How The Fed, Courtesy Of Foreign Banks, "Grew" The US Economy By $146 Billion In The First Quarter

Tyler Durden's picture

By now it should come as no surprise to anyone that in a Keynesian world in which the aggregate increase in credit levels is the only necessary and sufficient driver for "growth", as admitted repeatedly by Europe which has blamed its longest ever recession on "(f)austerity" and the inability to issue debt like a drunken-sailor, that the only thing that matters is how much credit money (i.e., liabilities) are created in the banking sector, either organically by creating loans, or through the Fed's low-power "reserve" money creation.

If there is any confusion, we present Exhibit A: the chart (now updated for Q1 data courtesy of the latest Flow of Funds report) that strips away all the conventional GDP = C+I+G+(X-M) abracadabra and cuts to the chase - US GDP has tracked the change in traditional bank liabilities for the past 50 years on an almost dollar for dollar basis.

Here is the most recent math:

  • Q1 increase in nominal GDP: $146 billion
  • Q1 increase in nominal bank liabilities: $212 billion (Flow of Funds sections L.110, L.111, L.112)

Which is why it is so critical for the US 'economy' to keep growing the debt: without credit (money) creation, there is no growth. Such is the reality in a Keynesian, monetarist world.

The logical next question is: just what are these bank liabilities that grew in Q1, and let the US economy "improve" at a 2.4% annualized pace in the first quarter. And, just as importantly, what are the assets?

We move on to Exhibit B - Bank Assets. Looking at the two largest components of the traditional banking sector (not shadow banking), specifically US-chartered depository institutions and Foreign banking offices in the US, we can see that of the total $165.1 billion increase in bank assets, more than all of it, or $300.3 billion was due to Fed Reserve growth! The reason why this was greater than the total is simply because conventional banking credit creation is still clogged up and traditional assets, chief among which was Credit Market Instruments or loans, in US banks declined in Q1.

To summarize so far: the bulk of bank asset creation has been thank to just one entity: the Fed.

Presenting Exhibit C - Bank Liabilities, or the component which as shown in the chart above tracks the GDP with an uncanny correlation. Here is which liabilities were the most to benefit from the Fed's largese.

Virtually all of the bank sector liability increase, or some $126.6 billion, was as a result of interbank liability creation by foreign banks operating in the US as a "net due to related foreign offices."

Which brings us back to another chart we like to show: the amount of Fed reserves parked with foreign banks.

Presenting Exhibit D - total Fed reserve creation and the cash held by domestic and foreign banks, as reported by the Fed's weekly H.8 statement:

And Exhibit E - the direct correlation between cash holdings of domestic branches of foreign banks and the reserves created by the Fed. As the chart makes all too clear, all the Fed's new reserves are going almost on a dollar for dollar basis to foreign banks!

By this logic it should also come as no surprise that total cash parked at Foreign banks operating in the US just rose to an all time record of $1.12 trillion, or more than all the cash held by domestic US banks, which was $100 billion less or $1.02 trillion. This was confirmed by the non-seasonally adjusted number as well, which too rose to a record high of $1.13 trillion up tom $1.1 trillion. Here is Exhibit F: total cash held by foreign banks in the US. (btw, NSA stands for Not Seasonally Adjusted, not this chart was created by the NSA)

So the next time someone asks you how it is that the US economy grew by 2.4% in Q1, explain as follows:

  1. Fed creates some $300 billion in reserves in Q1 courtesy of QE4
  2.  Virtually all reserves are parked as cash at foreign banks operating in the US.
  3.  ???
  4. Profit, aka GDP growth of $146 billion

And that concludes our New Normal economics lesson for the day.

Of course, the logical next question is "does this mean that $2.6 trillion, or 17%, of US "GDP growth" in the past four years is nothing but reserves created by the Fed and funneled through into the stock market economy?"

The answer, of course, is yes but we will leave it to readers to contemplate what it means that the Fed is now responsible for nearly one fifth of total US economic "output."

