Sunday, January 5, 2014

NY Fed Prez Warns: We Have No Idea If We Will Be Able to Smoothly Unwind the Trillions in Excess Reserves if That Money Starts to Hit the Economy

A large portion of  newly printed Fed money has never hit the economy. $2.4 trillion worth! The money is sitting at the Federal Reserve as excess reserves. The Fed knows that if this money starts to enter the economy it will cause massive price inflation--and when they speak candidly ( a rare occurrence), it's clear they really don't know if they will be able to sop up the reserves without causing massive disruptions in the economy.

 New York Fed president William Dudley, just yesterday, came as close as a senior Fed person is going to come in admitting this major looming problem/

WSJ reports on comments made by him during a panel discussion, on Saturday, in Philadelphia (Note: "moving to a more normalized state of monetary policy" means soaking up the excess reserves if they start hitting the economy)
Mr. Dudley also said that when it comes time to unwind the Fed’s easy-money stance, uncertainty is again a major issue facing central bankers.
“There could be unintended consequences” about moving to a more normalized state of monetary policy, he said.

One of the big challenges facing central bankers now is the unprecedented nature of current policy. “We just don’t have experience with this kind of episode,” he said.

Mr. Dudley said the longer-run framework for monetary policy is also up in the air, given all the changes the Fed has made in its tool kit for influencing the economy. “There is an open question” about how the Fed will conduct monetary policy over the long run, the official said.

He declined to say what the fate of a new central bank tool designed to soak up liquidity will be. Fed officials have been upbeat about this facility, known as fixed-rate overnight reverse repurchases agreements. It is in a testing phase scheduled to end at the end of this month.
When Dudley says  “We just don’t have experience with this kind of episode." He means it. Below is a chart of excess reserves since 1980. They barely existed before Bernanke started printing like a mad man in late 2008. If this money starts to hit the economy, price inflation, without doubt, will hit double digit levels.


  1. The Great Gold Robbery

    In the United States, the concept of gold as money beats in the hearts of a small fraction of the population. The gold confiscation in the 1930s and the elimination of silver in the remaining coinage in the mid-1960s did the trick. The connection between precious metals and money was broken.

    This is obviously not the case with much of the rest of the world. There is a cultural fever in India to acquire gold and now silver due to the shameful attempt by the Indian government to restrict legitimate purchases as well as dramatically increase the cost. The attempt has failed. Smuggling of gold has skyrocketed since the restrictions were put in place. On a recent flight to India it was discovered that every passenger was carrying a kilo of gold.

    China is a completely different story. Their government continues to encourage their citizens to acquire gold. At the government level, the output from domestic mines as well as massive imports of gold continues to be locked away. We have seen pictures of the crowds at the stores buying gold in a frenzied manner. There truly is a “gold rush” mentality taking place in China.

    The governments and citizens of the Western countries will greatly regret their foolishness in trying to ignore the role of gold and its history as money.

  2. I don't get the sense of alarm. Almost all of the excess reserves are held by the TBTF banks. If the FED at any point doesn't want these reserves to leave, surely it can just change the reserve requirement for that particular class of banks and thus these reserve will no longer be 'excess' but necessary? I looked it up, and in the 20s there were different reserve requirements for the big NY banks versus what we would today call community banks. This seems like such an obvious option (still has costs, but is a very flexible option) that I feel that I am missing something. In fact, changing the reserve requirement or discussion of that option was frequent before the Greenspan era, but now we don't hear about it anymore. Did something change?

    1. Fundamental to my Macro Credit analysis has been the thesis that prolonged Credit Bubbles inflate myriad price and spending levels throughout the economy. In the end, this inflation is unsustainable. Efforts to inflate out of deep financial and economic structural maladjustment risk systemic collapse. Importantly, prolonged Credit inflation creates systemic dependency to large quantities of inexpensive Credit/finance. I have posited that a self-reinforcing U.S. economic recovery would require in the range of $2.0 TN of annual NFD growth. NFD grew $922 billion in 2009; $1.373 TN in 2010; $1.382 TN in 2011; and $1.864 TN in 2012. Slowdowns in both federal and state & local borrowings will see NFD growth slow to about $1.60 TN in 2013.

      One could argue that my fundamental thesis has by this point been proven flawed. The year 2013 saw record stock prices, rising home prices, record Household Net Worth, lower unemployment and an improved economic backdrop – all in the face of slower system Credit growth. But how much of this was the consequence of the Fed’s $1.0 TN injection of new “money” directly into the financial markets? I’m convinced it would be a much different world without QE3. Moreover, the Fed’s extra Trillion had unappreciated deleterious effects, notably by spurring “terminal phase” excess in securities markets while deepening systemic dependency to Fed “money” printing.

    2. Here is a chart of the Case-Shiller 20 index, The Fed’s balance sheet and real median household income. Bubble anyone?

      The real problem for America’s middle class is that Fed policies have largely helped investors in the stock market and housing, not so much middle class households.

