• "Spreading the ideas of freedom loving people on matters regarding metals, finance, politics, government and many other topics"

Scorpio

Hunter of Chin Li's Boo Hoo Flu
Founding Member
Board Elder
Site Mgr
Midas Supporter ++
Joined
Mar 25, 2010
Messages
33,912
Reaction score
50,880
Why Reserves Aren’t Money
Jeffrey P. Snider

funnymoney.jpg



When the Federal Reserve through its Open Market Desk engages in a transaction under QE or the current balance sheet stabilization (reinvesting maturing securities) with a primary dealer, the direct effect is to increase the dealer’s account with the Fed while decreasing that dealer’s stock of securities. On the other side, absent any offsetting absorptions (either intentional or autonomous), FRBNY’s balance sheet size increases; with the newly purchased security expanding the asset side while the simultaneous reserve account increases by the matching amount. To some, this has been taken as “money printing.”

There is no money in reserves of this kind. It is nothing more than a strictly financial liability that requires further exertion on the part of the banking system in order to take usable form (money). In other words, nobody can access these reserves and use them in the real economy to obtain goods and services or to invest in real projects. They must be converted into other financial forms first, participating in the pyramid of wholesale schematics as just one liability among many, before they can actively contribute in the real economic structure. That bank “reserves” can only apply to primary dealers further suggests these kinds of limitations – that further chains of liabilities (interbank) beyond primary dealers will be necessary for that conversion from an idle and inert balance with the Fed to something actually useful.

That is the major difference between a eurodollar and bank “reserves”, as the eurodollar sits at the end of useful spectrum, acceptable as forms of payment in global trade and credit funding, while QE’s special byproducts are really quite remote. In fact, QE was never designed to be “money printing” directly, as none other than Ben Bernanke declared at the outset. From January 2009:

Our approach–which could be described as “credit easing”–resembles quantitative easing in one respect: It involves an expansion of the central bank’s balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank’s balance sheet is incidental. Indeed, although the Bank of Japan’s policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve’s credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses. This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes. In particular, credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing. To stimulate aggregate demand in the current environment, the Federal Reserve must focus its policies on reducing those spreads and improving the functioning of private credit markets more generally. [emphasis added]

Again in 2012 just prior to unleashing QE3:

Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors’ expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about “tail” risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.

The intent is “credit conditions” even when signaling more directly to households and businesses about the “future path of the federal funds rate” and long-term interest rates, recognizing again that bank transformations are the necessary components. Where the Fed (and ECB) fails in theoretical terms is thinking that QE (or LTRO’s) will have the intended impact on offered credit; downplaying how it is that banks actually do banking. That is where the wholesale banking system and eurodollar mechanics most matter – a bank balance sheet allocation and “budget” is determined by a great many factors (math as money) that these “bank reserves” cannot sway. In other words, central banks “printed” only virtual reserves for big banks in order that they would forward them systemically(interbank) so that the banking system as a whole would “print” new credit and loan growth. It would be credit and loans that would act as “more money chasing fewer goods” to create the “virtuous” economic cycle as Keynes suggested.

2016-Bank-Reserves.jpg
2016-Bank-Reserves-PCE-Fed-BS.jpg


2016-EU-HICP-QE-Liquidity-Needs-Infl.jpg


Banks, obviously, have vigorously refused the license, proving that bank “reserves” can only accomplish as much as banks wish them to. This is contradictory to the theorized effects of QE in many ways, which this declaration from the St. Louis Fed in early 2011 states:

Public expectations of future inflation are also crucial in determining the path of inflation and the ultimate effect of QE. If the public trusts that the increase in the monetary base QE creates is only temporary, then they will not expect rapid inflation in the near future. These expectations collectively influence actual pricing behavior and, in turn, actual inflation. As such, the credibility of the Federal Reserve is perhaps the most important determinant of successful monetary policy.

Since “actual inflation” has only resisted the Fed’s (and ECB’s; and BoJ’s) “best” efforts at sustained 2% we can only conclude that this is all wrong. Inflation expectations are now divorced from monetary policy directly because it has been revealed through the actions of the banking system that “money printing” is far more complicated and less likely to occur so long as current conditions remain. Unless and until banks make a determined effort globally to expand and expand in serious capacity, all these bank “reserves” can only accomplish is further and deeper interference within the financial system rather than the intended effects without (recognizing further that the mess within financial conduits perhaps contributes greatly to the continued reluctance to transmit monetary policy outside banking).

