Fed Worries About Deflation But Pays Banks Billions Not To Lend QE Proceeds!?

Tyler Durden's picture

Submitted by Chris Hamilton via Hambone's Stuff blog,

In October of 2006, President Bush signed the Financial Services Regulatory Act (FSRA)...the culmination of a five year Congressional effort.  Significantly, the Federal Reserve was given authority to pay interest on reserve balances held by depository institutions in Federal Reserve Banks.  But not just reserve balances, which were required to be held, but also on excess reserves.  Interestingly, excess reserves at the Fed had never been held in significant quantities.  Banks saw relatively little reason to put working capital (beyond required levels) at the Fed.  Excess reserves (as a % of required reserves) had generally vacillated between 5% to 15% and typically under $2 billion dollars, at any given time.
 
However, all this changed upon the implementation of FSRA (which was implemented ahead of schedule in conjunction with Secretary Paulson's Emergency Economic Stabilization Act of 2008 or EESA).  The EESA was formally proposed Sept 21 of '08 and passed into law by Oct 3.  The impact was a shocking increase in excess reserves.  The FSRA law supposed intention was, according to the Fed's Oct. 6, 2008 press release... 
"The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability."
The implication I took from this very convoluted Fed speak was that absent the Interest on Excess Reserves or IOER...that the Fed was concerned that the banks (by banks I mean Primary Dealer banks that directly buy the Treasury's from the government with the intention of reselling the Treasury's into the market) would actually utilize this money?!?  The Fed's intent seems to have been to utilize QE to buy (remove) assets from the banks and then pay the banks not to lend this money, keeping it from entering the economy (chart below).  Still, why would banks go along for this mere pittance of a 0.25% (significantly less than the banks were earning) when the funds could earn so much more if allocated?  When the largest, most influential / connected banks in the land do something that looks dumb with $2.4 trillion dollars, it's pretty clear something has changed and we (I) simply haven't caught up yet.  Was this some fashion of quid pro quo, collusion, or have the rules of capitalism changed?
 
 

 
By September '08 (in expectation of the laws passage), excess reserves had already increased from a couple billion $'s to never seen before level of $59 billion...and up to $800 billion by years end 2008.  Of course, today $2.4 trillion in banking excess reserves are paid to sit and do nothing...while the Fed bemoans a lack of inflation?!?
 

Some Background:

In the US, bank reserves are held as FRB (Federal Reserve Bank) credit in FRB accounts, regardless whether the reserves are required or excess reserves beyond the Federal Reserve requirement.  The definition of reserves (and by extension excess reserves) are monies not lent out to customers to satisfy Federal Reserve set requirements.  One would think holding $2.4 trillion in excess reserves at 0.25% interest during one of the greatest bull market periods in history would be an opportunity cost as higher risk-adjusted interest could have been earned by putting these funds to use elsewhere.  Strange banks were seemingly disinterested in the misallocation of their funds?  Are there new or different requirements placed on the banks regarding reserves?
 
When the FSRA was passed in 2006, required reserves held at the Fed averaged about $8 billion and excess reserves under $2 billion.  As of August '08...little had changed and required and excess reserves still stood nearly as they had in 2006. 
  • Notably, required reserves held at the Fed had been declining from the high water mark of $37 billion in 1988 against then liabilities of about $3 trillion...a 12.5% ratio.  Obviously the leverage in '06 of $8 billion required reserves held against '06 liabilities of $8.5 trillion (less than 1% ratio) may have been a bit aggressive?  By Aug of '08, required reserves of $8 billion were held against liabilities of $10.9 trillion (a 0.7% ratio).
 
Against the Fed mandated declining required reserves, mortgage debt and total liabilities of all commercial banks had grown nearly 6-fold (below).
 
 
However, from September '08, the quantity of required reserves began steadily rising (below).
 
 
But excess reserves held at the Federal Reserve went ballistic.  The previously unutilized avenue of excess reserves at the Federal Reserve continuously rose, housing nearly 60% of all new banking liabilities from '08 onward.
 
 
Only 20% of the new liabilities were commercially lent and mortgage debt outstanding contracted, still to this day.


 

Was the FSRA and Fed's intent to create this massive holding of excess reserves?  The primary discussion prior to the law was around the required reserves and the payment of interest upon these.  And yet, now eight years subsequent to the laws implementation, required reserves are a tiny fraction of excess reserves.  As the chart below highlights, from 2000-->Aug, 2008 (pre-FSRA implementation) essentially none of the new deposits (net) had been placed with the Federal Reserve.  However, with immediate effect post FSRA, 57% of all new deposits from '08 through March, 2016 have (net) been held as excess reserves with the Fed.


