Guest Post: Analyze This - The Fed Is Not Printing Enough Money!

Tyler Durden's picture

Submitted by Alexander Gloy of Lighthouse Investment Management

Analyze This - The Fed Is Not Printing Enough Money!

Before you trash me in the comments, hear me out.

It started off with Ray Dalio’s “beautiful deleveraging”, which inspired this post.

Since the financial crisis, the Fed has increased its balance sheet from $900 billion to $2.9 trillion (red line in below chart). The difference is $2 trillion (or 13% of GDP).

When the asset side of the Fed’s balance sheet grows, so must liabilities. The Fed’s liabilities consist mostly of money in circulation. So we can assume that $2 trillion in additional money has been pumped into the economy.

Or has it?

When the Fed buys bonds, it does so from “Primary Dealers” (21 global financial institutions). They hand over the bonds and get a corresponding credit on their account with the Fed. The Primary Dealers might then purchase some other securities with that money (which then gets credited to another bank’s account with the Fed).

And that’s where the buck stops. Three quarters of the money “printed” never make it into the economy. They remain as excess reserves (reserves in excess of banks’ minimum reserve requirements, blue line) in accounts at the Fed.

Hence, of $2 trillion additional money, only $500 billion (yellow line) ended up outside the Fed. Why? Banks could use those reserves for lending, but there is no demand for additional loans (from customers with sufficient debt bearing capabilities).

So if the money can’t find its way out of the Fed – how is money created then? What is money?

To understand, we have to take the example of buying a car.

In the US, literally nobody purchases a car with money form a savings account. The ability to purchase a car depends on the availability of credit. No credit, no car.

Credit availability depends on issuance of debt. Take a look at debt outstanding by ABS (asset-backed securities) issuers over the last 30 years:

ABS Credit market debt outstanding fell from $4.5 trillion at the peak in April 2007 to $2 trillion. That’s a decline of $2.5 trillion. This is money not available for purchases. It dwarfs the $500 billion pumped into the economy by the Fed.

Debt is money. The amount of debt outstanding controls the amount of money available for purchases, and hence for the size of the economy.

In addition ABS issuers there is debt by households, non-financial and financial corporations as well as the government sector. By adding them up you get the big picture: the total credit market debt outstanding (TCMDO):

TCMDO is the blue line, on a log scale. The red line is the change in the annual growth rate of TCMDO, measured from the prior post-recession peak growth rate. You will notice that every recession over the last 60 years, with the exception of 1970, coincides with a slowing of the growth rate by at least 2%-points. The red triangle depicts the 1987 crash, which followed a period of serious slowing in the rate of TCMDO growth.

Up until 2009, total credit market debt outstanding has never declined. The ratio of TCMDO to GDP continued higher and higher, at accelerating speed:

Has debt-to-GDP, or the debt-bearing capability of the US economy, hit a ceiling?

Look at how little additional GDP (blue area, below) we obtained in comparison to ever increasing amounts of additional debt (red area):

The dotted black line is the marginal utility of debt (right-hand scale). Think of it like this: how much additional GDP do you get out of one dollar of additional debt (in %). In 1992, for example, you get $0.30 in additional GDP for every additional dollar of debt.

Problem: this marginal utility of debt has trended lower and lower over the years, and actually reached zero in 2009.

Meaning: you can add as much debt as you want, and it still won’t give you any additional GDP.

To repeat: no amount of additional debt seems to be able to get economic growth going again.

That is a dramatic revelation. We might have reached the maximum debt-bearing capability of the economy. If true, no growth is possible unless debt-to-GDP levels fell back to sustainable levels (in order to restart the debt cycle). This could take years.

At this point, the only way to reset the debt cycle is to get rid of debt.

Ray Dalio correctly describes the three options available:

1. Austerity: this would be painful and take quite some time (the Europeans are going down this path)

2. Restructuring: requires write-downs and losses for bond investors (which are not being allowed to happen for fear of systemic risk)

3. Printing money: Inflation. Better yet: hyper-inflation. You have to destroy the value of debt fast enough before debt service costs, due to rising interest rates, drive the government into insolvency.