From that we can reinterpret Ben Bernanke’s speeches and assertions to the bare impotence of monetary policy. In other words, he, like Mario Draghi, expected QE to be a powerful financial incentive that would easily penetrate the financial complications to turn “reserves” into credit “money”; that was the whole point of the “Q” part in QE, as referenced above, that it would be so powerful that it needed to be limited (“only temporary”) so that the public might not get too carried away in the initial awe over how much loan growth would surely result. The first two were delivered with what was thought the “right” amount of “awe” and the right amount of “restraint”; until QE3 suggested exactly these kinds of complications of turning inert and useless bank “reserves” into credit or eurodollar “money.” The third (and fourth) was left open ended, initially, because the Fed realized, belatedly, there wasn’t so much “awe” in the banking system or even appetite to undertake the transmission work especially after the events of 2011 only further called into question the usefulness of “reserves” even inside the financial system. Huge miscalculations all around owing to drastically misunderstanding the actual monetary system.

In other words, Bernanke, as Draghi, thought that banks were only missing explicit financial support of the central bank(s) through what he thought as basic but virtual bank reserves. Instead, turning “reserves” into credit money only got more complicated due to wholesale and eurodollar factors unrelated to Ben Bernanke and Mario Draghi that intensified toward further thwarting all this genius and mathematical (“Q”) “science.” Bernanke got to escape the deficiency because for a short while it looked like it just might work (as the junk market went into overdrive without need for banks and bank loans).

From this view, we can appreciate quite well just how remote monetary policy actually is even though many still believe in “money printing.” For most of the public and the media, and most economists, there was never any thought given to “how” it actually worked A to B. Even among policymakers, that is still the case. Not only are bank “reserves” not money, they are being exposed as not even a very important form of financial liability especially outside the primary dealer/big bank network (which should have been apparent in 2008; dark leverage rules). The more interesting part (dereliction) is how it all got this way without the Fed (or ECB) noticing.



logo.gif
Alhambra Investment Partners, founded in 2006, is a registered investment advisory company. Our founder, Joe Calhoun envisioned a company dedicated to serving individual investors with honesty, integrity and compelling expertise.

Beginning with a single office in Miami and a core group of clients, we have expanded to include a team of highly accomplished investment professionals. Our portfolio managers have extensive credentials and more than 100 years of combined market experience. Our principals have been invited to appear on the business channel, CNBC and routinely publish commentaries at various reputable online outlets. The team has a varied investment background that includes compliance, research, trading on the major exchanges, and money management for municipal entities and Fortune 500 companies.

Our client list includes individual investors from all walks of life, as well as small institutional accounts. The firm has grown from the core group of clients to current assets under management of over $160 million spread across the United States and in several foreign countries.








www.alhambrapartners.com

http://www.silverbearcafe.com/private/02.16/reserves.html
 

BarnacleBob

Moderator, Equal opportunity annoyer!
Founding Member
Site Mgr
Site Supporter
GIM Hall Of Fame
Joined
Oct 15, 2012
Messages
18,546
Reaction score
41,309
Location
Ten-Oh-Cee
This reminds me of past financial history of the early 20th century.... Banks were becoming non-essential entities as the big corps were growing up & becoming self financing.... Taking a hard look at credit market participants such as money markets, pension & hedge funds, & insurance companies that have amassed trillions upon trillions in assets, we once again find banks as non-essential at creating organic credit....

The banks are now forced into the business of collecting fees for various services that were once offered at no charge, even further they are forced into speculating in the markets to survive, and their survival is dependant upon creating dividends for their shareholders.... no dividends, no bank! It appears that the undercapitalized banks are acting as mere middle men & agents for the credit markets.... no longer creating credit, but rather arrainging credit transactions between the borrower and the credit market lenders, collecting fees on each transaction. Isnt this how the pre-2007 housing bubble played out? Problem was that when the crash arrived, banks got caught holding worthless or debalued paper that the credit markets wouldnt buy.... Which in itself says a lot, I suspect that the banks have been leveraged to capacity against their capital, meaning they can no longer create bank credit... Thus they are forced to access the credit markets as middle men merely arrainging loans for a small fee....