 

Also interesting is that absent the utilization of this $2.4 trillion dollars (required and excess reserves combined), equities, RE, and most other asset classes (except the basis of all assets, commodities) have seemingly been unaffected and in fact have steadily risen 200% to 500% despite being starved of the new capital?!?
 
In order to see this phenomenon in it's fullness, the chart below highlights Fed Fund Rate % (FFR) vs. Excess Reserves.  The moment the FFR hit zero interest rate policy (ZIRP) in conjunction with implementation of IOER...this cheapening of credit theoretically should have been met with record new credit issuance but instead at ZIRP, credit began strongly contracting.  Banks stuffed the vast majority of new funds into a the Fed yielding 0.25% annually rather than lend?!?
 
 

The charts below are close ups of what happened with excess depository reserves during the past three recessions.

The chart below of the '91 recession shows the flash of reserves from just under a billion to $2.1 billion and the return of reserves to normal as interest rates were used to further heighten demand subsequent to the recessions conclusion.

 

 
Likewise, the chart below highlights the relationship in the '01 recession and safekeeping of assets associated with 9/11...
 
 
The chart below is the '08-'09 recession (vertical blue box with arrows top/bottom) and as rates hit zero, excess reserves ballooned from $2 billion to $1,200 billion.  And this is where during all previous recessions the Fed continued to push rates down and excess reserves went back to work.  But not this time.  Excess reserves continued to pile up "post recession" as rates did not decline as they had coming out of previous recessions...ZIRP did not turn into NIRP (negative interest rate policy).  The world was not ready for NIRP in '11.
 
 
Further, a massive implication of this quantity of reserves sitting at the Fed is the inability to effect interest rate policy as the Fed has since it's inception...via it's open market operations injecting or removing assets from bank reserves to impact overnight lending rates.  In order to effect rates as the Fed has done historically, the Fed would need to drain the excess $2.4 trillion in excess liquidity to effect an increasing tightness in overnight rates.  Clearly, the impact of draining this excess liquidity would likely be the equivalent of removing liquidity equal to 15% of US GDP.  The impact on equities, RE, bonds, etc. would not be pleasant.
 
*  *  *
 
So, lucky for us, the Fed in it's "wisdom" determined a means to raise rates without removing the excess reserves...or essentially rate hikes and QE simultaneously?!?  Pay the banks a higher interest rate to incent them not to lend the excess reserves!?!  The initial interest rate paid in '08 of 0.25% on a total of $10 billion was a relative rounding error.  Chump change by Federal .Gov standards.  But as the moonshot of excess reserves  headed toward infinity, a 0.25% turned into real money or about $6 billion paid to banks in 2015 not to lend.  But now with the Fed's rate hike cycle(?) underway, the Fed intends to continue hiking the interest paid corresponding to the Federal Funds Rate.  This means in 2016 (at the present 0.5% rate) banks will be owed $12.5 billion to not lend money!?!  Of course, if the rate cycle continues to say, 1% this year and 3% by 2018, and reserves don't decline substantially, banks will be paid about $75 billion annually by 2018 not to lend money (chart below).
 
As a final thought, a quick review of QE (charts below) shows that declining rates (based on 10yr treasury yields) were actually pushed upward during each QE period...and only once the completion date was announced did rates begin falling again.  Ultimately, rates were reduced by 100% from 5% to 0% but no net demand was spurred and instead outstanding mortgage debt has fallen by nearly $1 trillion.  Liabilities have increased by almost $3 trillion of which $2.4 trillion (80%) are excess reserves held with the Fed.

 
And a close-up of the Fed's QE and it's impact on the 10yr rate.  Likewise to the IOER's, the Treasury market yields are falling to century low rates on the absence of nearly all buyers since the abandonment of the BRICS (net) as of 2011 and all foreigners (net) plus the Fed since the completion of the Fed's taper.  These sources plus the fast waning intra-governmental buying via the SS surplus, had purchased 80%+ of all Treasury's since '00.  Now, in these sources absence of making any net new purchases, we are to believe the US public (pensions, insurers, institutions, and individuals) are buying around $50 billion of record low yielding treasury's...and again this has no negative impact on equity markets, RE, etc. etc. and instead all are near record valuations?!?
 