    3. The Gold Must Flow!

      Published on Jan 2, 2014

      How gold is mobilized by the elite of the world, it's importance to world trade, and further evidence that it's withdrawing its bid for paper currency.

    4. Regarding reserve requirements, I've heard that upping reserve requirements would decapitalize the banks (it would effectively be stealing), so that would potentially make the banks insolvent again. I don't know if that's correct, but it's something to read up on if you're interested

    5. I believe that raising the reserve requirement would make the banks insolvent only if the banks were fully loaned up, which they are not, as evidenced by the $2.4 trillion in excess reserves. The the problem is that at the current reserve ratio of 20:1 (believe its around that), those $2.4 trillion in excess reserves represent $48 trillion of potential new money that could be created via new loans. And doubling the reserve requirement would still leave $24 trillion in loanable funds. Still a massive problem. So bottom line, the only way out is to get those reserves back. But that can only be done by the Fed selling back the $2.4 trillion of junk mortgage-backed securities that it purchased to create such reserves. But who will buy those? No one! That is why the Fed had to buy them. So it looks like the Fed is experimenting with a reverse repo, which is basically getting the banks to loan the excess reserves back to the Fed instead of getting them back via sale of the unsaleable junk securities. Before 2008, the Fed would only mainly buy treasuries, not junk mortgage-backed securities, and treasuries were easily saleable to sop up the reserves. But not so the junk. The Fed is truly in uncharted territory and it looks like this reverse repo scheme is just kicking the can down the road a bit longer.

    6. Economist John Williams thinks 2014 will mark the beginning of hyperinflation. Williams contends, “You are going to see, early on, a crisis in the dollar that will start to trigger the inflation . . . as the inflation picks up, that’s going to savage the economy, which is already in a depression. It never recovered.” Forget what you have heard about the so-called recovery. Williams says, “The consumer is in trouble. There is nothing happening to turn the economy around.” The weak economy is bad news for the dollar. According to Williams, “Anything that would suggest deficit deterioration here, and a weak economy would do that, will have a devastating impact on the dollar.” And if foreigners start selling some of the 12 trillion U.S. dollar based assets, such as bonds and currency, things will turn ugly fast. Williams says, “We’re dependent on the rest of the world continuing to go along with us and continue to support the dollar. That’s not going to happen.” So, the big question everyone is asking is when will the buck take a hit in value? Williams says the dollar will likely begin selling off before the middle of this year, and he adds, “It’s really going to be a currency panic . . . when the fundamental selling pressure really starts to pick up, when the selling gets heavy . . . in turn, the weakness will be seen in a spike in oil prices and a spike in gasoline prices.” Williams says there will be a panic out of the dollar and he predicts, “Once you see a massive sell-off here, I see the game as being over.”

  3. Ben Bernanke:
    "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

    I still think that Bernanke truly believes that he was behaving as a MONETARIST when he began his descent into Hell. "If there is a run on the Bank (Read: The ENTIRE Banking System), I'll just back the Digital Equivalent of truckloads of cash to the back doors of the Banks... There!...No Problem!

    "It's easier to smell the incense than it is to have the religious experience."

    - Alfred North Whitehead

    'N here it is: Markets are Messy and it's so much easier to see beyond all of those Messy Mistakes that everyone makes IF I CAN JUST MANIPULATE THESE VARIABLES JUUUUST RIGHT.

    'N you never can. Bernanke will still argue this point on his turf as the Triumph of Monetarism because the Inflation hasn't happened yet. "There's still time...!"

    No BB. There isn't. It is neither the Triumph of Monetarism nor its Death. It is the Triumph of the State, which has once again convinced a person who declares that Others are trapped by the Categories of Understanding that he can Transcend them. This person is convinced that he can map a future onto those symbols better than the shopper who decides which brand of coffee to buy.

    Folly. Pure Folly.


  4. Just start issuing a sufficiently large amount of floating-rate government securities and you can be on your way to unwind as much excess trillions (or even quadrillions, provided you have any) as you like.

  5. Welcome to London, the most expensive city in the world: Soaring rent and petrol prices drive capital above New York and Paris in terms of costs of essentials
    Cost of living in London is the highest in world, according to a new report
    Petrol is double the US price, while rent is 62% higher than in New Zealand
    Coffee is almost three times cheaper in Rome than in the English capital
    Groceries, electronics and entertainment push up price of London living

    The website, which published its findings in the Sydney Morning Herald, found the typical price of a coffee in London to be £2.86, over 60 per cent more expensive than Rome, where a cappuccino can typically be purchased for little over £1.

    In terms of electronics, the only city more expensive than London was Tokyo, with New York among the cheapest places to pick up a 16GB iPod Nano, at around £92, compared to £130 in London.

    And if your budget stretches as far as the occasional luxury, there is nowhere in the world more expensive to buy cinema tickets than London, with the price of two admissions averaging £22, compared to just £14 in Sydney and only £10 in Singapore.

    Read more: