• Sprott Money
    05/06/2016 - 06:03
    The US, in its own decline, is showing this same self-destructive tendency. The worse things get, the greater the inclination of the citizenry to say, “Carry on, everything’s fine.”

The Fed Is Paying Banks Not To Lend

Tyler Durden's picture


Submitted by Michael Snyder of The Economic Collapse blog,

Did you know that U.S. banks have more than 1.8 trillion dollars parked at the Federal Reserve and that the Fed is actually paying them not to lend that money to us?  We were always told that the goal of quantitative easing was to "help the economy", but the truth is that the vast majority of the money that the Fed has created through quantitative easing has not even gotten into the system.  Instead, most of it is sitting at the Fed slowly earning interest for the bankers. 

Back in October 2008, just as the last financial crisis was starting, Federal Reserve Chairman Ben Bernanke announced that the Federal Reserve would start paying interest on the reserves that banks keep at the Fed.  This caused an absolute explosion in the size of these reserves.  Back in 2008, U.S. banks had less than 2 billion dollars of excess reserves parked at the Fed.  Today, they have more than 1.8 trillion.  In less than five years, the pile of excess reserves has gotten nearly 1,000 times larger.  This is utter insanity, and it will have very serious consequences down the road.

Posted below is a chart that shows the explosive growth of these excess reserves in recent years...

Excess Reserves

This explains why all of the crazy money printing that the Fed has been doing has not caused tremendous inflation yet.  Most of the money has not even gotten into the economy.  The Fed has been paying banks not to lend it out.

But now that big pile of money is sitting out there, and at some point it is going to come pouring in to the U.S. economy.  When that happens, we could very well see an absolutely massive tsunami of inflation.

Posted below is a chart that shows the growth of the M2 money supply over the past several decades.  It has been fairly steady, but imagine what would happen if you took the hockey stick from the chart above and suddenly added it to the top of this one...

M2 Money Supply

The longer that the Federal Reserve continues to engage in quantitative easing and continues to pay banks not to lend that money out to the rest of us, the larger that inflationary time bomb is going to become.

In a recent article for the Huffington Post, Professor Robert Auerbach of the University of Texas explained the nightmarish situation that we are facing...

One reason that the excess reserves grew to an extraordinary level is that in October 2008, one month after the financial crisis when Lehman Brothers went bankrupt, the Bernanke Fed began paying interest on bank reserves. Although it has been 1/4 of 1 percent interest, this risk free rate was not low compared to the Fed's policy of keeping short-term market rates near zero. The interest banks received was and is an incentive to hold the excess reserves rather than lend to consumers and businesses in the risky environment of the major recession and the slow recovery.


The Bernanke Fed is now facing a $1.863 trillion time bomb, they helped to create, of excess reserves in the private banking system. If rates of interest on income earning assets (including bank loans to consumers and businesses) rise, the Fed will have to pay the banks more interest to hold their excess reserves.

If interest rates move up dramatically (and they are already starting to rise significantly), banks will have an incentive to take that money out of the Fed and start lending it out.  Professor Auerbach suggests that this could cause an "avalanche" of money pouring into the economy...

Eighty five billion a month will seem tiny compared to the avalanche of the $1.863 trillion excess reserves exploding rapidly into the economy. That would devalue the currency, cause more rapid inflation and worry investors about a coming collapse.

So the Fed has kind of painted itself into a corner.  If the Fed keeps printing money, they continue to grossly distort our financial system even more and the excess reserves time bomb just keeps getting bigger and bigger.

But even the suggestion that the Fed would begin to start "tapering" quantitative easing caused the financial markets to throw an epic temper tantrum in recent weeks.  Interest rates immediately began to skyrocket and Fed officials did their best to try to settle everyone down.

So where do we go from here?

Unfortunately, as Jim Rogers recently explained, this massive experiment in financial manipulation is ultimately going to end in disaster...

I’m afraid that in the end, we’re all going to suffer perhaps, worse than we ever have, with inflation, currency turmoil, and higher interest rates.

