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Source link: http://archive.mises.org/12541/are-the-excess-reserves-finally-leaking-out/

Are the Excess Reserves Finally Leaking Out?

April 22, 2010 by

For a while I have been warning that one way the (price) inflation genie will get out of the bottle, is that banks will take some of their incredible excess reserves and buy Treasury debt (as opposed to granting new loans to customers). The trillion+ that Bernanke has injected into the banking sector would then start trickling out into the “real economy” via federal government spending.

So you can imagine my alarm when I read this story from CNBC:

Surprisingly strong Treasury auctions in March had help from banks, which normally stay away from such events.

Banks snapped up $5.7 billion of the total $34 billion auctioned in 10-year notes and 30-year bonds, providing demand for auctions that many analysts thought would flop…

“The pattern suggests that banks have been starting to put their large cash balances to work, but is not an indication that bank balance sheets as a whole have started to grow,” Deutsche Bank said in a research note.

The suggestion is that banks are using Treasurys as a way to get some return on their money that they might otherwise reap from making loans.

Yet combined with their purchase of agency-backed debt such as mortgages and student loans, banks bought a total of $40 billion from the Treasury in March, according to analysts at Deutsche Bank.

But there’s also another less-obvious reason banks could be stepping in to the Treasury market: A type of tacit quid pro quo with the Federal Reserve to keep short-term rates low by helping the government finance its debt through Treasury auctions.

Art Cashin, director of floor operations at UBS, noted after the 30-year auction suspicions among traders about who was doing the buying. In remarks to CNBC, he spoke of “all manner of conspiracy theories floating around. Is the Fed putting on a fake moustache and a raincoat and coming in as an indirect buyer?”

While there’s disagreement among analysts whether the actions are part of an explicit pact between the two sides, some suspect a gentleman’s agreement in which both sides benefit.

Now here’s the really interesting thing: Excess reserves fell about $41 billion in March. I don’t have the time to check all the possibilities, but it looks to me that my doomsday scenario is starting to play out.

{ 56 comments }

Bennet Cecil April 22, 2010 at 5:01 pm

The best way to prevent runaway inflation and to stabilize the US financial system is to force banks to hold treasuries and cash. We should end fractional reserve banking.

Jeffrey Tucker April 22, 2010 at 5:13 pm

That is absolutely chilling. Check out too the largest monthly food-price increase since 1984 http://www.bloomberg.com/apps/news?pid=20601110&sid=aodo4KKRlcJY

Poptech April 24, 2010 at 2:02 am

Pure insanity,

“Inflation remains subdued,” said Joseph Brusuelas, president of Brusuelas Analytics in Stamford, Connecticut. Limited price pressure “provides an extraordinary amount of comfort to Fed policy makers. They can stay on hold well into 2011.”

Nielsio April 22, 2010 at 5:27 pm

At least we’ll all be very well dressed!

Giant_Joe April 22, 2010 at 6:17 pm

I don’t know about the well dressed part. But at least we’ll have more colors than just black and white!

Jay April 22, 2010 at 7:14 pm

Wouldn’t this be a case of the Fed indirectly monetizing the debt?

cret April 22, 2010 at 7:30 pm

“That is absolutely chilling. Check out too the largest monthly food-price increase since 1984″

are these govt figures? is there a shadow stats for that???

are the excess reserves even true?? if you have what i guess is more paper than fed regs require is that ‘extra’ part’ a reserve of just the bank keeping more cash from deposits…due to fewer loans?//

JL Bryan April 22, 2010 at 8:06 pm

So, with fractional reserve banking, this could eventually become nearly half a trillion new dollars? With trillions more to come…that’s a lot of deficit to finance. And you know the deficits will only get worse each year.

cret April 22, 2010 at 8:18 pm

also, what particular fed actions-regulations/banking phenomena leads of have lead to ‘excess reserves”???

do individual bank hold the excess reserves or does the federal reserve?
does a reduction in overall bank lending lead to additional paper-dollar accumulations???

