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How The Fed Holds $2 Trillion (And Rising) Of US GDP Hostage
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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Actually you are incorrect.
What you point out is simply known, in the physical world as Inertia, a quality of any physical system with SMALL RESISTING/DUMPING factor to perpetuate its movement in the direction of the initial force ( initial debt creation )
You can view the drag to the "growth" to the dept increment as such a resisting/dumping factor, the higher the (already) accumulated debt the more such resistance to the newly created depth to show up as "growth".
So in your pointed case, the "growth" can continue for some time ( in the beginning ) even without much debt creation, due to the small resisting/duping factor of not having too much accumulated debt ( as explained in the above sentences ).
In the later times, the resisting/dumping factor increases and this is why and NEW debt decrement, or outright removal, is immediately followed by sharp decline in/stopping of the "growth".
What is more interesting is that the MORE DEPTH is created the HIGHER DUMPING/RESITING factor is, which actually you can see in any physical system ( expressed in the feedback connection ). This is how in Nature such systems self regulate and the world around us can exist in a stable form.
And of course, the depth/fiat money system, is claiming that such law is invalid ( at least in economy, it would be funny to try to argue for the physical world too ... ), and we can grow out of out debt.
Sure, we could, if we are in the beginning of the process, the PROBLEM is that we are at the END of it, for, as I explained above, the resisting/dumping factor is now TOO BIG.
All this of course, can be nicely formulated as a differential equation, but most of the people, have tendency of not liking such formulations and this is why it is why it expressed with words, in contrary to mathematical symbols.
More precisely, I think this is what you had in mind:
http://en.wikipedia.org/wiki/Hysteresis
"Actually you are incorrect"
What epwpixieq-1 says is completely correct with the agravant that the solution to those differential equations he mentions are known to be infinitely dependent to the initial conditions of the system. Thus making the new attractor the system will go to unpredictable, it could be wwiii or something else, there are many possible stable states in the future of humanity, each is a possible attractor. We also know that once the system abandons the present attractor there is no way they will be able to bring it back to that point of equilibrium since all their controls will stop responding as expected. We also now that the trajectory to the new attractor will bifurcate faster and faster as we move away from thebcurent one. Furthermore we wont be able to predict the state of the system for more than a few seconds...
We non-linear dynamic control gurus know this but have no clue how to educate or influence decision makers. We think that theybare working on the ledge unknowingly. They were never taught this level of math...
Until next time,
Engineer
To presume, as you do, that debt is a force, that is, that its quantity influences the rate of change of economic development, it simply pure Keynsianism wrapped in pseudoscience.
Look at the chart more closely. You will see that the game is to keep debt caught up to growth, by any means possible. As an analogy, examine your student loans, outstanding car loans, and possibly mortgage, which far exceed the reasonable repayment prospects of your job at the Genius Bar. They want you in debt up to your eyeballs, but NOT over your head, although accidents will unavoidably happen.
last time deposits exceeded loans (in the thrift industry anyway) we had a massive collapse, as hot money chasing CDs yielding better than 10% were flying out the door, and no one wanted to borrow money at anywhere near those high rates. i don't know how this won't end the same way on a much larger scale, and with John McCain ready to lead the way again (Keating Five)
I think that QE and such are nothing more than controlling the timing of the collapse...if you had the power wouldn't you get all your short positions in order before te reset takes place...jmho because that's how my mind works...lol
Sounds like a lawyer's mind!
I've been leaning towards that view myself for some time. I see QE & Zirp as barricades holding back a tsunami.
The pressure is building up and the barricades will collapse at some point. Who knows when? Whether this was always known or whether QE & Zirp were implemented in the hope they would resolve a temporary/transient problem, who knows.
This is the kind of reasoning a normal person would apply (instinctively thinking on how to solve a problem). But you have to keep in mind this is run by violent sociopaths.
Their goal doesn't necessarily have to do anything with long term solutions. Perhaps their goal is to inflict as much suffering as possible within the current framework, and if/when that fails they'll try to switch to another (e.g. war).
"It absolutely never will, until everything one day comes crashing down."
The question is what will make them decide to crash it and how will they come to the consensus to crash it?
They could find one day that they are powerless to do anything about it.