The Fed and other global central banks have created the largest bond bubble in the history of the planet.  If the Fed ends quantitative easing, the bond market is going to try to revert to normal.

That would be disastrous for the global financial system.  The following is what Jim Willie told Greg Hunter of USAWatchdog.com...

Everything is dependent on Fed support. They know if they take it away, they’re going to create a black hole. The Treasury bond is the greatest asset bubble in history. It’s at least twice as large as the housing and mortgage bubble, maybe three or four times as large.

But even if the central banks keep printing money, they may not be able to maintain control over the bond market.  In fact, there are already signs that they are starting to lose control.  The following is what billionaire Eric Sprott told King World News the other day...

It’s total orchestration. And it’s orchestration because they might have lost control of the bond market. I find it such a juxtaposition that central banks on a daily basis buy more bonds today than they ever purchased, and interest rates are going up, which is almost perverted. I mean how can that happen?


They’ve lost control of the market in my mind, and that’s why they are so desperately trying to get us all to forget the word ‘taper.’ In fact, we probably won’t even hear the word ‘taper’ anymore because it has such a sickening reaction to people in the bond market, and perhaps even people in the stock market. They will probably do away with the word. But the system is totally out of control. And then we’ve got this quadrillion dollars of derivatives. It just blows blows my mind to think about what could really be going on behind the scenes.

Sprott made a really good point about derivatives.

The quadrillion dollar derivatives bubble could bring down the global financial system at any time.

And remember, interest rate derivatives make up the biggest chunk of that.  Today, there are 441 trillion dollars of interest rate derivatives sitting out there.  If interest rates begin skyrocketing at some point, that is going to create some absolutely massive losses in the system.  We could potentially be talking about an event that would make the failure of Lehman Brothers look like a Sunday picnic.

We are moving into a time of great financial instability.  People are going to be absolutely shocked by what happens.

Our financial system is a house of cards built on a foundation of risk, leverage and debt.  When it all comes tumbling down, it should not be a surprise to any of us.

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Tue, 07/02/2013 - 16:56 | 3715212 unununium
unununium's picture

What?  Next you're going to tell us Fed buys defunct mortgage payment streams from banks, at full par value, to the tune of $85 billion monthly.


Tue, 07/02/2013 - 17:00 | 3715233 BadDog
BadDog's picture

That can't be. That would be like saying debt is money.

Tue, 07/02/2013 - 17:01 | 3715237 Xibalba
Xibalba's picture

And then theres this:


The United States has announced additional unilateral sanctions against Iran, in an attempt to force it to abandon its nuclear energy program. Much of the effort is to starve Iran of gold bullion, which it has been using in its “oil for gold” program in order to circumvent being locked out of the international banking system. The new measures target anyone selling gold to any Iranian agent OR private citizen, with repercussions up to exclusion from trading on the U.S. precious metals markets.

Turkey has been Iran’s biggest trading partner in the “oil for gold” scheme, and economic sanctions by the U.S. against its NATO ally could bring about a touchy situation. The U.S. is also counting on Turkey for support for the anti-government forces in neighboring Syria.

It is possible that Turkey, which also borders Iran, may give up access to U.S. commodities markets and go elsewhere for the gold it needs to purchase direly needed Iranian natural gas. It is also possible Turkey could launder the gold through Dubai, which has become a major regional precious metals hub.

Tue, 07/02/2013 - 17:17 | 3715276 francis_sawyer
francis_sawyer's picture

"The Fed Is Paying Banks Not To Lend"


Cheesepopes are counterfeitting money out of thin air & handing it out to their TRIBE... [who then, besides stuffing it in their pockets, CONTROL asset prices with the VIG]...


Tue, 07/02/2013 - 17:19 | 3715291 Divided States ...
Divided States of America's picture

Yup the cheesepopes are basically funnelling the money from the cheesepope operated financial cartel known as the Federal Reserve to the cheesepope dominated Financial industry on Wall Street...basically its a one way wealth transfer of epic proportions going on right underneath our noses.