Mitchell Powell April 22, 2010 at 8:19 pm

Fun stuff. Supposing that the nightmare scenario Robert Murphy laid out comes to pass, what sort of preparations would you all recommend? Just curious.

Jon O April 22, 2010 at 8:28 pm

If banks were putting excess reserves to use you would see them drop faster than total reserves. By loaning/investing excess reserves into the system other banks are then required to hold some of those reserves to back the new deposits; therefore the aggregate level of excess reserves will fall while total reserves remains the same. Another way of saying it: as bank balance sheets expand, and new demand deposits are created, required reserves must rise to “collateralize” them.

Here’s a chart of Total Reserves vs. Excess: http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=TOTRESNS_EXCRESNS,EXCRESNS&transformation=lin_lin,lin&scale=Left,Right&range=1yr,1yr&cosd=2009-03-01,2009-03-01&coed=2010-03-01,2010-03-01&line_color=%230000FF,%23006600&link_values=,&mark_type=NONE,NONE&mw=4,4&line_style=Solid,Solid&lw=1,1&vintage_date=2010-04-22_2010-04-22,2010-04-22&revision_date=2010-04-22_2010-04-22,2010-04-22&mma=0,0&nd=_,&ost=,&oet=,&fml=a,a

Excess Reserves are primarily falling because of the significant drop in borrowed reserves(from a normalization of the credit markets and bank balance sheets) as the fed is curtailing its purchases of agencies, mbs, and treasuries.I’m not sure how banks are allowed to treat treasuries on the balance sheet. By holding them as assets against deposits they may be able to lower their required reserves held at their fed account. Anyone out there know? I don’t believe it will make a difference either way though.

Until you start to see Demand Deposits(and broad money for that matter) grow against total reserves I wouldn’t be looking for any doomsday loop unless there is some serious exogenous factor that makes people flee cash balances, money market funds, and less liquid financial assets.

Here’s a chart: http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=REQRESNS_TCDNS_MZMNS_TOTRESNS&transformation=lin_lin_lin_lin&scale=Left&range=10yrs&cosd=2000-03-01&coed=2010-03-01&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2010-04-22_2010-04-22_2010-04-22_2010-04-22&revision_date=2010-04-22_2010-04-22_2010-04-22_2010-04-22&mma=0&nd=___&ost=&oet=&fml=b%2Fd

-jon

p.s. sorry about the long links but I screwed up the hyperlink

cret April 22, 2010 at 9:41 pm

“So, with fractional reserve banking, this could eventually become nearly half a trillion new dollars?”i dont know if the fractional reserve part means that much or if half a trillion new dollars is a problem????
if fractional reserve banking is taking place as you claim is the process of creating the ‘fractional dollars’ much different that just creating low cost paper-dollars????

cret April 22, 2010 at 10:09 pm

how do you have total reserves and excess reserves???

are total reserves the meeting of reserve requirements set by the federal reserve..and your so-called excess reserves something else??

are excess reserves as you call them really reserves or do they serve some other function??

cret April 22, 2010 at 10:10 pm

what type of nightmare scenario cold possibly happen???

consumers running out to buy loads of frozen entrees to hoard???

thestaz April 25, 2010 at 10:11 am

I certainly hope so. My entire 401k i in Swanson Foods.

cret April 22, 2010 at 10:11 pm

was there a change in some federal reserve policy that has generated the excess reserves that are claimed to exist??? has this occurred before???

what has created (economic or fed regulation issue) the claimed ‘excess reserves’ to occur???

Poptech April 24, 2010 at 1:58 am

The excess reserves came from TARP (Bank Bailout), the banks have been sitting on the money until now.

DixieFlatline April 24, 2010 at 2:22 am

The banks have been sitting on the money, because as Bob Murphy has pointed out, Bernanke has been paying them an attractive interest rate to keep them from resuming loaning.

