Wednesday, January 19, 2011

Here It Comes: Citi to Start Using Excess Reserves

Citigroup is about to start putting its excess reserves to work.

Citi had $190.4 billion in cash and deposits with banks at the end of 2010, a large chunk of this is likely sitting at the Fed as excess reserves.

Citi built up a big pile of cash during the financial crisis and now plans to put this money to work making loans and repaying debt, Citi CFO John Gerspach said yesterday in a conference call.

Will other banks follow Citi's lead in putting to use their excess reserves? That's a trillion dollars sitting on the sidelines.
Let's see what "tool" Ben Bernanke uses to sterilize this money flowing into the system. If this money flows into the system over, say, a three month period, without sterilization, it will make QE2 look like a bow and arrow operation next to the  nuclear explosion of a trillion dollars hitting the economy.


  1. Maybe Ben is singlehandedly trying to "help" the world with this :

  2. They NEED high inflation as a way to pay down debts...$200T of unfunded liability needs HUGE price/wage inflation to cover up. You don't think the USA public school idiots can wipe it away with economic growth, do you?

  3. seriously, still?

    banks do not lend reserves.

    money multiplier is long debunked.

    this doesn't invalidate austrian economic ideas.

    austrians need to come into the 20th century by embracing accurate analysis of modern monetary system.

    bloggers like you need to engage with bloggers like steve keen, mish, bill mitchel, orag cap, winterspeak, etc.

    not just exist in a bubble which still believes in utterly false premises like the multiplier or banks lending out reserves.

    your readership will balloon if you engage with these other heterodox schools.

    you can do this without compromising any of your free market beliefs.

    mises, hayek, etc. were describing a gold standard economic and financial system.

    we live in a fiat system.

    please read about modern monetary theory.

  4. I wonder what the "cover" will be for opening the money floodgates? Does anyone have any ideas?

  5. Am I wrong when I think that $1 trillion in excess reserves translates into $9 trillion in new lending - 5 times M1 and the same amount as M2 currently in circulation?? How is this not a catastrophic tsunami of money about to crash over us?

  6. HPX, that article made me sick. How can these fools be in charge!?!

    RW, your post is scarier.

    You, and some others, have been warning of the consequences of $1T hitting the economy quickly. Mass dislocations in wages, inflation, dollar weakness, etc. Would you, or anyone else, care to speculate on the consequences of this approach spreading to other banks? If it was coupled with a rush to loan it, what would that do to the economy?

  7. Hyperinflation?

    I still think hyperinflation will occur when people realize their currency is becoming worthless, with the curency entering the system won't be from increased wages or credit, but money coming out of hiding in bank accounts or from under the mattresses.

    Maybe this is a sign of a more credit fueled scenarion?

  8. Most of the concern is with loan demand - from businesses and individuals. Now that Citi is beyond TARP and bailout, it will be a loan supply actively looking for loan opportunities. The fact that it hasn't loaned it out means that Citi is not satisfied with the present opportunities. Should the economy get better, Citi will find better opportunities for its cash on hand. Should Citi change its mind, then Citi will view its current loan opportunities in a better light.

    JP Morgan is clearly benefiting from loaning out more money. It remains to be seen if that is because JP Morgan is better at finding loan opportunities or if JP Morgan is just more risk tolerant with its money.

    As for the monetary multiplier, I don't think that is being proposed as the driver of inflation. The monetary multiplier is not a rule that the banking system has to follow. The monetary multiplier instead places a maximum upper limit on monetary creation by banks. The price clearing point for loans is at a point much lower than the given maximum limits.

    The current low money multiplier explains the muted effects of QE1 and less muted effects of QE2. The MM is a symptom of pessimism of credit-worthiness and not a driver in the market. The excess reserve is only scary when the market turns towards optimism and the MM increases. What to watch out for in the market is optimism by borrowers willing to pay higher interest rates or by banks willing to accept lower interest rates. That will drive money creation in the banking system if it does happen.

  9. Here's my 2 cents. The artificial boom created by QE2 has started to fuel more consumption and higher demand. This creates incentives for businesses to borrow for expansion. This boom-bust cycle just got started again, and with all those reserves, the FED is going to have to pay a lot more interest than they are now to keep them out of the economy. Once they enter the regular market, though, I think that those funds are there to stay a while. I Bernanke cannot control this flood, it could very well lead to very high inflation. At worst, it could cycle so fast that it ignites the final stage- hyperinflation. That's the endgame. I don't think the elites are ready for that yet.

  10. I'm guessing "random person" is an MMT'er. Read all about it below as it relates to excess reserves. In the end, it's just another economic theory based on the equivalent of a perpetual motion machine.

    "MMT posits exactly the same explanation for public debt issuance – it is not to finance net government spending (outlays above tax revenue) given that the national government does not need to raise revenue in order to spend. Debt issuance is, in fact, a monetary operation to deal with the banks reserves that deficits add and allow central banks to maintain a target rate."

    That's a pretty big "given". Without the plausibility of future government revenues, eventually vendors will simply refuse to accept payment by the government (or anyone) in that government's fiat currency, regardless of whether government spending is matched by debt issuance. Thus, the premise is flawed. Because it is based on deductive reasoning, praxeology easily explodes these kinds of non-sequiturs that ignore extreme fat tail risk. Risk of default and regime collapse are real and affect interest rates (especially long term interest rates).

    "Second, “central banks may decide to remunerate excess reserve holdings at the policy rate” which “sets the opportunity cost of holding reserves for banks to zero”. The “central bank can then supply as much as it likes at that rate.” The important point is that the interest rate level set by the central bank is then “delinked from the amount of bank reserves in the system” just as in the first case when the central bank drains reserves by issuing public debt."

    The theory that interest rate levels set by a central bank can be delinked from the amount of bank reserves is true in a certain ideal case, but is detached from the constraints of reality. In theory, Bernanke could push one lever (POMO printing) while pulling another (raising IOER, creating term deposits, etc.). (Or, from the MMT perspective, Congress could increase deficit spending to soak up reserves--never mind that their spending is heavily skewed towards low productivity projects that bid up labor and capital goods).

    In reality, there are many factors that can prevent runaway price inflation from not being identified and stopped, not the least of which are the human factors of those making the decisions, such as incorrect economic observations and calculations, political aspirations and supplication, personal vanity and greed, etc. Incorrect economic observations by those who pull the strings is nearly guaranteed by the fact that CPI and PCE are designed to underreport price inflation.

    The money unleashed by Fed Treasury purchases is bidding up assets across the spectrum: commodities, other capital goods, and risk assets, such as stocks. Meanwhile, many markets that were hampered by inefficiencies created by the previous artificial boom have cleared (on their own--no thanks to the government) to a much greater extent than the QE1 era. And, the areas where they have not cleared (i.e., the big banks) are precisely the area where the Fed money is being shoveled. Taking the largest deflationary force off the table, the heavy money printing will turn an organic nascent recovery (that might have been smothered by government-backed zombie enterprises) into a manipulated boom.

    History does not favor the Fed being able to timely recognize over-accommodation or, if it does, having the will to timely attack it. The braking mechanism for previous over-accommodation is structurally flawed. This is why the quantity of reserves matter.

    Given the asymmetrical propagation of price inflation throughout the economy, distortions in prices will increase in proportion with (1) the lag in policy response and (2) the change in money supply. Inasmuch as unfettered bank reserves can enter the money supply at any time, a corollary is that the potential for price distortions increases with the amount of unfettered reserves.

  11. Benny could singularly help the world by resigning his post and saying that all his ideas were bizarre hoaxes.

  12. Fiat currency is doomed. It will take a while but gold is the only answer to these crooks in Washington. People truly won't be able to buy groceries in the near future in this country.

  13. Just an update, as of October 2014, excess reserves are now $2.8T