Remember, they print a lot of paper but they barely have any money. It just takes a tiny change in people's minds to bring the whole house of cards down.
something fishy going on .. The fed has stop updating the bank's total position on mortgages, corporates and tips on the website and to bloomberg. Now Fed only report Govenrment bond and agency position on a weekly basis.. Perhaps there is smething to hide. check out PDPPMORT, PDPPCORP AND PDPPTII index on bloomberg or on www.fed.gov website.. Now nobody will know what the banks are doing?
try this out until bloomberg is fixed (more likely b'bergs problem than the Fed's
http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html
According to Morgan Stanley:
http://fs1.hidemyass.com/download/YYNB3/s46g57028081978abtre3h2ou0
Why Did the Fed Choose a 6.5% Threshold?
We found intriguing the suggestion by Chairman Bernanke that the Fed could – should the current thresholds not be sufficient – “lower even further” the threshold for the unemployment rate. The Chairman alluded to this ability after making reference to the Fed’s success at managing the market’s interest rate expectations. He suggested that the current threshold at 6.5% remained sufficient to “approximate what’s called the Optimal Control path of interest rates, that it seems to give a path of unemployment and inflation that’s about as good as we can get with the monetary policy tools that we have.”
How can we show that the 6.5% threshold was sufficient in December? Exhibit 1 shows the Optimal Control path for the funds rate that minimizes the deviations of inflation from 2% and the deviations of the unemployment rate from 6% – last updated in November 2002. The exhibit also shows the unemployment rate progression under that path. An important assumption in the Optimal Control analysis is that the public fully anticipates that the FOMC will follow this optimal plan. For the path of rates to be effective, the market must believe the Fed will follow the plan. The more transparent the Fed is regarding its intentions, the more likely it becomes that the Optimal Control path for the funds rate will achieve its goals.
Understanding why the Fed set the initial unemployment threshold at 6.5% will help you understand why they may change it in the future. Exhibit 1 shows that the unemployment rate will cross 6.5% around November 2015 given the Optimal Control path of rates. Under the framework, the first 25bp rate hike will occur in September 2016, or nine to ten months after the unemployment rate reaches 6.5%.
If the Fed had chosen 7.0% instead of 6.5% for the threshold, the unemployment rate would cross in March 2015. With a 7.0% threshold, the Fed would have a difficult time explaining why the Optimal Control liftoff was projected to take so long (almost 1 ½ years) after having seen substantial improvement in the labor market (assuming that reaching the threshold proxies for “substantial” improvement). In addition, the market may not have believed that either (1) a 7.0% unemployment rate would constitute “substantial improvement”, or (2) the Fed would be able to keep rates on hold for that long after the unemployment rate reached 7.0%.
If the Fed had chosen 6.0% – a more understandable threshold, given the SEP’s longer run central tendency range for the unemployment rate between 5.2~6.0% – the unemployment rate would reach the threshold in September 2016. In this case, with the Optimal Control funds rate projected to lift off in the same month, the market may have interpreted the “threshold” as a “trigger”. Given the Optimal Control analysis – which Chairman Bernanke and Vice Chair Yellen seem to favor – we can see why they chose 6.5% for the threshold in December 2012: they had to make sure the “buffer” between crossing the unemployment threshold and the start of rate hikes was neither too long, nor too short.
yeah, the magic of the byrini ruler! lol just extrapolate as far into the future as you like...what could possibly go wrong?
No one on earth knows what unemployment will be next week let alone years into the future. It's part of the mindless delusion they all live under. my guess is that we never ever see sub 7% unemployment...ever! Too much automation and too much 3d world labor for that to ever happen in america save the next massive non nuclear war to fire the furnaces.
The system is untenable. Period. Exponential perpetual growth is mathematically impossible. Perpetual credit creation via the usury system of debt money is impossible. It's all impossible on a finite planet.
End of story, end the fed.
Glad you're finally talking sense. Now do you realize why a stable money supply is necessary?
PUD's last comment apparently.
http://www.zerohedge.com/users/pud
Good. If he brought contrary opinion and analysis he would still be here. He brought nothing. Head shot, troll down..
Here all along I thought they pulled that number out of their collective ass.
One month before next prez. election?$45 billion(trash buying) x 48 months = $2.16 Trillion. Anyone know how much bad mortgage debt the banks have, now?
Jon Jon, JMHO that they can choose any point in time for the crash/reset...I expect it to coincide with a war or some other very big EVENT(maybe later I'll share what I think that big EVENT will be) after huge positions have been taken...remember, a bear market can be at least as profitable as a bull when you position yourself well...who needs fiction with all this going on...not me, for one...