 
In a world in which growth is slowing, is it not strange that the Fed (privately owned by the largest banks in the world) would institute a system of rising payments rewarding banks for not taking risk or lending money!  This all tends to make believe that manipulation is the order of the day and the explanation is far simpler than most would believe, detailed Here.
 
And just in case you were wondering what the relationship of excess reserves, the Fed's balance sheet, and equity valuations looks like...here ya go.

 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Takeaction2's picture

I am trying to find Investment Properties here in Oregon... Good Luck.  Prices are through the roof. JUst got a few small steaks from Costco again...Ribeye..one pack $63.00 Tell me what is deflating besides the dollars buying power?

joego1's picture

Park your capital in PM's and PB. Wait until there is blood in the street and then buy Oregon property at a discount.

Takeaction2's picture

That looks to be the best plan.  I thought maybe there were some deals out there...Too many people moving to Oregone.  GO AWAY...LOL

cheka's picture

right on.  please stop it with the fed wants inflation but cant get it.  they want to limit inflation perception so they can continue the policies that funnel ill-gotten gains to their people

All Risk No Reward's picture

Understand the details.

1. Trillions funneled to Wall Street for free (to them, you get the debt, with interest, bitchez!).
2. They take "free" money and bid up commodities - that's the source of your price increases.
3. Incomes are falling.
4. Government financed and controlled by Debt-Money Monopolists (DMM).
5. DMM has trillions in debt-paper.
6. DMM has trillions in cash in its various mega-corporate fronts.
7. Venezuelan hyperinflation is actually a deflation in terms of Bankster dollars and Euros. The same was true of Argentina's devaluations. Bankster purchasing power WENT UP in these hyperinflations. THIS IS A KEY POINT.
8. Banksters CONTROL monetary policy, NOT THE GOVERNMENT THEY FINANCE TO STAY THE HELL AWAY.
9. WALL STREET CREATED THE CIA... BITCHEZ. SO DON'T THINK ABOUT GOING KENNEDY AND RUINING THE BANKSTER AGENDA... IN THE CASE OF KENNEDY IT WAS BLOCKING THE FALSE FLAG WAR AGENDA REVEALED IN OPERATION NORTHWOODS THAT WENT LIVE AGAINST VIETNAM IN THE GULF OF TONKIN).
10. The DMM will bust the dollar and euro economies so they can asset strip these economies the way they asset strip all countries. THEY WILL NOT HYPERINFLATE THEIR TRILLIONS AWAY BECAUSE THEY ARE STUPID. YOU ARE STUPID IF YOU BELIEVE THAT. "Pretend inferiority," Sun Tzu, Art of War.
11. They may well hyperinflate after they've asset stripped everyone, but it won't matter to those people with nothing or in debtor's prison because they will be wiped out for good.

Poverty - Debt Is a Feature, Not a Bug
https://www.youtube.com/watch?v=juQc0rLdB-E

Income Inequality - Why the Rich Get Richer
https://www.youtube.com/watch?v=ZzCegQVljdY

How Money Works
http://positivemoney.org/how-money-works/how-banks-create-money/

Renaissance 2.0
https://www.youtube.com/watch?v=96c2wXcNA7A

Debunking Money
https://www.youtube.com/watch?v=7_yh4-Zi92Q

richsob's picture

It never ceases to amaze me how people in Oregon will drive a ratty car and have crappy furniture just to have an over priced house that needs to be updated because it looks bad too.  Some of the ugliest homes/houses I've ever seen in my life have been in the beautiful state of Oregon.  Don't even get me started on the women and how they look in Oregon.  Hasn't anyone ever heard of hair coloring, cosmetics or treadmills?

skinwalker's picture

Fuck treadmills. There's little that's as boring as using a treadmill. 

 

I live out in the sticks, and three days a week I walk to the river and back, all through private property, owned by people I know well. It's about 3 miles round trip and beats the pants off an equivalent distance on a treadmill. Plus, it's free, and I do it without headphones so I can listen to the birds. Every so often I'll spot a deer or rabbit or something. 

richsob's picture

You are lucky to have that kind of property to walk on.  I do too and it's heaven to walk hard and not mind it.  I also do a half hour on the tread mill every morning and I go hard as hell so I'm totally winded when I'm finished.  I watch a lot of History Channel and Science Channel programs while I'm on the treadmill so I can ignore the time.  But you're right; for those people who don't have property they should do some serious walking in a park or on the side streets.  I spend good money for a gym membership so I can lift weights too but that's not for everyone.  But walking?  Do it even if you start out slow and can't walk very far.  Do it.

skinwalker's picture

This is just me, it may work differently for other people. 