In the US, (1) and (2) are not happening. That leaves (3).

As shown above, the amounts needed for the Fed to be able to create inflation are much, much higher than what we have seen so far. And it is not guaranteed to work. Destroying the trust in the value of a fiat currency is a dangerous experiment with mostly adverse consequences.

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Papasmurf's picture

Glass-Steagle should have been reinstated as the first step.

Precious's picture

They need more financial engineers to oil all the presses.

flacon's picture

PeeH Dee, baby! From an acredited university of course. 

Pinto Currency's picture


The only workable solution is a debt write-down to get debt from 400% of GDP down to 200% and return to sound money (gold).

This would wipe out the banks and those that now control the system so it's not going to happen.

So we get chaos.


economics9698's picture

The traditional GDP/debt ration on gold was about 150%.  Now we are at 350%.  The reason you do not see a corresponding increase in GDP with moiré debt is because of malinvestment.  Governments, housing booms/bust, NASDAQ boom, S&L boom and bust all siphon off resources from productive uses to unproductive uses that must be liquidated for the economy to reallocate those resources and continue on a path of real growth.

In other words there needs to be less credit for more productive economic growth.  A fixed credit supply, gold, would allocate money and time effectively, higher interest rates during the booms, and lower during the bust. 

When capital is allocated efficiently productive projects get build and unprofitable ones do not.

I hope this helps.  Ludwig von Mises explains it a lot better than I do.

boogerbently's picture


"When the Fed buys bonds, it does so from “Primary Dealers” (21 global financial institutions). They hand over the bonds and get a corresponding credit on their account with the Fed. The Primary Dealers might then purchase some other securities with that money (which then gets credited to another bank’s account with the Fed)."

As soon as the "primary dealers" (GS, JPM, DB...) reinvest that $$$ into another banks acct., they are no longer LEGALLY liable to repay it. Neither is the "other" bank, even if they KNOW that money was stolen, and who it was stolen from.....see Sentinel court decision.


fourchan's picture

Number 3 or any inflation for that matter is off the table also because the fed only considers wage inflation in its decisions, and we have shipped all our wage earner's pricing power over seas to the slave nations of the world. The fed preys for inflation that will never come and does policy based on flawed philosophy.

But what I see as flawed is their perfect program of capturing assets and means of production through boom and bust cycles it creates and enslaving the population to debt through mortgages, credit card loans, student loans, and car loans.

I wonder what the fed will do for its centennial celebration? kill off its slaves?


CompassionateFascist's picture

T'sall nonsense. Debt is our most important product. More debt, more product.

Muppet of the Universe's picture

Just to clarify for the muppetry and noobs:  this crisis is by design.  Pure and simple.


So how to get out of shitfest?  too bad, it's too late, by like 30-40 years.

mathematical: collapse is a cerntainty.  119 trillion in us liabilities?  LOL yea that's not getting paid w/o epic printing.


So question is, how to proceed after the collapse?


Solution?  Kill all muppets.  No system of governance can work with people who are not even smart enough to elect people who won't sell them down the river.

Establish a weak system of military defense, and general law with use of arbitration for disputes.

Weak law will prevent robber barrons and leeching.  Strong law will become abused by corruption.


Secondary solution? 

Well, step one, fuck B.M. Keynes.  Fucking retard, or good conman of muppets.

Step two, return to retarded system of resources = infinite.  (don't like it?  Should have gone with solution 1)

Step three, system will collapse when raw materials are all used up.  Until then use PURE capitalism with minor controls on environmental safety.

No regulating body can stop the sale of anything harmful to humans, unless it is harmful to the environment.

Use independent ratings agencies to establish product credibility.  capitalism will flourish...

then resources run out, lol then game over forever.