Tyler,
If you add the base notes & coins (M0) to the bank liabilities it may match the GDP figure even more closely. After all, GDP "growth" works on coins and notes as well as bank liabilities.
O/T. Has anyone seen anything more about this? N. Korea set to stage major military drill: report - Yahoo!7
You should present a good argument as to why Itunes shouldn't be considered growth.
What exactly is growth?
Well, the music they sell on itunes does take creative energy to produce, and then people have to sell it, and someone has to create/maintain the itunes interface/database. I'm just wondering why that shouldn't be included. Maybe the answer is obvious, and I'm just missing it.
Service component.
Anyway this doesn't help GDP grow because nobody takes out a loan to buy an itunes song. You want your GDP number up? Then you concentrate on the industries and sectors that cause people to take out loans.
Explains why cars and housing keep ending up in bubbles.
Isn't everything already accounted for in what costumers actually paid?
The FED is controlled by robots. Millions of descent jobs are eliminated each year to automation/robots which means central banks must create trillions in new funds to keep consumption flat (robots need consumption, not health care). It can't end since automation is accelerating. As millions go on food stamps and lose any chance of a middle class life, the Govt must take more control of our lives. The young 20-30 year old today will face a much more difficult life than those coming out of college in the 1960s.
So you think the US govt is going to cover the cost to feed and house the citizens for the remainder of their lives? Baby boomers retiring. SS and Medicare. War fronts in a few different countries. debt of nation, public beyond comprehension. Dollar losing its purchasing power. Banks gambling with trillions of dollars in dark markets...
No. The citizens of any govt who are unable to provide for themselves are faced with either moving to another country or facing the life one lives in a collapsed country. You are naive to think otherwise.
Isn't there a way to force investment into productive assets?
IE: How can congress stop the banks/hedge funds/wallstreet in general from taking 9000% pay hikes and instead take that 9000% pay hike that would of been and invest it into ... oooo i don't know
-Plant
-Equipment
-Production
-Manufacturing
-Construction
-Roads
etc.. etc... etc...
Make it less profitable to gamble, and More profitable to produce "stuff".
Great article. Why can't the Krugmanites of the world understand this?
Because it would mean unicorns and cotton-candy rainbows aren't real..
I believe in me.
Confiscations of deposits and pensions are the FED's exit strategy. They just won't admit it.
Confiscations of deposits and pensions are the FED's exit strategy. They just won't admit it.
That worked out well. Sorry for the multiple posts.
Excuse me for the stupid questions.
If all banks deposits are unsecured loans to the bank are ALL unsecured loans to the banks considered deposits? If that is true then that explains a lot. The Fed money paid to the banks for the crap that has been transferred to the Fed from the banks would be unsecured loans unless the banks wiped the money out of existence.... here is my logic...
Banks create money by creating a loan on one side of the balance sheet and fiat money out of thin air on the other sides of the balance sheet. As the principal of the loan is paid that money should poof out of existence (in a legal and ethical world)... because it only existed because the loan was created. HOWEVER, since many loans were sold to the Fed the banks has a dilemma. The principal paid by the Fed when they buy the loan should go poof ... but if the principal stays in existence to be used to prop up the banks liquidity and hence the stock market then it should be accounted for as an unsecured loan from the Fed to the bank. This way any principal amount that the Fed buys, but the bank does not poof out of existence is a new found deposit from the Fed to the bank.
... or do I not understand something correctly?
The Fed is wrecking the country> They have taken risk out of the equation. No risk no reward... THE YIELD CURVE IS FLAT...Banks can't make money nor can risk takers...
According to Credit Suisse:
Money Matters: FOMC Preview - Tapering versus Tightening
- The FOMC next meets on April 30-May 1, and we expect no significant policy changes to be announced at that time. Even if the Committee had been entertaining notions at its March 19-20 meeting of slowing its asset purchases anytime soon, the disappointing economic data released since then probably have shelved such plans for several months.
- In our view, an opportunity to scale back the asset buying may not come until later this year perhaps in September. For now, we expect the size of the Fed's monthly purchases to remain at $85bn ($40bn MBS, $45bn Treasuries).
- Looking forward, we maintain that any future decrease in the size of QE3 purchases would not be a monetary policy tightening, although the markets may initially react as though it were.
- Moreover, even if the Fed were to eventually end QE3 sometime in 2014 and start hiking interest rates in 2015 (or later), we believe monetary policy still will remain very accommodative for many years.