Source: Z.1, H.8

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HedgeAccordingly's picture

It is ok. at least blackrock's Schawrzman is bullish .. on himslf http://

Pinto Currency's picture


"Z1 A Severe Storm Warning" sums the debt problem with excellent graphs:

maskone909's picture

im surprised ZH isnt covering the rise in domestic bond yields as much as we cover japan.  its no wonder, with rates rising, all of this fallout from surveillance and spying is occuring.  when the system begins to fail, the neuss starts to tighten on its people.  if the FED pulls out it will be too late to jump back in.  just my view.

flacon's picture

That first graph is where MMT (Modern Monetary Theory (think: Keynesianism on steroids)) gets it wrong. They say as the government spends the citizens save more, so more spending = good for citizens. Of course "savings" in our upsidedown world is "liabilities" for the banks. Voila the MMT can solve the world's problems simply by having the government borrow and spend - a LOT. The more the better. 

Skateboarder's picture

Most people will not fully understand or give a fuck about even your most traditional accounting equation. Just point to who's responsible for paying the bills and the "consequences" of not being able to pay those bills. Who? Me? Really? All dem trillionz? But I didn't borrow anything! FUUUUUUCK!

q99x2's picture

Just as Obama and Holder are about to be impeached we have entered into a goldilocks economy and everything is fixed.

dick cheneys ghost's picture

I dont think Obummer will be impeached........but if he is, there is something 'they' want 'him' to do that he does not want to do......think of timing of petrodollar/watergate/vietnam and lewinsky/gramm-leach-bliley..........Clinton plays dumb about repeal of Glass-Steagall, but he knew exactly what he was doing...and he knew exactly what would happen, but he signed it anyways to 'save' his presidency...these things dont happen by accident

asteroids's picture

Now you know why the DAX and Europe has an unusual effect on US stocks. The chairsatan is paying them to levitate markets.

scatterbrains's picture

I want to buy some /ES but I'm worried, what if the center doesn't hold with our corrupt rulers?  I'm not worried about earnings or inflation... can someone assure me that these crooks can hold onto power for a bit longer?  otherwise it's too risky.

Element's picture

OK, I'm still a little confused about how to go from 300 billion bucks of loans to $146 billion of GDP 'growth'.  I suspect #3 is implicated.

Presumably the other $154 billion pops up somewhere, at some other space 'n time ... or does that happen in the sequel?

Tyler Durden's picture

It offsets the drop in all other bank liabilities.

Why are other bank liabilities dropping? Due to the Fed. Chicken, meet egg.

101 years and counting's picture

Offsetting the deflationary spiral by printing money.  Too bad for Ben, the depression he created is swallowing all his money and spitting out nothing.

maskone909's picture

its not about deflation.  its about funding government institutions.  the tax payers would never stand for the real amount of money it takes to prop up all of this PORK.  so keep them pacified with food stamps and WIC programs and shit.  instead of taxing them lets just print money and buy treasuries.  they could fuckin care less about the economy.

Element's picture

Thanks tyler, think I flashed-crashed into the mad-hatters tea-party for a moment when I read that.

ekm's picture

"balance sheet" logic is misleading, since numbers on paper as "assets" mean absolutely nothing for the real economy.


Reserves are money that Fed created but...........nobody wants.

Hence, the more the reserves, the more the USD is avoided.

OneTinSoldier66's picture

"Due to the Fed. Chicken, meet egg."


I'll take the chicken meat. The egg I'll save for Bernankes face.

adr's picture

If you see someone driving in reverse, but he's going with the flow of traffic, it may look wrong but he says, "I just like driving in reverse and I'm getting to where I'm going."

"But you're gong backwards!", you say.

He says, "Maybe you're the one going backwards."



and there is a perfectly good explanation of the Fed and our wonderful economy.

andyupnorth's picture

Correlation is not causation?  Ah, screw it! It's causal!

Ying-Yang's picture

Thanks Tyler... great info and nice charts

notadouche's picture

The pieces are finally starting to fit.  First the swoon in gold from out of nowhere an obvious front run by the "in the know crowd" of the Fed use of the word "tapering" followed by the S&P rating and stating that the end of QE would be "welcome evidence improvement blah blah blah..."   

You have also had some violent down days over the last few weeks that mysteriously lead to nowhere but up.  A similar pattern happened during the crisis days forcing the QE hand to begin with.   

The elites know exactly what is going to happen when and are stealthily making their moves now successfully being masked by Treasury, media etc...

Or it's all disinformation and slight of hand wanting you to believe this taper lever is about to be pulled giving you the ultimate head fake and take advantage of you thinking your being clever.   Or.......