Should have gone with step 1.  Lose the dead weight.

Element's picture

Don't want to be a wet-blanket but I'm pretty sure hyperinflation will create far more problems than it solves, some of them potentially extinction-related.

WhiteNight123129's picture

THe Author is off big big time on his analysis.

~In the US, literally nobody purchases a car with money form a savings account. The ability to purchase a car depends on the availability of credit. No credit, no car.~

That is where the author is off. The anomaly is the following: "In the US literally nobody purchases a car with money from a savings account".

This is anomaly is in hte process of being rectified. I think both Bernanke and the author confuses circulation and capital. The circulation is impacted by wages, only a rise in wages will promote a general rise in prices (as opposed to bifurcated prices). The reason soft commodities rise in price is that there is competition from emerging markets being industrialized, along with irredeemable currency working its way slowy down those. So out of hte printing of BErnanke a tiny portion goes into wages and a lot into capital, where there is too much of it. The capital uses credit instrument and capital transaction in B to B, and hte consumption is using circuation. There is a skinny labor and a fat capital. The labor is skinny because there was repression of wages both in the US and in China, theer was a forced consumption through fiat, all of that makes the capital gain in the short term, but  as Adam Smith and Tooke point out, there can never be more dealers transaction that what they ultimately serve which is the consumer. So now the consumers can not sustain artificially consumption that the Capital tried to goose up. So there will be massive capital destruction one way of the other, either through total deflation or through wages inflation and stagflation where the capital is forced to raise wages and real profit (not nominal) actually go down. That would either bring a Gold/Dow ratio in favor of Gold.

Only a rise in wages can promote inflation, Bernanke is increasing capital not circulation, and the capital is sitting idly or going into mergers (which do not produce anything, similar to what happened before Weimar hyperinflation and in the conglomerate boom of 60s, 70s).That being said irredeemable currency always always produce but it needs to be spent to permeate the economy (war, or large keynsian expenditures).

I suggest that the author revists Thomas Tooke and the anti-bullionist/ currency school. The banking school of Tooke and Fullarton are teh real deal. THey advocate large bullion reserves and let the market decide when alternate bullion commodities are in demand for money and avoid Bank of England meddling. Keynes is not off, he is just a devilish man who understood how to please governments and crony capitalism which leaves no capacity to the people to decide if they wnat to save or spend without being forced to it by irredeemable money.


Fiat is like Gold (no redeemable in anything else), with the difference that someone controls the quantity produced ad libidum which hurts a lot of people and favor those who anticipate. The banking school is the real deal, they advocate keeping a large quantity of Gold and Silver and let the necessity of hte economy dictate the increase of decrease in circulation, and they are actually against manipulation by the Bank of England. According to the Banking school (anti buillionists anti currency school,) the paper currency which is as good as gold is the Bill of Exchange, or the receivable for actual work in the economy which is endorsed from supplier to another supplier for 90 days until Gold at the end of the 90 days extinguishes the chain of receivables. It is the multiplier in the economy, the paper money without any leveraged bank counterparty and a mutual funding of the Grain dealer to the farmer to teh Grocer to teh baker in chain of mutual funding without charging any interest!!!!  There is no spread charged, the actors of the economy fund each other at no cost. This a mutual, lever free, peer to peer lending system THat is the non banked ultimate safe paper currency because tehre is no leveraged counterparty and there is a multiple guarantee of as many people who have endorsed the bill of exchange.So obviously the banking system does not like this system, it is an enormous competition to its system.

If in a banked system (preferably without central bank), the paper circulation should always be redeemable so that the economy decides teh want of circulation and noone can stuff the economy with unwanted circulation medium.





Muppet of the Universe's picture

wow. Where past attempts to control the muppetry throughout a collapse have failed:

Science comes to the rescue in the form of "socially acceptable" austerity measures...