First propaganda move, declare the insolvency a credit crunch. This allows for radical bank re-capitalization so they can “resume lending”. Then, pay them not to lend, to perpetuate the situation where there is an ongoing (manufactured) crunch, endless bailouts, and more powers assumed by the FED.

Never let it be said the government is not competent enough to pull a fast one on the American people at large. Whether it is WMDs, fractional reserve or 9/11, the booboosie love to be scared and lied to.

Brad April 22, 2010 at 10:20 pm

My household received an offer for credit in the mail the other day, so I figured this was happening. Looks like we’re heading toward the crack-up boom.

cret April 22, 2010 at 11:01 pm

do you really believe that?

cret April 22, 2010 at 10:21 pm

additionally, does the currency in circulation measure (found at economagic.com) of money include (what i think, anyway) paper-dollar reserves or holdings at the federal reserve??? does currency in circulation include the monetary base (paper dollars??)

Doug McKnight April 23, 2010 at 7:22 am
cret April 23, 2010 at 1:28 pm

much of that didnt make sense to me.is it true in your opinion??

from what i gather the fdic has aquired a number of bad loan assets from banks via its insurance capabilities and thus allowed some banks to keep on lending..perhaps with some additional regulation.

but that didnt actually answer my question about the money supply figures.

the word reserves was never mentioned in the link.

cret April 23, 2010 at 1:45 pm

correction. it was mentioned once in somethign called loan loss reserves. not sure what that is though.

Dagnytg April 23, 2010 at 1:29 pm

Doug,
Thanks for the link and excellent presentation….as Bastiat said- what is seen is not as important as what is not seen. Thanks for shedding some light on the unseen:)

thestaz April 25, 2010 at 10:16 am

If ‘what is seen is not as important as what is not seen’

and, the poster shed ‘light on the unseen’

supposedly, then, the unseen now becomes seen … and is no longer important.

/ just sayin’

Barbarossa April 23, 2010 at 12:36 am

The funniest part about this piece (whether intended or not, I’m not sure) is the use in the title of the worked “leaked,” since that’s exactly the word that a Keynesian would use in regard to savings, except in this case it’s about reserves being lent out. I don’t know. It was a “lol” moment for me.

Barbarossa April 23, 2010 at 12:36 am

Not “worked” but “word.” Damnit.

cret April 23, 2010 at 2:06 am

For a while I have been warning that one way the (price) inflation genie will get out of the bottle

is the price inflation genie malevlolent??? what does that mean???

cret April 23, 2010 at 2:44 am

The trillion+ that Bernanke has injected into the banking sector would then start trickling out into the “real economy”was there a formal federal reserve policy decision to i guess rather quickly place a trillion dolalrs into the banking system?? is there a new or developed policy to regulate its distribution??

was the trillion dollar injection a large purchase of exising bank assets of various types???

cret April 23, 2010 at 1:22 pm

“The trillion+ that Bernanke has injected into the banking sector would then start trickling out into the “real economy””

was there a formal federal reserve policy decision to i guess rather quickly place a trillion dolalrs into the banking system?? is there a new or developed policy to regulate its distribution??
are trickling dollars harmful??

mr taco April 24, 2010 at 6:48 pm

go to the forum/community
they’ll help you there

brian April 23, 2010 at 6:22 am

Cret doesn’t seem to be following our posting guidelines. Somehow when I see posts like that it seems to undermine the credibility of the blog. I suggest consolidating or removing those posts…

Shay April 23, 2010 at 4:52 pm

Strongly seconded. I have nothing against cret, but all his posts in a row and lack of reflection is cluttering up this thread.

Shed Plant April 23, 2010 at 9:21 am

@cret, @brian
On that note, one question mark per question is quite sufficient.