Tue, 07/02/2013 - 17:24 | 3715310 HowardBeale
HowardBeale's picture

"...one way wealth transfer of epic proportions..."

I recall it being about $83B/year--which represents most of, in not more than, the total profits of the circle of thieves. Anyone else recall whether that number is about right?

Tue, 07/02/2013 - 17:36 | 3715357 malikai
malikai's picture

Can somebody please tell me what a cheesepope is?

Tue, 07/02/2013 - 17:43 | 3715376 ZerOhead
ZerOhead's picture

There are some questions that are better off not being asked here at ZH... and that is one of them.

You may however feel free infer away at your own risk...

Tue, 07/02/2013 - 17:44 | 3715386 malikai
malikai's picture

Maybe I'd just rather not know..

Tue, 07/02/2013 - 17:49 | 3715404 dick cheneys ghost
dick cheneys ghost's picture

The 'cheesepopes' are the 'Bangladeshi's'

Tue, 07/02/2013 - 18:20 | 3715533 francis_sawyer
francis_sawyer's picture

'ELITE' Bangladeshi's...

Wed, 07/03/2013 - 00:33 | 3716740 prains
prains's picture

here i thought it was an orange chip

Wed, 07/03/2013 - 14:42 | 3719054 fallout11
fallout11's picture

Oi Vey!

Tue, 07/02/2013 - 17:52 | 3715419 kito
kito's picture

im a cheesepope...hes a cheesepope....wouldnt you like to be a cheesepope too??????????????

Tue, 07/02/2013 - 18:15 | 3715502 Colonel Klink
Colonel Klink's picture

In a word, no FUCKING way.  Ok that was 3.

Tue, 07/02/2013 - 18:23 | 3715543 francis_sawyer
francis_sawyer's picture



You're more like a "blintz"...

Tue, 07/02/2013 - 21:27 | 3716180 Umh
Umh's picture

They are talking about those of some sort of Jewish persuasion. They are a bunch of cowards who think that 2% of the worlds population control the rest of us. I'm not really sure if they are talking about ethnic Jews, religious Jews or some idealized Jewish superman, but they obviously fear them.

Tue, 07/02/2013 - 17:38 | 3715361 nope-1004
nope-1004's picture

US Economic foreign policy is a bunch of wet band-aids trying to stick to a speeding locomotive.  The foreign nations are sick of US exported inflation and are simply taking matters into their own hands by using another form of money:  Gold.  Is there anything wrong with that?  Apparently there is, which is why the US is finished soon and will be shunned by all other nations who will give the royal middle finger to Obama and all his cronies.  Since the US won't get with it and do the same, they are stuck in the old mold of threatening military force against someone who chooses to survive and pay bills in an alternative form.

Watch the big banks invest in foreign treasury bonds as this goes further, the ultimate form of insubordination to the Fed..

US economic foreign policy is in such shambles, it's almost comical to read stories like these.


Tue, 07/02/2013 - 17:28 | 3715323 fonzannoon
fonzannoon's picture

We are all going to make pretend that the italians have nothing to do with it?


Tue, 07/02/2013 - 17:31 | 3715337 kito
kito's picture

no fonz, its ALL my fault.........you are your ilk are exonerated.......................

Tue, 07/02/2013 - 17:36 | 3715356 fonzannoon
fonzannoon's picture

Hey listen, what's up with your avatar? He folded like a cheap suit. I was bummed out to see that. Truly.

Tue, 07/02/2013 - 17:51 | 3715411 kito
kito's picture

rumor has it that correa was getting annoyed and growing weary with meddling by assange......that assange leaked (irony) the unsigned ecuadorian travel letter that wouldve allowed snowden safe passage to their embassy.......i believe that if snowden had actually made it to the ecuadorian embassy on his own, correa wouldve kept him................there is also a sizeable part of ecuador that does not want to risk their export status with the u.s.......................who knows.......but yeah, im a bit disappointed as well...........................