- The risk is that even if business cycle conditions were to allow the Fed eventually to firm up its policy stance, subsequent economic performance (or budgetary strains or financial fragilities) would force renewed easing long before the Fed reached an elusive "longer run" neutral funds rate target.
- Monetary Policy Review/Preview
- Beige Book (released on April 17).
- Fed Balance Sheet Update
- The Fed's MBS portfolio surged $55bn to $1.1tr in the week ended April 17.
- Excess reserves total $1.8tr, $159bn above their previous peak in July 2011.
- Money Supply Update
- M1 posted its largest weekly decline since just after the 2001 terrorist attacks.
- A $63bn pop in savings accounts at commercial banks limited M2's decline.
- Bank Balance Sheet Update
- Adjusted for a 2010 accounting change, commercial bank loans outstanding yesterday (April 23) are still some 5% below the Q4 2008 average.
- Cash assets held by domestically chartered banks have jumped by more so far this year than have cash assets at branches of foreign banks in the US.
Well, maybe gold has been telling us it ain't working any more.
My other thought is that GPD is created through value adding labor. Obviously all banking activity (and most service economy activity) is non-value adding labor. The US us suffering from a death spiral for multiple reasons: The misallocation of assets, financialization of the economy, the reduction of value adding labor, the growth paradigm .. that is impossible in a negative population growth economy without value adding labor... and all sorts of corruption caused by those who create and distribute fiat money.
Personally, I believe that there is a way for the US to have a value adding economy and still help grow the rest of the world and bring it on an equal footing. But it would require the false banker paradigms to be discarded as voodoo bullshit.
http://www.bloomberg.com/news/2013-04-28/ebbing-inflation-means-more-easy-money-in-name-of-stable-prices.html
In the U.S., two regional Fed presidents -- Narayana Kocherlakota of Minneapolis and James Bullard of St. Louis -- voiced concern this month that inflation may be skidding far below the central bank’s 2 percent goal.
“We should defend the inflation target from the low side,” Bullard told reporters on April 17 in New York.
Consumer prices rose 1.3 percent in February from a year earlier, according to the Fed’s preferred gauge of inflation. That matches the lowest level since October 2009.
Fed’s Intolerance
Bernanke and other Fed officials have shown intolerance for very low inflation in the past. Not only does it raise borrowing costs in inflation-adjusted terms, it also could cause firms to fire workers because wages typically don’t fall as fast as prices for goods and services.
To provide the economy with support, the Fed is buying $85 billion of Treasury and mortgage-backed securities per month --a strategy known as quantitative easing. The central bank has pledged to keep interest rates near zero as long as unemployment is above 6.5 percent and inflation isn’t forecast to exceed 2.5 percent. Joblessness in March was 7.6 percent.
At their last meeting in March, Fed policy makers discussed scaling back the amount of monthly asset purchases and possibly ending the program by the close of the year, according to the minutes of that gathering.
If the fed does not buy US debt any longer, how will the USA pay it's bills?
Will the wars end when the bills go unpaid?
Or will the checks to the people on govt payroll stop?
How do you see this unfolding?
http://useconomy.about.com/od/monetarypolicy/f/fed_monetizing_debt.htm
Question: How Is the Fed Monetizing Debt?
Answer: The Federal Reserve is monetizing debt anytime it buys U.S. Treasuries. The Federal government borrows from individuals, corporations and even foreign governments when it auctions Treasury bills, bonds and notes. When the Federal Reserve buys these Treasuries, it doesn't actually have to print money to buy them. It issues a credit, and puts the Treasuries on its balance sheet. Everyone treats the credit just like money, even though no actual cash is printed.
How does this monetize the debt? It turns the debt into money. It takes those Treasuries out of the open auction, which decreases the supply of Treasuries. This means the remaining Treasuries are bid up higher. Treasuries that are more valuable don't have to pay as much in yield to get buyers. A lower yield drives down interest rates on mortgages. The net effect is that it is as if the Treasuries bought by the Fed didn't exist.
But they do exist on the Fed's balance sheet. Technically, the Treasury must pay the Fed back one day. Until then, the Fed has given the Federal government more money to spend and increased the money supply. This is called monetizing the debt.