Mmmm, GMoooo

(edit:  I'd follow this guy's lead, cus the muppets are way too stupid to figure out this gmo nightmare is really austerity)

(disclosure: long 3d printing tech companies since 2011.  It's the future, pure and simple.)

savagegoose's picture

yeah but to print steak, you need to fill ink   cartrige with 1/10th juiced cow.

qqqqtrader's picture

Actually we do need more jobs, just about the biggest problem this country faces...

Population and Employment Level

Muppet of the Universe's picture

woa woa woa.  You are mistaking the purpose of the Fed because this author is really stupid...  Glass steagal would NEVER be repealed.  That would fix things.  See this moronic author has you misinterpreting the goals of the Fed: fixing things is not the goal.  To the moronic author:  No fucking DUH!  You think this fact hasn't crossed the Fed's mind?  QE is about keeping banks stable through their ongoing insolvency!  Seriously, how the fuck did buying the stock market outright help the economy?  You're just figuring this out now?  Stock market does not equal economy.  It is a money extration tool for the wealthy and intelligent to "get theirs" before the SHFT and hunger games becomes a reality.  You know what would help the stupid fucking economy?  Not printing any more money!  You stupid fucker.  wage stagflation + monetary supply inflation = reduced real incomes = reduced economic flow.  Butt Fucking moron!

Stackers's picture

Hello $1,000,000,000/oz SILVER !!!

THX 1178's picture

Hello $400,000,000 gallon of gas.

Stackers's picture

Thats 25 gallons per oz. Much better than the 7.5 gallons per oz of today. Sounds good to me.

kaiserhoff's picture

Uh, Dudes, hyper-inflation wipes out debt.  It does not change relative values among durable goods, and/or commodities.

There are plenty of good minds here, but work with first principles.  These experiments have been run. 


And that's 2.5 gallons/ounce...  OUCH!  As my friend, Dr D used to say, "smart kids should get computers.  Dumb kids should get pencils and a piece of paper."

CompassionateFascist's picture

That's not all it's going to wipe out. The new currency will be bullets<-------->lives.

ultraticum's picture

"hyper-inflation wipes out debt."


Money = debt


.'.   Hyperinflation wipes out Money (FRNs)

But there are also wealth cycles that come into play between commodities, which will be exacerbated during hyper-inflation.  Example:  as soon as the former day-trader former real estate flipper muppet next door realizes it's party time for hyperinflation, a pre 1965 half dollar will fill up your bug out vehicle's tank.  Reason:  A parabolic price move will be in the commodities that are rare, durable, divisible, uniform (fungible), and portable.  Gold, Silver, Platinum.  So all other factors being equal, the massive unleashed demand for a commodity that is also MONEY will do relatively better and buy MORE of the other commodities.  The Chinese understand this well.


kaiserhoff's picture

Yes and No.  Money does NOT equal debt.  Real money is useful for current exchange.  Debt is/will be ancient history.

I agree that those who see this coming will have interesting arbitrage possibilities, but that's not forever.  While I like PMs as a universal, durable, portable medium of exchange they have no permanent advantage over guns, farm land, tractors, or cattle.  In fact, quite the opposite is true. 

There are many scenarios, and endless possible end games, but for PMs to have lasting, real value implies a relatively stable community, well defended, and with rule of law well established.  But it's all better than Benny-Bucks, so happy trading.

... and the Chinee kleptocrat understands portable.  Enough said.

Vendetta's picture

world oil production: ~27 billion bbl/yr

world gold production: 2500 tons or 80 million oz/yr
world silver production: 700 million oz from mining, approx. 200 million oz from recycling = ~900 million oz/yr

normalizing gold oz to silver oz at a 40:1 (extremely conservative): 80 million oz x 40= 320 mil/oz

silver + normalized gold oz = 900 + 320 million oz = 1,220 million oz annual production rate or 1.22 billion oz/yr

world oil production / normalized world precious metals production = 27 billion/1.22 billion = 22 bbl oil per oz of precious metal

so try barrels per oz (22 playing with numbers), not gallons per oz.