Jonathan Finegold Catalán April 23, 2010 at 9:37 am

I’m sure this will just unleash even more spam, but cret is a well-known troll/spammer from the forums and has been banned under two previous accounts.

jl April 23, 2010 at 9:55 am

Required reserves are currently around $65 billion, and this should be driven by demand deposits which are around $450 billion, plus other checkable deposits which is around $370 billion. So if the drop in excess reserves results in pyramiding 10 to 1 off of $40 billion, we should see a very noticeable jump in checkable deposits and a commensurate increase in required reserves, as the money gets spent into the system and re-loaned out.

Month-to-month data jumps around a lot, so you really have to wait for the trend. The monetary base has been falling for the last couple of months.

cret April 23, 2010 at 1:35 pm

is there a money supply figure that shows the ‘excess reserves’?? are teh excess reserves solely paper dollars?

does it appear in currency in circulation’ money measure found at http://www.economagic.com???

jl April 23, 2010 at 7:38 pm

All these statistics are available at the FED.

http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm

The H.3 report has info on reserves, broken down as required and excess. The H.6 report has info on demand deposits, components of M1, currency in circulation.

The vast majority of reserves are held as bookkeeping entries at the Fed Reserve banks. Currency in circulation is cash in bank vaults, but most of it is out in people’s pockets, mattresses, cash registers, and so on. I hear that half of the currency is outside the U.S.

cret April 23, 2010 at 1:20 pm

For a while I have been warning that one way the (price) inflation genie will get out of the bottle

is the price inflation genie malevlolent??? what does that mean???

if you feel that a price inflation genie is about to go out of the bottle does that put you in a good position?? will the price of you labor also increase with the prices of goods???

“but cret is a well-known troll/spammer….”

no. i am a person asking questions about economics on these sites. if you say you know me, i doubt it…unless there is something you arent telling me. i have never met you.

Gerry Flaychy April 23, 2010 at 6:44 pm

To Robert Murphy.

If banks bought a total of $40 billions from the Treasury in March, it seems to me normal that excess reserves of all the banks fell about $41 billions.

The good news in this, is that the Fed seems to have decided to stop issuing new money in the markets.

Cybertarian April 23, 2010 at 8:01 pm

If you look at the current Wall Street rally, it’s 8th consecutive gains week, we can see that inflation has already taken place in the stock market and that all the news about the economy getting better are fake news.

I feel that we are heading straight to another crash as wall street will run out of funny money.

cret April 23, 2010 at 8:16 pm

“The vast majority of reserves are held as bookkeeping entries at the Fed Reserve banks.”

is that true???

so a reserve requirement – the ones that exist in federal reserve regs and such isnt a requirement to hold paper dollars on reserve (in some vault somewhere) ????

a reserve can be a non paper dollar???

are you calling reserves the very thing that there are supposed to be reserves for???

jl April 24, 2010 at 11:27 am

We have a fiat money system. So money is whatever the central bank declares it to be. Currency is only printed to satisfy the demands of people to hold cash OUTSIDE of banks, or for banks to have cash in their vaults. In this sense, a paper dollar is just a placeholder. An entry in a book is just as good a placeholder as a piece of paper.

If the FED buys a new government bond, it can just credit the bank account of the seller. As long as the seller keeps the money in the banking system, there is no need to ship a bundle of bills to that bank. If he writes a check to someone else, the banks just clear their balances by debiting bank A and crediting bank B.

cret April 27, 2010 at 1:48 am

ok. i assume that is true. i will look into that further.

do reserves even have any meaning with the current system?? what role does a reserve fill if its such an easily manipulated system of place-holers or bookkeeping entries???

cret April 27, 2010 at 2:19 am

The only standard money that the banks had available with which to redeem their checking deposits was $42.7 billion in standard money “reserves.” These $42.7 billion of “reserves” were the standard-money backing for a total of $6108.2 billion checking deposits, i.e., deposits equal to the sum of $42.7 billion + $6065.5 billion. To say the same thing in different words, there was full, 100 percent standard-money backing for $42.7 billion of deposits, and no standard-money backing whatever for $6065.5 billion of deposits, which latter constituted fiduciary media.
http://mises.org/daily/3556

are the different types of reserves than the ones mentioned in the above excerpt???

i took the standard money definition to mean paper currency.

does the above excerpt state fed operation incorrectly or are there different types of reserves?? other than paper/standard money/currency

L.J. de Kroon April 24, 2010 at 1:49 pm

What’s the difference between China or Goldman buying US treasuries? Seems to me the problem is the government that is building a ponzi scheme while endlessy auctioning treasuries….