The Fed only monetizes debt in an emergency, like a recession. It helps the Treasury increase government spending to stimulate the economy without raising interest rates, which would depress the economy. When the economy improves, then the Fed can reverse the transaction, get the Treasuries off of its balance sheet, and remove the credit from the Federal government's operating budget.
these treasury /bond purchases by the central banks
will need to be coordinated or the failure of the
system will occur. I think japan and it's monetary
policy and central bank are the canary in the central bank
coal mine. when that situation is rejected then it is
game over all over the world, crisis time, monetary summit
is required and there is bank "holiday", the jig is up,
"how do we get them all to fall for this new thing" ..
moment. then, your money is no good, to be turned in for
"real" money at some rate. digital will be converted automatically.
what will the new metal suppression paradigm look like>>>>>>>?
stated in the form of a thought experiment.
liquidity in zero gravity, result, surface tension dominance,
no flow and a great loss of temporal normalcy or relevance to
planetary surface relationships.
.
Wet Washcloth In Space - What Happens When You Wring It? | Video
http://www.youtube.com/watch?v=lMtXfwk7PXg
.
Never have there been so many stupid motherfuckers in charge. . The IOeR policy doesn't "divorce money from monetary policy", it emasculates the Fed's "open market power". Whereas an injection of reserves (open market operations of the buying type by the FRB-NY's "trading desK"), formally resulted in an immediate expansion of the CB's investment or loan portfolios, nowadays it results in the mal-distribution (re-concentration) of excess reserves.
Only legal (required reserves), were supposed to be an unfair "tax" on the bankers (not their unused cash). The payment of interest on excess reserve balances was designed to retard CB lending & investing. The IOeR policy is a credit control device which absorbs Treasuries (safe-assets) in the secondary market (i.e., helps stabilize [sic] the gov't securities market).
Excess reserves are remunerated @ .25% - which exceeds Daily Treasury Yield Curve Rates up to 2 years out (@ .24% on 4/8/2013). I.e., under the borrow short to lend long paradigm, the IOeR policy inverts the short end segment of the yield curve (the NB's wholesale funding matrix).
So whereas the CBs would have traditionally activated "pump priming" coming out of a recession, by buying gov'ts (making investments), the CBs hold interbank demand deposits (IBDDs) at their District Reserve Bank (e.g., which then qualify as a "Stock of High Quality Liquid Asset" for Basel III's "Liquidity Coverage Ratio").
But that’s not the worst part. The payment of interest on interbank demand deposits (IBDDs) also induces dis-intermediation (an economist's word for going broke). Dis-intermediation is a term that can only be applied only to the non-banks (NBs) & shadow banks (SBs) -- not the commercial banks (CBs). The last period of dis-intermediation for the CBs was during the Great-Depression (the Federal Reserve Act of 1933 was passed to backstop the CBs). Now we have the FOMC. Now there is one Central bank (FRB-NY) & not 12. Now there is no gold collateral requirement. Now membership is compulsory. Now the volume of "eligible paper" is virtually unlimited, etc.
Between 1933 & 1942 Fed policy was likened to "pushing on a string". It wasn't until 1942 that the CBs remained fully “lent-up”, i.e., they held no excessive amount of excess legal lending capacity to finance business (or consumers). Between 1942 & Oct 9th 2008 excess reserves were used to acquire a piece of the national debt or other creditor ship obligations that are eligible for bank investment.
Then came the IOeR policy which induced dis-intermediation (like during the 1966 S&L crisis), where the size of the NBs shrink, but the size of the CB system remains the same.
It’s not that the SBs & NBs are deleveraging (via debt reduction, asset liquidation, or rebalancing), because their customers (business & consumer) are downsizing, or restructuring their balance sheets. It’s not an increase in consumer delinquencies or charge-offs (which hit a bank’s undivided profits account). It’s not FASB fair value accounting “true ups. It’s not dis-saving due to account liquidation or redemptions. It’s not non-performing loans which necessitate selling non-core assets. It's not that borrowers & lenders can't service their current obligations from their incomes received.
Net worth hasn’t declined because the provision for bad debt was growing. Net worth declined because the non-banks (NBs) couldn’t meet the current test of liquidity. The NBs must balance their assets & liabilities between liquidity & income.
The maturity mis-matches are being generated on the liability side of the NB's balance sheets. There's a (policy induced) outflow of loan-funds (short-term wholesale funding), from the NBs (or negative cash flow), which shrinks the size of the NBs & forces the Fed to counteract this deflationary effect - by following an easier money policy (expanding CB credit).