 

I do all my exercising either out in the woods or in a spare bedroom I have. I bought all the weights, mats and other paraphenalia I need to workout. Is it more expensive than a gym membership? You betcha. However, if I had a gym membership I could find a million reasons why I don't want to drive 45 minutes to the gym to exercise. However, when the stuff it sitting upstairs I have no excuse not to get off my butt and work out. It's a psychological thing. 

 

End of the day, I'm old school. I believe you can get a great workout by doing some pushups or taking a walk in the woods. Would you get a better workout in a gym with high tech equpment? Probably, but a mediocre workout you do every day is still way better than a great workout you do sporadically. 

All Risk No Reward's picture

Look into Body by Science (BbS) - especially for folks who are older who aren't anabolically gifted.

I'm actually looking to lift heavy, so I do BbS and I lift a few reps heavy on day 4. Maybe one or two reps at max - 20 lbs and then two sets of one rep at max. That's it.

The idea is to maximize the signal to gain muscle while minimize the recovery time to get back even so your body can actually add muscle instead of operate in a recovery deficit.

It has worked well so far, but it will be another 6-8 weeks before I can say it worked well enough to help me blow past my previous ceiling using more traditional weight training (lots of sets and reps that required massive recovery).

fiftybagger's picture

Born and raised there.  Dreading going back.  SJW central, land of fruits and nuts.

joego1's picture

Planning for the big one obviously. They know the end game.

Seasmoke's picture

Moral hazard is a bitch....They are afraid to lend it out, because it will not be repaid back. 

NidStyles's picture

More like they are afraid it will ramp inflation even faster than it's already going.

FedFunnyMoney's picture

If all that monetization were to flow into economy, it would be the beginning of hyperinflation.

All Risk No Reward's picture

>>If all that monetization were to flow into economy, it would be the beginning of hyperinflation.<<

Would more borrowing on a credit card result in massive hyperinflation?

Not unless the banks wanted it. If inflation started up, all the banks would do is call in the debts and the money would disappear. This is so simple, yet so few people get it.

You live in a Debt-Money Monopolist Fascist Mega-Corporacratic Empire.

Open your eyes!

The Money Changers figured out how to dupe the masses and game the system.

The politicians are nothing more than rental rhetoricians paid to spew Machiavellian lies for the Debt-Money Monopolists.

They Live - Preacher Speech 720 HD
https://www.youtube.com/watch?v=gWx7Jc7lNLc

PS - It is NOT the Jews. > 99.9% of Jewish people are clueless as to how debt-money works and are mere servants of the system, NOT masters of the system. European Royalty is almost certainly involved, as are the Rockefellers. Some small portion of all Jews are involved, just like some small portion of Western white people are involved at the very top. It is also NOT Zionist. > 99.9% of all Zionists have no clue as to how the debt-money system works. Again, they are servants of the Debt-Money Monopolist system and both Jews and Zionists are not above having their homes foreclosed upon by the Debt-Money Monopolist corporate fronts.

However, there are small groups (think the capstone on top of the partially built pyramid on your $1 FRN - hidden in plain sight) at the top of these groups that are involved in the Debt-Money Conspiracy.

Sharpen your intellectual acumen. Name a thing what it actually is in reality - AND NO MORE. Their agenda is to hide in the forest of over generalization. My agenda is to flush them out so you can see only the criminals oligarchs who control Debt-Money Tyranny.

naiverealist's picture

The purpose of the lending program was merely to recapitalize the insolvent banks.

Jubal Early's picture

The purpose of the lending program was merely to recapitalize the insolvent jew owned bank so after they crash the market again, jews will be able to buy up the rest of the countries wealth at pennies on the dollar.

resaci's picture

FUCKING CRIMINALS - HANG THEM ALL - SHOW NO MERCY

yogibear's picture

Would Pay-Per_Veiw to see the Federal Reserve 12 and Yellen hanged. So would many elderly. 

Kaervek's picture

Go figure.. whoda thunk Mr. Bush would sign something that hurts the american taxpayer? No way.

