Friday, February 18, 2011

Is Bernanke Being Devious or Has He Lost Control of the Money Supply?

Despite the buying on a weekly basis of tens of billions of dollars of Treasury securities by the Federal Reserve, only about $5 billion of that is finding its way on a weekly basis into the money supply. Most of the rest is ending up as excess reserves. From December 29 to February 9, excess reserves (money with the Fed and not in the system) have climbed by nearly $100 billion.

This means one of two things, Bernanke has a secret deal with the big banks whereby they have agreed to put the money in excess reserves (and smaller banks are following along) or Bernanke has totally lost control of the money supply and the banks are doing this on their own.

In either case, if this keeps up, QE2 could very well turn into Crash2, with the stock market and economy landing real hard.

For those of you that need to follow this much closer, be aware that I provide much more detail and analysis in the EPJ Daily Alert.


  1. Does this not mean that inflation will not appear in the short term??

  2. @Connor

    No price inflation is pretty much baked in becasue of the earlier money printing, though its intensity may be more subdued.

  3. It is certainly strange to have so much of it go into excess reserves. It seems like some of these bankers are either pulling our chain about better lending opportunities, repaired balance sheets, and willingness to seek better returns or something else is afoot.

    I didn't see any news about IOER. Do you have an easy way to look up the current IOER rate? Very strange times indeed.

  4. I am curious how you can say price inflation is baked in. I work in the Consumer Goods Industry (food you buy in the grocery store) and we're still pushing price increases into the system. They'll hit in 30 to 60 days. I know our peer set is, too.

  5. I seem to remember you saying that there was very little chance of QE2 becoming excess reserves since since the PDs were likely to spend the money immediately.

  6. @Anonymous 2-18 12:05 You write:

    "I work in the Consumer Goods Industry (food you buy in the grocery store) and we're still pushing price increases into the system. They'll hit in 30 to 60 days. I know our peer set is, too."

    That's what I mean by being "baked in" it is still in the oven, but it be reflected in prices over the next three months or so

  7. @Anonymous 2-18 1:41

    I did say I did not expect QE2 to become part of excess reserves and it didn't until January, which makes me highly suspicious when suddenly the entire banking system decides to put $100 billion into excess reserves.

    But I didn't say PDs would spend it. PDs are the brokers for the Federal Reserve, they didn't get the funds, which makes the move to excess reserves all the more peculiar since it would have been spread around the country as part of the normal sales of Treasury bills. Very unusual and conspiracy theorists should take note.

  8. QE1 ended up as excess reserves AND all markets went up. Why not for QE2?

    Also, I am not sure the excess reserves are in any case excess. I am not an expert on bank balance sheets, so I am open to an education....

    It is a safe bet that the asset values on the balance sheets of the banks are overstated. If these are overstated, does this not overstate the reserves? If so, excess reserves aren't excess.

    Second, cannot marketable securities be counted in the assets of the banks, via some formula, for reserve purposes? If so, markets can be pumped while reserves remain excess.

    Again, open to comments from those wiser than I am.