Hans Palmstierna April 24, 2010 at 2:43 pm

Here is a VERY disturbing blip in the CONSUMER data series at the stlouis federal reserve. Putting reserves to work and “resuming lending”? We’ll probably know soon.

For a handy image + conspiracy theory, go here :

http://savecapitalism.wordpress.com/2010/04/14/todays-scary-thought-is-the-us-financial-elite-bailing-the-ship/

Guard April 26, 2010 at 9:22 am

Thanks for the interesting link. Remember, today’s conspiracy theory is tomorrows history.

cret April 27, 2010 at 2:06 am

“Three months passed between Nayirah’s testimony and the start of the war. During those months, the story of babies torn from their incubators was repeated over and over again. President Bush told the story. It was recited as fact in Congressional testimony, on TV and radio talk shows, and at the UN Security Council.”
http://www.prwatch.org/books/tsigfy10.html

“The Caucus also failed to reveal that H&K vice-president Lauri Fitz-Pegado had coached Nayirah in what even the Kuwaitis’ own investigators later confirmed was false testimony.
If Nayirah’s outrageous lie had been exposed at the time it was told,…”

is the above info true??? conspiracy theory or real conspiracy???

bob April 26, 2010 at 10:31 am

The Fed monetizing Treasury debt (directly or indirectly) effectively skips the money multiplier.

For now, we have nothing to worry about.

Of course as this new money eventually has a significant easing effect on the ability of debtors to repay their debts, it will magically heal bank balance sheets, allowing them to expand credit, using the money multiplier. Then things take off unless the Fed can start shrinking the monetary base…which will be very difficult, without sending interest rates soaring and/or creating a new recession.

cret April 27, 2010 at 2:01 am

“The Fed monetizing Treasury debt (directly or indirectly) effectively skips the money multiplier.”

is the money multiplier a true occurence or something false???

is the mm as you call it where banks lend non-paper dollars from deposits and create non-paper dollars into deposit accounts??? dollars based on some varying reserve requirement where the reserves arent even paper-dollars???

i have read that some deposit accoutns can be reclassified to suit various reserve requirements…is that done somewhat at whim??

does the money multiplier as you call it just create more bookeeping entries on top of existing bookkeeping entries with no formula based on the amount of paper dollars??

Of course as this new money eventually has a significant easing effect on the ability of debtors to repay their debts,……..

does it??? do prices tend to increase faster than many wages with such monetization occurring???
making debts no easier to repay at all???

billwald April 26, 2010 at 1:32 pm

With the interest rate on government paper below the inflation rate, the banks are not going to get rich buying government securities. At best, they will cut their losses due to inflation.

cret April 27, 2010 at 4:33 am

how does the interest rate fall below the rate of money-inflation?? if that occurs isnt the fed doing quite a bit of buying from banks to keep the interest rate down????

luciyahelan July 8, 2010 at 1:49 am

how does the interest rate fall below the rate of money-inflation?? if that occurs isnt the fed doing quite a bit of buying from banks to keep the interest rate down????I appreciate the concern which is been rose. The things need to be sorted out because it is about the individual but it can be with everyone. I like this particular article It gives me an additional input on the information around the world Thanks a lot and keep going with posting such information.
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Tax Reserves

Dale1147 March 9, 2011 at 8:53 pm

Read the merchant of Venice

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