprises "on the Road to Valhalla" (or is it Perdition?) those interest rates plunging was never part of the plan for example...

Go Tribe's picture

But they tell us buying silver and gold at these levels is insane.

resurger's picture

but, i thought they will trickle down some of that wealth before it pops...nvm maybe am wrong





mikla's picture

The funniest part is how bad this is, even using fraudulent data:

(a) GDP double-counts and mis-counts "production", no, it's not even close to correct

(b) Bank liabilities are "hidden" through off-balance sheet transactions, failure to mark-to-market, fraudulent accounting, and no loan-loss-reserves

Even with go-to-jail fraudulent data, it's a disaster.

master of the universe's picture

BUT IT'S A 'FREE' MARKET... no, really, it is...

Go Tribe's picture

Or at least make FRNs convertible to gold and vice versa.

jekyll island's picture

They are convertible. Just take them to your local coin dealer, he will show you how to do it. It's easy, I did it last week online.

auric1234's picture

Yup. They even offer you a huge discount. I hear the Fed is sponsoring all gold purchases by artificially lowering their price and forcing miners to sell on the cheap.

Clearly, we shouldn't hate them so much.


McMolotov's picture

In other words, we've been Weekend at Bernie-ing for years without most people knowing it.

pods's picture

I like to think of it as the New and Improved Depression (hedonically of course).


Edit: Long Febreeze

ejmoosa's picture

The GDP is simply not the important measure of the US economy.  Double GDP without doubling profits and you have nothing.

BTW, year over year, profit after taxes turned negative for the fourth quarter of 2012.  Do we hear that anywhere?  No.

Just the constant harping over GDP.

THe USSR had GDP without profits as well.  Didn't work out so well.



nofluer's picture

One of the biggest frauds around is that government spending and Fed money creation count as part of the GDP. Since the government creates nothing, makes nothing, how can it contribute to GDP? To arrive at true GDP, you must subtract all government and FED activity from the "given" number.

markettime's picture

I am calling it right here and now. The largest financial scandal in history will be the Fed has printed more money since 1913 than we ever thought possible.  And there is a lot less gold and silver than we have been led to believe because someone has stolen a big chunk of it and has taken it out of the system decades ago. Where is my tinfoil hat? 

tango's picture

You have it on unless you can present more "facts" than mere opinion.  The FED has screwed up royally (by becoming a completely political tool for central planning) but we need hard facts on the disappearance of gold and silver.,,and not a You Tube video with scary music.  Where's the proof that "someone" has stolen it.  Most likely, all gold and silver that ever existed still exists but it is so mired up in the slosh of trading and redistributing debt (the main economic global activity) that it can't be identified.

Perhaps it's like a quantum indeterminacy  - you can measure either the momentum or the position but not both.  We may can calculate the location of gold yet not know how long it has been there or if it will be there in the next second. 

nofluer's picture

Where did the gold go? The little green men were seen loading gold into their flying saqucers... that's where it went.

auric1234's picture

Sounds an improved version of Krugman's wet dreams. Alien invasion and gold confiscation at the same time!


nmewn's picture

mikla is 100% correct.

(a) GDP double-counts and mis-counts "production", no, it's not even close to correct

(b) Bank liabilities are "hidden" through off-balance sheet transactions, failure to mark-to-market, fraudulent accounting, and no loan-loss-reserve

Kayman's picture

When McDonalds and Caterpillar had to run to the Fed to make their payrolls in 2008, why would any sane company not keep a stack of "cash" on hand.

And for small/medium sized companies that got a slap upside the head while the crooked, slimey bankers that were the central cause of the 2008 collapse were rescued with taxpayers money, why borrow when you know the entire system is Ponzi cubed ?


tango's picture

Because modern economics is based on efficiency and the most efficient way of meeting payrolls and expenses is not through selling shares, etc but via credit flows.  What few realize is that in 2008 we were days from a catastrophe since the stores would be empty because deliveries were not made because fuel or salaries were unpaid because credit froze.  It's not Ponzi - it's the way things work and it works well except in times of crisis.  Note that corporate cash means nothing if oil and gas are not available to buy. 

MiltonFriedmansNightmare's picture

Perhaps I was wrong, perhaps Tango = Krugman, fucking annoying.

Being Free's picture

What few realize is that in 2008 we were days from a catastrophe since the stores would be empty because deliveries were not made because fuel or salaries were unpaid because credit froze.

Did you read the article?  There is no fucking "credit" to the real economy it's been frozen for years...days from catastrophe, indeed, brought to you by TPTB.


Kayman's picture


Huh ?  What ?  Payrolls are paid by cash or credit. Try running a business. When payday comes, selling shares would never be an option.

And most people realized what a catastophe we were in. Just most people did not expect the cure to be saving the disease.

"corporate cash means nothing if oil and gas are not available to buy"- Huh ?  I didn't know oil and gas production collapsed when Lehman went broke . How about that.


adr's picture

My business makes payroll from the money that comes in from invoices paid. Not from a bank credit account. We don't have shares for sale. If we don't do enough business to cover payroll, well that's that. We also don't buy production on credit.

That is called running a business. It is also called how to stay in business.

Our problem is publicly traded business runs on credit. That bankrupt corporations can be extended nearly unlimited credit because some rating agency claims they are solvent, and some analyst claims worthless sheets of paper are worth a few billion dollars. In reality, there is no cash for payroll, but why do you need cash and real sales when people are more than happy to trade stock certificates and hand you real money.

The collapse of Lehman and the credit freeze didn't threaten real commerce, it threatened the stock market that can only exist on the continuous expansion of bullshit.

TheProphet's picture

Two things to try to explain why you're wrong:

-One, cash on delivery is impraticable at the grand scale it would be required to keep shelves full and gas stations pumping. The entire society operates on net 30 payment terms, and would not operate even remotely as efficiently without it.

-Two, in 2008, a credit freeze was absolutely imminent, and if it had occurred, all counter-parties would have simply held the cash they had, INCLUDING THE BANKS WHERE PEOPLE AND BUSINESSES KEEP THEIR MONEY.

The problem is, once you make a deposit, you're just another counterparty for that insolvent bank, insured by an FDIC that would pay you your dollar equivalent in dollars of rapidly falling value. And the speed at which the Fed can repay you that money (that you will no doubt want to withdrawal immediately) is limited to the speed at which they can print it.

The FT wrote just a few weeks ago that despite the printing presses at the Ft Worth, TX Fed printery running 24x7 for the last five years, the number of $100 bills in circulation has increased by only 42%.

It is clear that the Fed has engineered this precise outcome outlined in paragraph 2, only the Fed did so over a handful of years, and avoided the pesky shut downs, complete loss in confidence in institutions, and the civil insurrection.

And the political class has certainly protected their friends on Wall Street. No fucking doubt about that whatsoever.