Examples of these shadow bank liabilities include: brokered CDs, asset-backed commercial paper (ABCP), interbank repurchase agreements, etc.
If the NBs can’t renew, rollover, refinance, or reinvest their contingent liability exposures, then they must sell off their earning assets (deleverage). But even with new financing, the NB's cost of capital (payment periods, risks, & rates-of-return), are reset, or restructured (lowering net-interest rate profit margins).
I.e., given the business model (where long-term loans are funded through short-term deposits & other liabilities (e.g., derivatives: swaps, options, & securitization), the banks must match their aggregated liabilities (by duration buckets) with the corresponding earning assets to achieve positive cash flows (prevent gaps between the inflows & outflows of contractual collateral & cash), i.e., to maintain their liquidity & solvency.
But Bankrupt you Bernanke thinks a CB is a financial intermediary (doesn't know the difference between money & liquid assets). Never are the CBs intermediaries in the savings-investment process. From the standpoint of the system, CBs always create new money when they lend & invest. They do not loan out existing deposits (saved or otherwise).
Both the CBs (or Reserve Bank), can out bid the SBs & NBs for savings (thereby impounding savings within the CB system). But the NBs are not in competition with the CBs. Money flowing to the SBs/NBs never leaves the CB system in the first place. It's impossible to take money out of the system unless e.g., you’re hoarding currency. Thus, in the longer term, the IOeR policy will generate ever higher levels of stagflation.
The Fed has bosses, white house and congress.
"Advise all our clients to by the S&P to 1605 tomorrow, Ben Valentine has set the price."
Article end line:
"...can all trivial and absolutely meaningless discussion over whether the Fed will halt QE (now or ever) finally end? It absolutelynever will, until everything one day comes crashing down."
ZH Tylers should think a little bit deeper and understand that financial or economic systems are established by.....people, hence their existence depends mostly by the ...WILLINGNESS of the people inside the system.
Hence, whether the Fed will stop QE or not does NOT depend at all on whether the system is functional or not, but it squarely depends on the conclusion of internal wars between different groups trying to control the system.
This is world history. It has been like this, it is like this and it will always be like this.
The almost public war inside JPM right now, is a small mirror into the background wars for and against QEs, since QE helps few oligarchs but harms other oligarchs inside US elite.
That's why Obama and Boehner have taken up golfing full time. They're letting them fight over it and then deal with the winner.
Oil peaked in Feb as I said. The economy peaked in March as per the roc in MVt. Stocks to fall after 5/1/2013's annual inflection point. The market "zinger" I predicted on 12/14/2013 will then be over.
Stocks to bottom in Oct. Inflaiton to bottom in Sept-Oct.
Fundamentally, Oil peaking is a geostrategic and political decision. not a flow of funds decision.
Methinks the Fed knows and is about to be party to a BIG change...imminently...
Methinks they were ready to crap it when they pulled the plug on MF Global in nov 2011, but they changed their minds.
Methinks.....Iran.
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
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Sounds a bit deflationary to me-
No, it's a plateau of hyperinflation.
A lot of people including (probably) the Tylers fall for the POINT OF REFERENCE trick.
Compared to 10 years ago, commodities and food prices are 300% higher. Compared to 15 years ago they are 500% higher. I consider that hyperinflation. But it can't go on higher infinitely, it has plateaued.
Fed is NOT fighting deflation, which assumes a ...slow and visible process. Fed is fighting the implosion down to normal.
ekm... do not confuse real monetary inflation/deflation (base and credit supply) with "prices"
Correct, but I do not live in theory, I live in the real world.
Monetary theory matters nothing to me. All I care about is prices
Only reality dictates.
If you want to know whether China will collapse into massive demonstrations, check pork price in Beijing.
If you want to know if khomeini can survive in Iran, check chicken price in Teheran.
Monetary theory matters nothing to me. All I care about is prices
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Well of course prices are important to any consoumer- but the understanding of monetary order or disorder could save you a whole lot of grocery money-
Prices eventually have to revert to the available money supply- be it credit or savings-
As this article points out--credit is contracting--that-- is genuine deflation
Compared to what?
What I am saying is that slow monetary deflation is irrelevant since the amount of UNWANTED credit created is too too too too big
Compared to what?
What I am saying is that slow monetary deflation is irrelevant since the amount of UNWANTED credit created is too too too too big
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So.. you're recognizing debt--how do you see anything infationary about that?
Debt = default risk-
Which inflation?