If indeed this is the case, the Central Banks are dead in the water... as the NEW creation of bank induced credit accounts for the majority of inflation... Could it be that actual core inflation is low because the credit flows are coming from the credit markets using money substitutes that have been previously created? IOW the CB and bank system cannot create inflation....

Even further, it seems that credit market credit would be much less expensive to access than newly created credit.... The banks acting as an agent for the credit markets would not be subject to charge backs against their capital, excepting maybe a chargeback against the fees collected if the loan terminates prior to maturity.... Again as we observed in the aftermath of the Housing Crash, the banks were mere agents for the credit markets, they arranged the loans which were sold to the credit markets and also maintained the loans by accepting payments and performing the accounting on these loans.... this was proven by their failures to properly register and pay the fees associated with the loan transactions, a.k.a. the private MERS system (Mortgage Electronic Registration System).

If the above is even partially correct, the transmission utility that the CB employs to perform monetary policy would be severely diminished, if not incapacitated.... Which brings up the ? of Japan.... Did the highly successful Nippon corps become self financing and thereby incapacitate the BoJ monetary policies?

Do banks & their traditional services & offerings become essentially obsolete when economies become wealthy and mature.... ??? Seems like that would be a likely outcome when self financing arises....
 

All-in

Silver Member
Silver Miner
Joined
Mar 31, 2010
Messages
800
Reaction score
305
Location
Scotland
That's something i always wondered about BarnacleBob, why doesn't businesses lower costs to potential customers by allowing direct payment schemes. Say $100 direct debit to Ford, say for 100 months to pay for the car. Rather than going third party, through banks with fees and interest. Is it because it would cost to administer, and involve the hassle of chasing down non-payers. I paid over £3k on interest and fees on a new car. Something i will have to do again sometime.

Find away to cut the middle men out big business and lower the cost. And let the banks die, or at least not be, the be all, end all in trade.

If the banks did become less in society, what would actually be the medium of exchange (bank credit would be scarce)? Company script?
 

Scorpio

Hunter of Chin Li's Boo Hoo Flu
Founding Member
Board Elder
Site Mgr
Midas Supporter ++
Joined
Mar 25, 2010
Messages
33,912
Reaction score
50,880
I have heard bankers lament that fact, where they have become 'originators' and 'servicers' in todays system,

and for this grand McDs task, they are paid with fee structures.

For years we have tried to get people to understand that bankers are nothing more than order takers at anything other than the highest levels.

Go get a home loan from a local bank, they aren't holding the paper.
Go get a car loan, unless you go direct as All states, they may or may not slough off the paper, probably only keeping the prime stuff.

About the only thing I am seeing them holding paper on any more is some business loans, unsecured paper, etc.

So in order to have further paper generation, either the main credit markets need to be willing and able, or small businesses need to demand more. Except, a whole new industry has sprung up due to lack of bank willingness to lend to small business, that specifically caters to small businesses. They are booming.
 

BarnacleBob

Moderator, Equal opportunity annoyer!
Founding Member
Site Mgr
Site Supporter
GIM Hall Of Fame
Joined
Oct 15, 2012
Messages
18,546
Reaction score
41,309
Location
Ten-Oh-Cee
That's something i always wondered about BarnacleBob, why doesn't businesses lower costs to potential customers by allowing direct payment schemes. Say $100 direct debit to Ford, say for 100 months to pay for the car. Rather than going third party, through banks with fees and interest. Is it because it would cost to administer, and involve the hassle of chasing down non-payers. I paid over £3k on interest and fees on a new car. Something i will have to do again sometime.

Find away to cut the middle men out big business and lower the cost. And let the banks die, or at least not be, the be all, end all in trade.

If the banks did become less in society, what would actually be the medium of exchange (bank credit would be scarce)? Company script?

@ All-in.... In the states many of the auto manufacturers do offer in house financing, Chrysler Credit, Ford Motor Credit, GMAC, etc... however they will only finance and accept the most pristine credit consumers, the remainder being the majority are farmed out to secondary sources such as banks & credit unions. By this means, the manufacturers have shifted the risk and burdens onto these institutions and investors.