 

Oh and what is going to happen to inflation expectations once those $2.5 trillion get back in circulation. Lube up plebs, we're all gonna be millionaires.

cheka's picture

bush's fault.  got it.

Ham-bone's picture

Bank lobbyists wrote it for Congress...Bush signed it...Obama instituted it.

Please...no red team or blue team games.

WTFUD's picture

If you don't count the Debt, we're rich!! Whoopee, let's celebrate.

The Fed's favoured Primary Dealers are the envy of Las Vegas and deserve to be immortalised in Caesar's Palace.

All Risk No Reward's picture

>>If you don't count the Debt, we're rich!! Whoopee, let's celebrate.<<

As retarded as it is, you've encapsulated "conventional wisdom."

We are idiots.

SunRise's picture

When you write an article this long,  why not just summarize the conclusions in the first short paragraph,  then provide the facts for those who want to go further?

Ham-bone's picture

Will do and sorry if it drags on...never sure where exactly where to start or finish.

Lordflin's picture

So unless I am missing something, and if I am please explain, as I know many of you are far better versed in these numbers than I am, this is just a direct transfer of wealth out of the hands of the many and into the hands of the few and their kept pets.

As there appears no attempt to disguise the fact either the few believe the many incapable of action or time has just about run out. If it is the latter then what is the point of a few more ones and zeros on the plus side of the ledger?

wedderburn's picture

Central banks in Japan and Europe not paying anything on reserves. Money flowing to American dollar put in safe keeping with the FED for 0.25%

Fuku Ben's picture

Of course they're doing this. That's their goal. Devalue currency, hoard it, manipulate if for their benefit, maximize profit for themselves, destabilize and destroy economies and play their part in ushering in the globalist criminal one world order. Inflation is a low level concern for them.

They, along with other globalist central bank counterparts around the world, have a schedule and if they can't get the economy to where it needs to go by the time that schedule needs to get there we're going to see blatant open attempts to start global conflict to destabilize things and force it there. Although the open attempts inciting international conflict have already started happening anyway.

Everything they've ever printed either originally or through QE isn't theirs to start. It is all stolen and they're treating like they own it.

Of course I do not consent to any of this.

http://www.washingtonsblog.com/2013/06/81-5-of-money-created-through-qua...

Bam_Man's picture

Interest on Excess Reserves is just another way to subsidize the TBTF zombie banks.

So is ZIRP and so is NIRP.

It is all about keeping TBTF zombie banks on life support. Over time, the subsidies required get bigger and bigger.

Look at Japan, which has been doing this for 26 years and counting.

buzzsaw99's picture

...isn't this an indictment of our entire American society? Well, you can do whatever you want to us, but we're not going to sit here and listen to you badmouth the United States of America. [/Otter, Animal House]

Paul Kersey's picture

And yet, the big banks can and do always come up with the money to lend on credit cards @ 15% to 30%, or for sub-prime auto loans on previously owned vehicles @ 15% to 30%, or on student loans @ 8%.  Oh yes, the bib banks will always lend when they can make loan shark money returns.

petroglyph's picture

That is a hell of an article there Chris Hamilton, easy to understand, great grafics and good link. It should be manditory reading by voters. Bravo

hopefulbutwary's picture

Reply to Sunrise. Great idea. These articles are too long.

OverTheHedge's picture

I disagree, but that's just me.

 

To Hell In A Handbasket's picture

These cunts don't give a shit about the little man and deep down we all know it, despite the constant protestations of the rich to the contrary. The elite survive by pretending they share the same basic interests as the plebs. In reality this is a fucking lie. As long as the plebs aspire to be super rich like the elite, we will overlook 99% of their indiscretions including financial crimes, especially  tax avoidance, in the statistical no chance in hell belief, that someday we will be super rich too. Hence the plebs deserve every shafting up the rectum the elite give us, as we consistently and I mean consistently, vote against our best interests.

 

The old adage, "the citizens get the government they deserve" rarely has truer words been spoken. We deserve the Obama's, Merkel's, Hollande's and Cameron's. We deserve the most corrupt and crooked, for as a collective we do nothing about it. How many times have the press and this includes sections of the MSM, declared post 2008 crash it has been the greatest transfer of wealth from the bottom 90%, to the top 10%? Are we angry? Not as angry as we are when minorities have EBT cards and there lays the problem. EBT cards is a drop in the fucking ocean compared to the shafting the American middle classes are getting by the banksters and their political cronies who pass their legislation.