YuShun's picture

or maybe 2.5 gallons per ounce.

Caviar Emptor's picture

@Muppet: You win today's distinguished award from Biflation Nation. 

Fed never expected it but they have reached an endpoint where monetary expansion no longer creates just inflation. It creates inflation AND deflation at the same time.


We all know what inflates: everything you need (cost of living and doing business)

We all know what deflates: real median income, net worth and business margins. 


When the cost of working and of doing business rises but the ability to pass on costs is no longer operational then you get biflation. It accelerates when both workers and businesses are locked into yesterday's cost structure (and debt) in today's environment

Workers have to pay more just to get to work (transport, tolls, auto expenses), stay at work (food, clothing, fees and licensing, credentialing costs, cost of staying healthy, child care) and make work pay (zero interest on savings, rising taxes). 

Businesses contend with rising costs from overhead, raw materials and inputs, operating expenses, but can't pass on the extra cost to squeezed consumers, which compresses margins. 

Wash rinse repeat and voila, a biflationary spiral. The numbers will gravitate toward zero: CPI, PPI, average hourly earnings. But "productivity" will sky (because people are working more for less) and prices paid/received will compress. 

centerline's picture

In hypertiger terms, economic cannabalism of the underclasses to support diminishing yield.  Scary how much of his ramblings look true.

Muppet of the Universe's picture

I think what everything he just said equates to is a mantra repeated by Taleb and Zerohedge endlessly:

On a long enough timeline, everything returns to 1:1.

Dr. Sandi's picture

An even bigger problem is that many of those hard-pressed workers will no longer have jobs under a hyperinflation scenario as most businesses will be hard pressed to keep up with the cost of doing business vs. the cost of being paid for their product.

Margins can't really be compressed past zero for very long or the business becomes a hobby.

KickIce's picture


Which brings us to option 4, hang the SOBs.

akak's picture

Yes, the Fed is not printing enough money ....



April Fool's!

vast-dom's picture

fantastic post! thank you.


the sane thing would be to use a combination of the 3 points and not think in either/or terms, with point 3 being the one to avoid at all costs since velocity of M2 is dead anyhow...if we were to project total debt to gdp in the above chart we could have some seriously grave plunging -- this is what happens when "unconventional" central planning measures become conventional yet with no comprehension of possible repercussions. and i believe the start (yellow dot) and end (green dot) of 2008 recession is inaccurate esp if you factor in said projection...

And maybe Okun's Law isn't the most accurate measure, but when you factor in true unemployment at well over 15%, declining wages and NIRP you also need to take into account that consumer debt becomes essentially impossible to generate, which further compounds the GDP decline in "real" terms, whatever that is today...and your above red total debt line plunges over time post 2012...

maybe some here would make an arguement that people on food stamps could buy a car from savings since they don't spend on food. what idiocy today up here in da ZH. GOLD STARS to all that bought their cars from personal savings! Congrats you are the minority that wouldn't impact the above charts in any measurable way!!! Brafuckingvo for being right!

SafelyGraze's picture

".. the start (yellow dot) and end (green dot) of 2008 .."

1790-1834 : 44 yr, of which 33% in recession 
1843-1927 : 84 yr, of which 45% in recession 
1928-2009 : 81 yr, of which 20% in recession

if post-federal-reserve banking practices artificially lowered the recessionary periods from 40% to 20% (on average), then that leaves an unrealized 20% over the last 81 years still in the pipeline waiting for recessionary clearing.

16 years of recession overhang

fourchan's picture

now we know what the "system" part of their name means. seems to be working perfectly.

vast-dom's picture

generating new consumer debt is going to be nearly impossible over time. the graph for non-payment of credit cards will shoot up or we will have a housing-like stall of banks going after delinquent accounts a la shadow bankruptcy stock in limbo. interesting times for sure.