You know what, fuck it.  It's just better not to play the game because, just like Vegas, all of those new casino's can't be built on the house losing.  They just publicize one big loss and show a lot of glitz. glamour and turn the volume up when the machines dispense quarters on dollar slots giving the illusion of constant winning luring in the unsuspecting masses.  


OneTinSoldier66's picture

There is someone(s) out there that cannot stand the thought of you not being in debt.


By that I mean they can't stand the thought of you not being debt to them. A small cabal of people perhaps. It's their method of control. Whoever it is sick, just sick.

GreatUncle's picture

Guess what 0 debt ... nardah, nothing.

On that I guess they don't like me then but the feeling is mutual.

YC2's picture

They wish you'd lever up your consumption but thy are fine withholding 20-40% from your paycheck to pay the interest on the national debt for now.

Nue's picture

G.D.P: Gross Deception Program

OneTinSoldier66's picture



GDP = Government Domestic Pillaging

GreatUncle's picture

The article could take one step further ... and explore possible actions I can see 2.

FED now stops the government cannot afford to pay the interest on the sovereign debt.

or ...

FED now unwinds and removes the cash injection and would you expect nominal growth to rise, stay flat or fall.

On that it is QE forever if the only growth is actually QE so the debt can be serviced the ultimate CATCH 22.

Yen Cross's picture

      I can't wait to see if last Tuesday was a "one hit wonder".

Element's picture

btw, good call on the ~.95 level Yen, I'm guessing you think it's still going a lot lower ... I got setup for that before it even dipped to parity. :)

emersonreturn's picture

please, which foreign banks?

Seeking Aphids's picture

Sorry but I am still confused....isn't the GDP calculated by looking at the GDP? I see the correlation but  not the causation (as someone already noted).....don't we still need to explain or look at the GDP calculations that the govt comes up with? They are based on what they consider to be real stats, right? My, oh my, when you are drinking tea with the Mad Hatter things always become curiouser and curiouser...........

longwind's picture

Speaking of confused, I know the Fed is owned by the Queen of England and all that, but even given foreign shares of ownership, why's the Fed dumping all its magic  money in foreign banks? Why isn't Goldman getting its pound of dollars? Why isn't the racket better domesticated? Isn't free money a citizenship perc? Surely we're doing more than bailing out the EU?

emersonreturn's picture

yes, longwind, i'm trying to follow the money as well.  certainly the bankocracy is accustomed to ruling the world, all for one and one for all, but how is the bankocracy managing in china and russia?  will they play accordingly or is the game shifting?

Urban Redneck's picture

It's entirely out of self-interest on the part of US Bankers (who own the Federal Reserve) as opposed to concern for their fellow (banker) man overseas.


dadichris's picture

Although I'm a fan of the gold standard, I keep saying that switching to gold standard (or any other) won't make any difference in the world of fractional reserve banking and debt-based monetary system.  Debt begets more debt which begets more risk-taking...

Lmo Mutton's picture

Soooo, QE does work??  The Kenesians were right???

If I hadnt lost all that AuAg in that boating accident I would sell and apply for my obummer phone.

Whiner's picture

The financialization of the world starts with Rubin Clinton. It's now all a big piece of puffed pastry. The gubmint tells you what the price gonna be. Watching you closely. So what you gonna do about it? How about a national tax revolt? Restart, Bichez!

flow5's picture

"Perfect substitutes?"  Treasuries & excess reserves aren't functionally equivalent. QE (directily & indirectly) takes Treasuries completely out of circulation (inevitably inducing dis-intermediation among the non-banks). But neither IBDDs (reserves), nor the money stock (bank deposits), can be taken out of the commercial banking system (except by hoarding or a change in FOMC policy).

Even Joe sixpack knows better:

(1) “CBs held 2.5T assets in May 2008 & now hold 2.75T”.

(2) “Fed increased securities by 2.6T”.

(3) Ergo, the Fed bought most of its assets from the non-banks?

NO, contra wise, CB credit (& the money stock) failed to confirm this macro trend (POMOs between the FRB-NY's "trading desk" & the non-bank public increase the money stock - not the CB's excess reserve balances).

CB credit was actually reapportioned (more gov'ts, less private sector investment).

But where then did the SB's (NBs) "safe-assets" go?