July 09, 2008
– Comments (14)
So basically there is no free money to lend or what?
Right, except for the free money they make out of paper and ink. Only trouble is, while it's free for the Fed, it's anything but free for us. There are major consequences to interventions of this magnitude, and in this case inflation will be the most palpable consequence for the average consumer. The degree of dollar devaluation ensured by such irresponsible practices, furthermore, has global ramifications.
By "free reserves" you mean nonborrowed reserves?
Better be careful that you truly understand what the numbers mean before investing based on them.
If I understand the nonborrowed reserves issue, it is a simple arithmatic difference between what they call required reserves (reserve capital that banks are required to hold) and the amount of money borrowed from the Federal Reserve. Anyone please correct me if I'm wrong.
Banks are allowed to lend money that has been borrowed from the Fed. In fact, that is the point: to minimize credit shocks. The fact that the borrowed money is larger than the reserves (which must be at least 10% of loans outstanding?) doesn't necessarily mean anything is insolvent. It just means the Fed is a more attractive or more willing source of funds.
Comparing total reserves to required reserves is a more useful metric to determine solvency.
Like I said, correct me if I'm wrong. I may well be.
But if I understand it correctly, it looks to me like the Fed is trying to fight off a credit contraction. Credit contraction = deflation.
I'm not arguing we're in for a deflationary collapse, but I'm saying that if I understand this correctly, it is a deflationary pressure, not an inflationary one. And being on the wrong side of the inflation/deflation argument could be disasterous to a portfolio that is not fully diversified (like mine).
In fact, your chart shows the similarity between the current situation and the early 1930's would support the deflation argument.
Can someone who understands banks better than I do please help?
Ron Paul Schools Ben Bernanke Yet Again 2-27-08
You're absolutely right about what the chart is displaying, and I will point out to the chart's creator that the use of 'free reserves' in the title could be misleading. But... I disagree with your interpretation of what the data communicates. Normaly, a credit contraction would be deflationary, but not when the Fed steps in with unprecedented injections of liquidity. In order to stave off a massive credit contraction, the Fed has lent to the banks $124 Billion more than the $41B they are required to keep on reserve within Fed accounts, for a total outflow of $165B. Bernanke has announced the facilities, now in the $150B area every 2 weeks. This TAF is only half the picture, too. There's the TSLF as well:
Federal Reserve ActionsThe Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.
In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.
The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.
Add to this the $150+ Billion economc stick-it-to-us package, out-of-control war spending by the Treasury, etc., etc. ,etc... and trust me... this is not a deflationary environment. The lending facilities, for pumping reams of new money into the banking system, is purely an inflationary pressure.
Thanks for the clarification on the confusing chart title, though. And as always, thanks for the debate. :)
I am a bookseller by trade. I can read the chart. FDIC only has more or less 50 billion dollars on had for the entire nation. So... They can't even cover the top 5 banks. chase, bank of amer ect. Not to mention Goldman Sacks and what not. We now have a reported housing debt of over a trillion. + 50 bill -1 triil.= we have no money and The central bank ( FED ) don't want you to wake up and realize that the country and the banks are BANKRUPT. Why do you see all the television stories tell you to save. To give the banks more money to do what? Cover losses? We are not quite there yet but it is almost 2 times as bad as the last depression. 1 run on one large bank say Chase would wipe FIDC insured out. That is what keeps BEN at the FED up at night in my humble thoughts. I love gold rings because when the crash comes you will be able to sell the gold jewelry little by little to buy food. Trust a Bank? No way my mama didn't raise no fool.
Yikes that is one uglllyyyy graph
Am I reading this right? Is is really predicting a depression worse than the 1930's?
Holy Hannah Montana....
If you'll permit, I'll continue the debate.
I agree that the Fed's actions are inflationary. But the question is: Will the Fed's actions be able to counteract the deflationary pressures in the credit markets? Or will they go too far and create inflation?
I'm not sure how this will play out, but I'll play devil's advocate for a minute. During the Great Depression, we had monetary expansion and the government defecit-spending, but the velocity of money fell dramatically and credit was, for the most part, unavailable.
Why? Best I can tell, it was wreckless lending practices, believing that asset (especially stock) prices could only rise and defaults would remain low. When borrower's were unable to repay credit collapsed, causing a deflationary spiral--despite increases in money supply. Frankly, banks didn't have the money to lend. And our banks have been forced to raise capital repeatedly.
The government doesn't have the power to force credit to expand. You can't force people to borrow when the public is worried about job security and is having trouble servicing their existing debt. You can't force lenders to lend to high-risk borrowers or those without unpleged collateral.
I'm no scholar of the depression, so correct me if I'm wrong. And I do not believe we are in for a depression. Just that the potential exists.
Anyway, money supply expansion isn't the only factor. Monetary scholars tell us that you need a rise in wages in order for people to be able to afford the more expensive goods. That, or credit to expand. Credit spends like actual money. Without rising income or credit, demand destruction takes over and prevents prices from rising. I don't buy that China is going to take up our slack. They're heavily dependent on us and Europe, and Europe is struggling as well.