WhiteNight123129's picture

It is a shitty post, the author confuses circulation and capital and lump that together as "money".There is littel increase in wages (the circulation) and hte increase in capital is sitting idle and not converted in wages. Eventually when the infrastructure gets really poor, corporation will be forced to spend the capital and convert that into wages, and then inflation will go somewhat biserk.

Though some his arguments are correct. The Fed believes it is stimulating the circulation, while in fact it is increase the quantity of capital (while we are capital fat and wages skinny). The Fed believes it is creating inflation by lowering rates which it creates a dangerous deflation and resulting hyperinflation. The Fed does not know how it could stimulate wages without putting more debt on the consumers (which it tried before and that was a disaster).


Hannibal's picture

When the "solution" becomes (is) the problem its down the rabbit hole fast.  This imaginary "debt" never existed in the first place but fabricated with a magic wand out of thin air and then "monitized" by your labor (the bankers dirty little secret).\

Complete debt forgiveness/writeoffs is the only way.

akak's picture


"In the US, literally nobody purchases a car with money form a savings account."

Really?  LITERALLY "nobody"?
Not ONE single person buys a car with their OWN saved money in the USA?

I guess that the purchase of my current vehicle, made entirely with my own SAVED money, never really happened, because some crank named Alexander Gloy says so.

Oh, and then there was this gem of idiocy:

Debt is money.

No, you fool, all debt is NOT money, merely because our 'money' (Federal Reserve Notes) happens to be issued as debt.  This is the same egregiously simplistic, and erroneous, assertion made by every other deflationary flat-earther, but it is still wrong.

Stick a fork in this idiot's credibility; I have already read enough to dismiss this fool.

vast-dom's picture

debt was once upon a time money, when there was something (of measurable value) backing both the debt and the money. that is in some way the point of these charts.

brutus keynesius's picture

Nobody with any sense would purchase w/savings.

akak's picture

Before I rescind your red arrow, care to explain why NOT going into debt is without sense?

centerline's picture

Is all a gamble I think.  Debt - no debt.  Clean title.  I had to replace a car recently and decided to take the 0% for 4 year deal - but have the cash in savings to throw at it in an instant.  Or, if things go the other way, run out and deploy it before it is worthless (hoping ZH gives me a 24-hour advantage).  Or live off of for awhile longer if we wind up in some other wierd place... and say "fuck it" come get my car if you want.  Note though that I DID pay for my wife's car in cash because I wan't to have at least one that is MINE.  Her car is the one that is bigger, more powerful, etc. in the case I need to leave in a hurry.  Or wind up living in it (lol).

Seasmoke's picture

thats called an auto hedge

smiler03's picture

 "I had to replace a car recently and decided to take the 0% for 4 year deal"


Here in the UK you would get a discount on the new car for paying cash. Thereby making your 0% discount look expensive. Surely the same applies in the US?

centerline's picture

Not when I went - but I don't aim for luxury vehicles either.  The incentive was the 0%.  Even if there was a discount, one has to weigh the risk in giving up leverage.

Kalevi's picture

In my case, to have cash available in case of emergency, where I live, it is a fact of life that cash is king.

But go into negative overall balance is something I will never ever do again.

Beam Me Up Scotty's picture

I beg to differ.  Instead of paying $10,000 for your car, you are paying 12 or 13,000 since you are also paying interest.  By paying it out of savings, if the interest rate you are paying on that $10k car is say 5% you are in effect saving all of that interest payment---in effect paying yourself that interest not the bank.  And the government doesn't even get to tax you on that amount that you saved.  On the other hand, if you took out a 10k loan at 5% and got .1% interest on the 10k you left in your bank account instead of paying for the car outright, you are giving that money to the bankers instead of yourself.  And to top it all off, you have to pay tax on the .1% interest that you earn.

Most people who are poor are debt slaves.  They have to take on ever higher loads of debt, which eats into their disposable incomes, which means they have to take on ever MORE debt.  And most of the debt they take on is to buy shit that doesn't last and you can't eat any of it.