Duc888's picture

 

 

 

.....makin' money the old fashioned way, overnight swaps.

financialrealist's picture

the only deflation the FED is worried about is in financial assets...nothing else matters. the cost of everything is higher, we all know that...banks actually lending the money was never part of the equation  but only to support the banking sector, asset prices, and give the impression the financial markets are functioning normally in hopes the economy might actually recover.  but nothing ever worked, so subsidizing the banking sector has become normal practice. 

Dwain Dibley's picture

Reserves have absolutely no baring upon a bank's ability to generate credit, none, nada, zero zilch.

Reserves are held on a fractional amount of existing demand deposits and are not used in the pseudo-lending process.

The "Money Multiplier" theory, is pure fiction.

The Bank of England Corrects a Widespread Myth
https://billtotten.wordpress.com/2014/04/04/the-bank-of-england-corrects...

Does the Money Multiplier Exist?
http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

“The role of reserves and money in macroeconomics has a long history. Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons. First, when money is measured as M2, only a small portion of it is reservable and thus only a small portion is linked to the level of reserve balances the Fed provides through open market operations. Second, except for a brief period in the early 1980s, the Fed has traditionally aimed to control the federal funds rate rather than the quantity of reserves. Third, reserve balances are not identical to required reserves, and the federal funds rate is the interest rate in the market for all reserve balances, not just required reserves. Reserve balances are supplied elastically at the target funds rate. Finally, reservable liabilities fund only a small fraction of bank lending and the evidence suggests that they are not the marginal source data for the most liquid and well-capitalized banks. Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected. Specifically, our results indicate that bank loan supply does not respond to changes in monetary policy through a bank lending channel, no matter how we group the banks."

Here's a good explanation on how pseudo-loans are actually created.
Basics of Banking: Loans Create a Lot More Than Deposits
http://www.cnbc.com/id/100497710

Banks are not intermediaries between borrowers and savers, they originate pseudo-loans as deposits, irrespective of credited savings accounts or current reserves held.
Banks do not loan money.

Working Paper No. 529: Banks are not intermediaries of loanable funds.
http://www.bankofengland.co.uk/research/Pages/workingpapers/2015/wp529.a...

Legal tender money (cash) is not borrowed or loaned into circulation.
Banks do not loan money.

How Currency Gets into Circulation
https://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html

Applicable Laws and Information.
Federal Reserve Act, Section 16
http://www.federalreserve.gov/aboutthefed/section16.htm

Legal Tender Status
https://www.treasury.gov/resource-center/faqs/currency/pages/legal-tende...

Legal tender Law
https://www.law.cornell.edu/uscode/text/31/5103

Now, we can observe in the Treasury's Legal Tender Status, (a brief synopsis of the Federal Reserve Act) that the Fed must pay for the production of FRN notes, and post collateral of equal value to the notes it issues into circulation. (The Fed assets used as the collateral mentioned, have changed to Mortgage Backed Securities and Treasuries.) Also noteworthy is that member banks must buy the notes at face value from the Fed by drawing down their accounts with the Fed and that, Federal Reserve notes represent a first lien on all the assets of the Federal Reserve banks and on the collateral specifically held against them.

Taking that into consideration along with congress's right to take possession of the notes and collateral upon the dissolution of the Fed, we can infer that, the Fed does not own the legal tender Federal Reserve notes. Combine that with the New York Fed's explanation of how FRNs get into circulation, we can also infer that FRNs are neither borrowed, loaned or spent into circulation.

From this, we can objectively conclude that Federal Reserve notes are a debt free legal tender currency, issued into circulation through the Fed and the banking system, in compliance with their legal obligation to supply that money property, as represented by the credited deposit accounts, to the account holders upon their demand.\


As I cannot prove a negative, the next three assertions require a little bit of effort, they require disproving.

1) There is no law anywhere that grants to the Federal Reserve or the banking system the authority to create money, and they don't.

2) There is no law anywhere that designates or acknowledges the debt based credit generated by the Fed or the banking system as being a legal tender, or money, or currency, or even a medium of exchange.

3) The only legal validity given to the debt based credit, is held by the debts incurred with its use.

If the banking system collapsed tomorrow and all debt based credit !POOF!ed out of existence, all debts will still be valid and collectible even though the debt based credit used to create and service them, no longer exists. See: 1930's Great Depression. 2007-10 Credit Collapse.