Tue, 07/02/2013 - 17:22 | 3715278 YuropeanImbecille
YuropeanImbecille's picture

What pisses me off about this, is that it is clearly stated in the protocols of zion (and no, i don't care who wrote them or whatever).


"Economic crises have been produced by us from the goyim by no other means than the withdrawal of money from circulation. Huge capitals have stagnated, withdrawing money from States, which were constantly obliged to apply to those same stagnant capitals for loans. These loans burdened the finances of the States with the payment of interest and made them the bond slaves of these capitals" (Protocol 20). 


The above was written in 1903

Tue, 07/02/2013 - 17:28 | 3715322 Jackagain
Jackagain's picture

Exactly what they did in the Great Depression...

Wed, 07/03/2013 - 02:16 | 3716835 Flagit
Flagit's picture

Much of the effort is to starve Iran of gold bullion, which it has been using in its “oil for gold” program in order to circumvent being locked out of the international banking system.

and there, you have a motive to tank the gold price. if the fuckers are gonna sell, make sure they get the least amount possible. any correlation to their purchases with the dips in the gold price?

Tue, 07/02/2013 - 17:14 | 3715271 Groundhog Day
Groundhog Day's picture

So your saying that the only form of real money is the real gold and silver you can place in your pocket?  ok got it

Tue, 07/02/2013 - 17:31 | 3715338 SilverIsKing
SilverIsKing's picture

Not entirely true.  You can place it in a safe, bury it in the ground, drop it in a lake, and much much more.

The only thing you can't do is eat it.

Tue, 07/02/2013 - 18:51 | 3715647 Scro
Scro's picture

Colloidal silver

Wed, 07/03/2013 - 09:08 | 3717355 marathonman
marathonman's picture

Money can be anything that we agree to exchange for goods of value.  Gold and silver just happen to be real commodities that check all the boxes of a good medium of exchange.  Debt can also be used.  It just has a half-life because eventually to keep it stable, the debt must expand exponentially to give lenders a chance at paying their loans back with interest.  In economics as the quantity of money approaches infinity the value approaches zero.  We are on the verge of take off on the growth of money as the Fed and government by hook and crook expand the debt.  Eventually people realize how screwed they are and quit wanting the money that loses value daily.  They trade it quickly for real goods.  Velocity takes off, hyperinflation erupts, and the currency fails.  It happens to every 'fiat' currency.  They don't really teach that stuff in school though.

Tue, 07/02/2013 - 18:42 | 3715616 XRAYD
XRAYD's picture

Worse. BAD debt is MONEY!

Wed, 07/03/2013 - 00:14 | 3716717 Boop
Boop's picture

Just like Soylent Green.

Tue, 07/02/2013 - 17:20 | 3715298 GVB
GVB's picture

Imagine some trillion dollars getting lent out in a fractional reserve system?

All these smartphones with huge screens, I now seem to understand they are recently brought in the market because all the zero's have to fit on the screen. I need to create an app that creates three zero's by clicking one time the zero button. I will be rich.

Tue, 07/02/2013 - 17:37 | 3715359 lordbyroniv
lordbyroniv's picture

Bbbut...what happens when everyone gets tired of living in their moms basement?!?!!?!?!?

Wed, 07/03/2013 - 07:30 | 3717105 ZeroPoint
ZeroPoint's picture

It is a little frightening that they have claims on all that real estate isn't it?

Tue, 07/02/2013 - 16:54 | 3715213 yrbmegr
yrbmegr's picture

Interesting.  Higher interest rates may actually cause inflation to accelerate.

Tue, 07/02/2013 - 17:01 | 3715235 Dr. Richard Head
Dr. Richard Head's picture

Mind = blown!  Never looked at it that way, but then again this in this perverted market anything is possible....aside from sustainability.

Tue, 07/02/2013 - 17:27 | 3715319 The Final Countdown
The Final Countdown's picture

It's the new normal. Bad news = good news, banks profit from not lending money, printing money causes deflation, higher interest rates cause inflation, and record demand for PMs makes their price go down.

Tue, 07/02/2013 - 17:45 | 3715391 Xibalba
Xibalba's picture

Peace is war and McDonald's is food

Tue, 07/02/2013 - 17:35 | 3715355 onewayticket2
onewayticket2's picture

"If interest rates move up dramatically... banks will have an incentive to take that money out of the Fed and start lending it out.


doesnt this assume the spread bw the fed rate paid and loan rates received by banks would be increasing in a way that would incent pulling money out of the fed and putting to work in the form of loans ?


Question:  why wouldnt this just be another lever for the Fed toy with....couldnt they raise interest paid on excess reserves in lockstep (zero spread change)?  or more?  or less?  depending on their objective? 





Tue, 07/02/2013 - 17:20 | 3715294 alangreedspank
alangreedspank's picture

Household debt is still very high. Not a lot of people will take out loans IMO.

Tue, 07/02/2013 - 20:15 | 3715956 yrbmegr
yrbmegr's picture

The same thing could happen if the fed stops paying interest on the deposits, AND if they stop buying paper from the banks.  So the fed is stuck in this infinite do-loop of inflating bank balance sheets to avoid having those deposits flood into the global economy.  If all that money starts coming out, the fed will have no choice but to mop it all up quickly with sky-high interest rates.  It will wreck the U.S. economy, but it will DESTROY the Chinese economy.

Tue, 07/02/2013 - 16:56 | 3715215 Dr. Richard Head
Dr. Richard Head's picture

"imagine what would happen if you took the hockey stick from the chart above and suddenly added it to the top of this one..."

Imagining an implied direct correlation I can say yes, I can imagine.  How about 11 Million Billions or 11 Quadrillion.  So that should about cover the derivatives then.

Tue, 07/02/2013 - 16:55 | 3715216 Rainman
Rainman's picture

Interest rate derivatives.....think I saw that black swan swimming around somewhere.

Tue, 07/02/2013 - 16:58 | 3715225 l1b3rty
l1b3rty's picture

But of course the banks will repay this, just like they repaid TARP.


Tue, 07/02/2013 - 16:58 | 3715226 q99x2
q99x2's picture

If even the bank of Zelienople, PA goes bankrupt and that trillion plus of re-hypothecated FRAUD would all be wiped out in seconds. FED, the Morgue and the Goldman Sach has everything all ice-9'ed up dude.

Tue, 07/02/2013 - 16:59 | 3715228 Divine Wind
Divine Wind's picture




The sums of money being discussed here are just staggering.




Tue, 07/02/2013 - 17:16 | 3715277 ZerOhead
ZerOhead's picture

A trillion here a trillion there... pretty soon it adds up to real money...

(except in Zimbabwe)

Tue, 07/02/2013 - 17:03 | 3715229 DormRoom
DormRoom's picture

Like the Latin American crisis where authorities denied rumors the banks were insolvent, then we discovered a decade later that the banks were indeed insolvent.  The lie allowing the banks time to repair their balance sheet.

I wouldn't be surprised if the TBTF banks have been insolvent, and the Fed has been helping them repair their balance sheet with QE, so they can come out of shadow insolvency a half decade from now.

 "When it's dire, you have to lie" -- some guy in the EZ.

Tue, 07/02/2013 - 17:14 | 3715257 Rainman
Rainman's picture

The other patch in the recovery tool kit was holding back diseased housing inventory from the market, thus hiking the liquidation prices for the banks. All that mortgage shit paper is held at par anyway or passed on to Chairsatan and F and F.

All of it will continually point to fail < due to the natural laws of gravity > 

Tue, 07/02/2013 - 17:11 | 3715259 Colonel Klink
Colonel Klink's picture

Most if not all of the major banks are insolvent if they had to mark to market.  It's one big fraud since 2008.  Well really 1913 but CONgress has perpetuated it and shirked their constitutional responsibility.

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