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.
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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.
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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.
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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:
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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!
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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)
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So the next time someone asks you how it is that the US economy grew by 2.4% in Q1, explain as follows:
- Fed creates some $300 billion in reserves in Q1 courtesy of QE4
- Virtually all reserves are parked as cash at foreign banks operating in the US.
- ???
- 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."