Inflation of INPUT costs?
Inflation of FINISHED products?
Which inflation?
Inflation of INPUT costs?
Inflation of FINISHED products?
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Inflation or deflation of the money and credit supply.. as Von Mises/Rothbard clearly explained it-
Your replys to me are not taliking about the same thing as i posted at all-
Ah, I see. I refuse to read theory.
I'm learning by reading the reality, that's on purpose. My own methodology.
I know concepts, I know what credit..debt are, I do not know different ways of interpretations by others. I want to create my own interpretation.
Ah, I see. I refuse to read theory.
I'm learning by reading the reality, that's on purpose. My own methodology.
***********
Yes of course-- you just kicked all the old austrians asses with your modern day interpretations-
LOL fair enough
EKM. Price is a monetary phenomenon. Why do I say this? Because you can have both rising a falling prices in a monetary inflationary economy, or monetary deflationary economy. If we get prices deflating (and I think we will for all shit that is unproductive), this is a good thing. Ultimately, I think all asset prices (including PMs) are going to take it on the chin, UNLESS, the Fed starts outright purchases of asssets (stocks, commodities, etc.). On the other hand, I think hyper inflation, is possible if $USD start to enter the real market from bank reserves, if there is even a hint of trouble (i.e he who sells first sells best syndrome). Also if the US dollar is cornered as a result of an abandonement of it as a trade settling currency. This could also lead to hyperinflation (loss of confidence). So, I think tings can go either way. Fast.
Fully agree with the analysis. Monetary phenomenon is a general term, I'm ok with it.
How it goes up and down, it's exposed to interpretations.
Actually I'm copy/pasting your post for future reference.
Hmmm... "monetary phenomenom"... ranks right up there with "Where the fuck is my dinner"!?
Seriously, nobody gives a shit about phrases like "monetary phenomenon". Speak to the people! Educate the dumb fucks for fuck sakes instead of tossing around useless phrases nobody understands.
Good Fucking Grief, Charlie Brown!
I hear you.
Fed already has bought up commodities via primary dealers
http://www.reuters.com/article/2012/04/16/copper-glencore-idAFL6E8FG9NU20120416?sp=true
It may be convenient to throw around numbers with nothing substantial with which to back them, but I must call BS on the statement that food prices are 300% higher than 10 years ago and 500% higher than 15 years out.
Maybe commodity prices have risen by that amount - corn, wheat (don't know for sure, didn't check) - but I can safely say a dozen eggs, which were about a buck in 2003 and 1998, are not $3.00 nor $5.00 today. I'd say some things have basically doubled over that time, but other things, like a whole chicken or a ham shank, have been relatively stable.
Slice it any way you like, but just what has the Fed been fighting since 2000? DEFLATION, but, they haven't been very successful. Home prices? They did a nice job up until 2007, but that busted. All they have going for them is the bond and stock markets. Expect the ten year to hit 1.40% yield this summer and the stock market to make new highs, maybe today.
We have, at best, deflation, at worst, stagflation, so we're probably somewhere in between. Bi-flation. Some things go up, others down.
(I know nobody will read this comment, so I am safe to say anything I like, but I think I'm on the right track.)
"Swiss keep pot of gold in the UK: Country has 20% of its reserves in Bank of England in case it is invaded"
http://www.dailymail.co.uk/news/article-2316322/Swiss-pot-gold-UK-Country-20-reserves-Bank-England-case-invaded.html
In case it is invaded by PIIGS...
Tyler, "October 200/ total loans and leases outstanding in the US were $7.323 trillion." - October 2008, you mean?
You will see QEinsanity will continue as long as Bernanke is ChairSatan. Only when he refuses another term will make the next ChairSatan the fall guy, probably after the Republicans take the WH and they can then ruin us all right before Barry leaves office.
Cheney's plan: Disaster for Barry coming into office and disaster for Barry leaving office.
Then Ben can retire to write his memoirs and hang out with Hank Paulson and Corzine on Jecklyl Island.
http://memory.loc.gov/service/gdc/scd0001/2006/20060517001te/20060517001te.pdf
These charts can serve as prosecution exhibits during the upcoming treason trials.
Better to Rent then Buy:
http://www.thefiscaltimes.com/Media/Slideshow/2012/01/04/12-Markets-Wher...
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i believe that monetizing GDP will one day work, you can milk the bulls and birds, their milk tastes good.believe in miracles, they can happen.