I find no evidence that wages are rising. Everything I see signals that credit is contracting, though it is arguable as to how much it is contracting.
On the other-hand, the falling dollar is inflationary. Most deflationists conveniently ignore this fact. That's why for a long time I've said companies will see serious margin pressure. Input costs are rising sharply, yet consumers as a whole don't have the means to absorb the costs when businesses pass them through. This is very bad for the stock market, which has traded at an average P/E a bit on the high side as it was.
But, as I mentioned before, I think the rest of the world is going to struggle, too. So I'm not convinced the dollar will slide forever. If it stops, that will relieve much of the inflationary pressure.
I still have money in natural gas and metals, so I haven't jumped over to the deflationist camp. But looking around at my friends, most of them are not able to absorb many more price increases before they become personally insolvent. I think that puts a limit on inflation as a whole. Not necessarily one specific segment like food, energy, etc. But as a whole, they are already being forced to cut back purchases, crimping demand.
On a somewhat related note, the price action of crude oil this week has been interesting. An almost $10 drop in two days, then a penny rise after the weekly report showed a surprise inventory drop. The end of a bubble? Or a bull-market correction?
"Anyway, money supply expansion isn't the only factor. Monetary scholars tell us that you need a rise in wages in order for people to be able to afford the more expensive goods. That, or credit to expand. Credit spends like actual money. Without rising income or credit, demand destruction takes over and prevents prices from rising. I don't buy that China is going to take up our slack. They're heavily dependent on us and Europe, and Europe is struggling as well."
Money supply IS the only factor. The inability of wages to keep up does not turn inflation into deflation. Take a look at the best case of stagflation the world has seen in the fiat era: The Weimar Republic.
"On the other-hand, the falling dollar is inflationary. Most deflationists conveniently ignore this fact. That's why for a long time I've said companies will see serious margin pressure. Input costs are rising sharply, yet consumers as a whole don't have the means to absorb the costs when businesses pass them through. This is very bad for the stock market, which has traded at an average P/E a bit on the high side as it was."
Agreed... the falling USD raises prices for U.S. consumers substantially. And the trend for the USD, both technically and fundamentally, is fully intact. How long do you think ntions will continue to cooperate by taking on enormous supplies of USD into their reserves in exchange for goods. The undesireability of the USD is as much a reason for Russia's move to limit foreign ownership of key industries as it was a move to stake a claim on strategic resources.
China is raising interest rates, the ECB just raised and will continue to raise despite their playing along with hawkish rhetoric. U.S. demand can crimp all it wants.. it will not reverse this hyperinflationary tragedy for which the curtain has already been raised. Thanks for the debate... stay long commodities, but as it matures more stick more and more closely to the items people absolutely need... ag., water, energy, and gold and silver in place od USD.
Money supply isn't the only factor. You forget money velocity. And if people aren't making money or borrowing it, money doesn't move around.
I'm not saying that you cannot overcompensate by running the printing presses nonstop as they did in Germany. I'm just not sure that the Fed's lending facilities necessarily mean we're in for inflation or hyperinflation, or if they just offset or partially offset the deflationary forces at work. In fact, I think the Fed recognizes these forces and that is why they are trying as hard as they are to keep the inflation/deflation situation neutral. Do I have faith they will get it right? Nope.
Bluntly, my opinion is that when someone cries "Inflation! Inflation!" or cries "Deflation! Deflation!" they are usually only looking at part of the picture.
And above all, I love the debate because it sharpens my understanding of the situation.
If you go to the labor department web sight and go to their inflation caculator you will see that in 1970 your 100.00 dollars would need to now be 558.33 to buy the same amount. I am looking at super hyperinflation. ( Real average weekly earnings fell by 0.4 percent from April to May after seasonal adjustment) 0.4 in just one week. ( from May 2007 to May 2008. After deflation by the CPI-W, average weekly earnings decreased by 1.2 percent.) Unemployment Level: 7,078,000 for 2007 what is it now? "The risks to inflation are likely not symmetric and they have definitely increased. We cannot and will not allow a wage-price spiral to develop," she said. Yellen is not a voting member this year of the U.S. central bank's Federal Open Market Committee, which sets monetary policy. Is the Federal Reserve Solvent? Not without the printing press! Printing money = Inflation. At the rate they're going... hyperinflation If the Federal Reserve is not solvent then that meens the country is not solvent. They do not have the gold to back up the money. The country is bankrupt.
Thanks iguadland, I appreciate the debate too.
Government statistics on labor and inflation? Useless lies.
Words uttered by Fed mouthpieces? Useless lies.
The point on which we agree?
"If the Federal Reserve is not solvent then that meens the country is not solvent. They do not have the gold to back up the money. The country is bankrupt."
Inflationary depression inside the USA, solved by the globalist with the North American Union and Amero
Deflationary depression everywhere else.
Green Zones all over the US, separating the 1% from the rest of us. Just imagine what cool technologies they bring home from war to control the peaceful protests.
Wont be long now.