For instance, the manufacturers will advertise "no money down & zero % interest @ 60 months" In this scenario, the vast majority will not qualify, and those that do qualify can usually pay cash for the vehicle.

The real advantage to allowing the banks v manufacturers credit is that the banks are local in the community. They employ local people with ties to the community... IOW they possess distinct advantages over a lender that is 500+ miles away.... A late payment can be serviced easier when the collector is local, same can be said for remitting payments. Most people like to do business locally, hence local banks, even if their main offices are in NY, etc. provide the illusion of being local. They also possess the ability to repossess defaulted loans at the local level.... Hence, the bank system does possess certain advantages over manufacturers credit lending & servicing....

As for the idea of scrip, thats exactly what fiat currency is, "collective" company scrip that is enforced by the sovereign. The economic game of countries operate as "company stores" and/or "labor plantations" in a global trade & finance system.... Whichever you prefer to call it!

Of course the global trade & finance system was/is designed around banks, especially CB's as the controlling apparatus & transmitting utility that creates inflation that supports the western socialist political system.... 40+ years of what amounts to high velocity "compounding" inflation & interest rates has produced an over abundance of millionaires, billionaires & mega corporations, all of which have resulted in breaking the original design & transmission utilities.... IOW the banking system has lost control over the control levers as the abundance of credit, inflation and compounding interest combined with insurance, pension funds & money markets has created a new financial industry that operates outside of the control of the CB system & its regulatory structure.....

The "War on Terror" is actually a banker & sovereign conspiracy on this uncontrolled wealth that operates outside of the global banking system & club membership. Private off-shore & Swiss accounts are targetted under terrorism or tax laws, the NSA, CIA, etc. are listening in to capital movements and/or manipulate markets to the favor of the banks, etc., etc., etc.... For the sovereigns are reliant upon the bank system to secure their funding, hence they are in full bank protection mode, and using the fake "threat of terrorism" to facilitate the scheme.... Remembering G.W. Bush, "you are either with us or against us," and anyone protecting their capital from them is against them.... ergo, they are terrorists!

JMO
 

the_shootist

I identify as fully vaccinated so I'm good!
Midas Member
Sr Midas Supporter +++
Joined
May 31, 2015
Messages
62,577
Reaction score
124,320
Location
Earth
This is about all we have left for reserves in the US
film-fight-club-toilet-scenes.jpg
 
Last edited:

Scorpio

Hunter of Chin Li's Boo Hoo Flu
Founding Member
Board Elder
Site Mgr
Midas Supporter ++
Joined
Mar 25, 2010
Messages
33,912
Reaction score
50,880
wow, thanks for shitting on my thread,

only appropriate in your mind
 

BarnacleBob

Moderator, Equal opportunity annoyer!
Founding Member
Site Mgr
Site Supporter
GIM Hall Of Fame
Joined
Oct 15, 2012
Messages
18,546
Reaction score
41,309
Location
Ten-Oh-Cee
I have heard bankers lament that fact, where they have become 'originators' and 'servicers' in todays system,

and for this grand McDs task, they are paid with fee structures.

For years we have tried to get people to understand that bankers are nothing more than order takers at anything other than the highest levels.

Go get a home loan from a local bank, they aren't holding the paper.
Go get a car loan, unless you go direct as All states, they may or may not slough off the paper, probably only keeping the prime stuff.

About the only thing I am seeing them holding paper on any more is some business loans, unsecured paper, etc.

So in order to have further paper generation, either the main credit markets need to be willing and able, or small businesses need to demand more. Except, a whole new industry has sprung up due to lack of bank willingness to lend to small business, that specifically caters to small businesses. They are booming.

Yes, this is true.... Let me also point out that a number of insurance companies are so flush with capital that they too have entered the automobile lending industry. And like banks, they too have agents in almost every town or city their lending in....

Reminds me of Hedge Funds producing & financing Hollywood movies, pilot teevee sitcoms & various special presentations seeking yield away from an overcrowded market.... This speaks to the high inflation of the previous 40 years....