The takeaway from all of this should be the realization that, there are two Federal Reserve administered systems in operation and running concurrently within the U.S.:
1) The legal tender monetary system.
2) The Fed and Banks' asset backed, debt based credit system.

Currently, there is only $1.45-Trillion in U.S. legal tender money in circulation around the globe, all the rest is Fed and bankster generated asset backed, debt based credit, not money.

http://carl-random-thoughts.blogspot.com/

Atticus Finch's picture

This commentary has so many inaccurate assertions, that I will only address one of the simpler misstatements. It is preposterous that this person believes."the Fed must pay for the production of FRN notes, and post collateral of equal value to the notes it issues into circulation"

OK, there is no way that the Fed would reduce its profits by paying for the production of FRN notes. That cost is borne by the Treasury and the Treasury must pay for the cost of notes out of the funds given to it by the Primary Dealer banks that win the Treasury Bond auction in the open market operation.

Only a fool would believe that the Fed pays any cost that would reduce the profits of the primary dealers.

Dwain Dibley's picture

Here you go dumbass: Quoting the Treasury:

https://www.treasury.gov/resource-center/faqs/currency/pages/legal-tende...

Federal Reserve notes are legal tender currency notes. The twelve Federal Reserve Banks issue them into circulation pursuant to the Federal Reserve Act of 1913. A commercial bank belonging to the Federal Reserve System can obtain Federal Reserve notes from the Federal Reserve Bank in its district whenever it wishes. It must pay for them in full, dollar for dollar, by drawing down its account with its district Federal Reserve Bank.

Federal Reserve Banks obtain the notes from our Bureau of Engraving and Printing (BEP). It pays the BEP for the cost of producing the notes, which then become liabilities of the Federal Reserve Banks, and obligations of the United States Government.

Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

---

All "profits" collected by the Fed are returned to the Treasury minus expenses.

Rudolph Steiner's picture

Until you can forensic these FACTs, follow the burning FRN's torch and illuminate the faces and chalk the outlines of their motives, we will all just sit here and watch them take... take it all ` like rats ` until sombody finally decides to get a shillelagh and plant themselves above the hole these rats use to get in to this economic bomb-zombie shelter. But this, this is inspired stuff. Thank you! In the meantime ~ RIP a generation's retirements and pensions... it's all so terribly like watching a cynical 'elderly abuse" comedy series on Netflix.

Dwain Dibley's picture

I posted the links that corroborate everything I've stated, read the facts for yourself.

DerdyBulls's picture

"Also interesting is that absent the utilization of this $2.4 trillion dollars (required and excess reserves combined), equities, RE, and most other asset classes (except the basis of all assets, (commodities) have seemingly been unaffected and in fact have steadily risen 200% to 500% despite being starved of the new capital?!?"

This is not and insignificant question. I wish it was answered.  

Jus7tme's picture

>>The Fed's intent seems to have been to utilize QE to buy (remove) assets from the banks and then pay the banks not to lend this money, keeping it from entering the economy (chart below).

What the above quote and the article as a whole does not mention, is  that reserves is the "currency" with which FRB finances QE purchases, that is, it is the currency that funds Quantitative Easing (QE). When FRB buys bonds from a member (client) bank as part of QE, it does not "pay" the bank: It books the payment as an increase in reserves held by the client bank , and the client bank is thus satisfied.

Reserves is effectively a currency of which the FRB can create seemingly unlimited quantities. Note that reserves indeed *IS* the currency of interbank payments. That is, the original and primary reason for having reserves parked at the Fed is to keep the accounting of interbank payments honest.

So what QE really is, is to remove both good (US Gov) and bad (MBS etc) bonds from the open market and credit them all as reserves at the FRB, meaning that these bonds, good and bad alike, serve as deemed-to-be-good collateral for all interbank payments and transfers. As long as the FRB can keep the world convinced that the  collection of bonds backing the reserves is suffciently solid, people will trust the client banks of the FRB to hold their money.

One of the functions of QE then is to hide the risk of suspect bonds behind a curtain of secrecy. How does it work? Well, banks no longer need to worry explcitly whether a specific bond that is offered by bank A to bank B as payment of an interbank transfer (or interbank debt) is "good" at its face value or not. Rather the FRB disperses or diffuses this risk by putting all the bonds, god and bad alike, into one big pot of reserves, a pot on which claims are transferred between FRB member banks as payments.