Saturday, July 2, 2011

Krugman Discovers Excess Reserves

In a blog post this morning after discussions by me, the New York Fed and Alan Greenspan, Paul Krugman has discovered excess reserves. He publishes the below chart of the soaring excess reserves.

He also writes:

...banks are also sitting on large amounts of cash that they aren’t lending...never mind the fact that if they wanted to lend, all they would have to do is withdraw some of those huge excess deposits they have at the Fed.
This is partially true. Banks literally have over $1.6 trillion just sitting with the Fed as excess reserves, earning risk free returns BUT, they are starting to lend the money out. In the EPJ Daily Alert, I have been pointing out that required reserves ( watch for a Krugman chart on these , in about a month) have started to grow on a 20% plus annualized basis. Required reserves are the exact opposite of excess reserves, required reserves are created only because banks loan money out. These required reserves have only been significantly increasing in recent weeks, but this growth appears to be, as you would expect, starting to spur money supply growth---which will provide a manipulated boost to the economy and also spur even greater price inflation.

Krugman is really commenting on last week's baseball game , while there is a different more important game going on before him. Yes, excess reserves are very important to watch, but climbing required reserves is an even more important factor that must be monitored very closely, since if they continue to increase rapidly, a new pseudo-boom, with very strong price inflation will be right in front of us.

Price inflation is coming, but if these required reserves, continue to climb the intensity of the inflation will be much greater.


  1. your saying that banks are loaning out money, and what they are to reserve as required reserves are being borrowed from the fed?

  2. What do you think of Ron Paul's brilliant idea of making making the recent increase in the monetary base a permanent one? Hyperinflation be dammed.

    "Ron Paul:We owe about 1.6 trillion dollars because the Federal Reserve bought that debt so we have to work hard to pay the interest to the federal reserve. I mean, they're nobody. Why do we have to pay them off? Why don't we take that away from them and reduce the debt 1.6 trillion dollars or whatever. But what they lose is their skill to manage the money supply and interest rates if they can't buy or sell these treasury bills. But we don't owe that to anybody. I mean the federal reserve,how do they pay for it? They printed the money out of thin air. So why don't we eliminate it and say we don't owe to you anymore.

    Interviewer: Would that effect our bond ratings?

    Ron Paul:I'm not predicting that there's any chance that we're going to default on paying the federal reserve, but if you did that might reassurance to the bond holder. They'll say "Hey, they just reduced the deficit over a trillion dollars now. Now they can handle it. They could go back to meeting their other obligations. It might give some reassurance to the market."

  3. Anonymous - the increases in the monetary base are *always* permanent, in the longish term.

    What Ron Paul wants is to stop exchanging proceeds of taxation (which are *real* money) in interest for the loans backed by counterfeit money created by the Fed - by the simple expedient of bankrupting the Fed.