Yet nothing speaks to the past inflation like 2% interest rates.... If money & credit was scarce, interest rates would be 6% - 8%, not 2%! And it appears that even 2% cannot attract the interest of bank borrowers!

The centrist planners have over-indulged, they have created inflation that has spawned great competition that is threatening to highly diminish or destroy their control system.... Is it any wonder that Yellen testifies like a deer caught in a head light???

The War on Terrorism is the tool they are attempting to use to reign in the competition they themselves created.... indeed banning cash & wholesale confiscations of savings & assets are the only means for these clowns to regain central control & monetary policy again....
 

the_shootist

I identify as fully vaccinated so I'm good!
Midas Member
Sr Midas Supporter +++
Joined
May 31, 2015
Messages
62,577
Reaction score
124,320
Location
Earth
wow, thanks for shitting on my thread,

only appropriate in your mind
Fair enough Scorp.....I changed it to a more palatable image but the message remains the same :belly laugh:
 

the_shootist

I identify as fully vaccinated so I'm good!
Midas Member
Sr Midas Supporter +++
Joined
May 31, 2015
Messages
62,577
Reaction score
124,320
Location
Earth
Yes, this is true.... Let me also point out that a number of insurance companies are so flush with capital that they too have entered the automobile lending industry. And like banks, they too have agents in almost every town or city their lending in....

Reminds me of Hedge Funds producing & financing Hollywood movies, pilot teevee sitcoms & various special presentations seeking yield away from an overcrowded market.... This speaks to the high inflation of the previous 40 years....

Yet nothing speaks to the past inflation like 2% interest rates.... If money & credit was scarce, interest rates would be 6% - 8%, not 2%! And it appears that even 2% cannot attract the interest of bank borrowers!

The centrist planners have over-indulged, they have created inflation that has spawned great competition that is threatening to highly diminish or destroy their control system.... Is it any wonder that Yellen testifies like a deer caught in a head light???

The War on Terrorism is the tool they are attempting to use to reign in the competition they themselves created.... indeed banning cash & wholesale confiscations of savings & assets are the only means for these clowns to regain central control & monetary policy again....
I view capital as measured in FRNs as debt. Capital as we know it, has nothing to back it. It's all smoke and mirrors. I guess that's my point. All these big businesses have lots of capital, but what do they actually have?
 

All-in

Silver Member
Silver Miner
Joined
Mar 31, 2010
Messages
800
Reaction score
305
Location
Scotland
Cheers shootist, just cheers! LOL

And yes Bob even those 0% interest deals over 6o months deals come with limits, credit score, how much you are willing to spend, etc... And as you say they use the banking credit score criteria to working out the deal. I read some stories that they come with some hidden fees that they like to execute (borrowers make a mistake, misses a payment).

I also read that 0% loans from financial institutes is a scam (massive). It states that it allows banks to temp people to create money (usually credit cards), that can\will be deposited at other banks allowing for an increase in total money supply, allowing for more loans. I hope i said that right.
 

BarnacleBob

Moderator, Equal opportunity annoyer!
Founding Member
Site Mgr
Site Supporter
GIM Hall Of Fame
Joined
Oct 15, 2012
Messages
18,546
Reaction score
41,309
Location
Ten-Oh-Cee
Back t
I view capital as measured in FRNs as debt. Capital as we know it, has nothing to back it. It's all smoke and mirrors. I guess that's my point. All these big businesses have lots of capital, but what do they actually have?

Capital is much more than FRN's, as FRN's are NOT capital, but rather a financial asset to the holder and a liability to the issuer.

Capital is real tangible property, usually some form of a productive asset.... Stawks and bonds are not capital, but rather a financial derivative derived from capital. This is not to say that in some financial circumstances they cannot be substituted and treated as capital, but the substitution & treatment does not necessarilly make them capital!
 

Carl

Gold Member
Gold Chaser
Joined
Mar 30, 2010
Messages
3,883
Reaction score
2,827
Location
Texas
Back t
Capital is much more than FRN's, as FRN's are NOT capital, but rather a financial asset to the holder and a liability to the issuer.
FRNs are capital, made so by law. That the intermediaries are made financially liable for their disposition, between the originator and the end user, does not make them a liability overall, or any less of a capital asset.
 
Last edited: