Bernanke gone berserk! Bank reserves explode!
by
Martin D. Weiss, Ph.D.
Martin here with the most shocking new numbers I've seen
in my lifetime.
My
conclusion: Fed Chairman Bernanke has dumped so much funny
money into the U.S. banking system and has done so little
to manage how that money is used, the fate of our entire
economy has now been cast under a dark shadow of doubt.
This
is not conjecture or exaggeration.
Nor
are the underlying facts subject to debate.
They
are blatant, unambiguous, and fully supported by the Fed's
own data ...
Fact #1. Up
until the day Lehman Brothers collapsed in September of
last year, it took the Fed a total 5,012 days — 13 years
and 8 months — to double the cash currency and reserves in
the coffers of U.S. banks.
In
contrast, after the Lehman Brothers collapse, it took
Bernanke's Fed only 112 days to double the size of U.S.
bank reserves. He accelerated the pace of bank reserve
expansion by a factor of 45 to 1. (Click
here for the proof.)
Imagine a crowded interstate highway with a speed limit of
55 miles per hour and with a long tradition of allowing no
one to exceed the limit by more than 20 or 25 mph.
Suddenly, a new driver appears on the scene with a
jet-powered engine that accelerates to a supersonic speed
of 1,350 mph.
That's the same magnitude of change Fed Chairman Bernanke
has presided over.
Fact #2.
Even in the most extreme circumstances of recent history,
the Fed never pumped in anything close to this much money
in such a short period of time. Indeed ...
-
Before the turn of the millennium, the Fed scrambled to
provide liquidity to U.S. banks to ward off a feared Y2K
catastrophe, bumping up bank reserves from $557 billion
on October 6, 1999 to $630 billion by January 12, 2000.
And at the time, that was considered
unprecedented — a $73 billion increase in just three
months. In contrast, Mr. Bernanke's recent money
infusion is $1.007 trillion or 14 times more!
-
Similarly, in the days following the terrorist attacks
on the World Trade Center and the Pentagon, the Fed
rushed to flood the banks with liquid funds, adding $40
billion in the 14-day period between 9/5/01 and 9/19/01.
Mr. Bernanke's recent trillion-dollar flood of money is
twenty five times larger.
Fact #3.
After the Y2K and 9-11 crises had passed, the Fed promptly
reversed its money infusions and sopped up the extra
liquidity in the banking system. But this time, Mr.
Bernanke has done precisely the opposite: Since he doubled
the currency and reserves at the nation's banks with his
112-day money-printing frenzy in late 2008, he has thrown
still more money into the pot.
Fact #4.
With no past historical precedent, no testing, and no clue
regarding the likely financial fallout, Mr. Bernanke has
invented and deployed more weapons of mass monetary
expansion than all prior Fed chairmen combined.
The
list itself boggles the imagination: Term Discount Window
Program, Term Auction Facility, Primary Dealer Credit
Facility, Transitional Credit Extensions, Term Securities
Lending Facility, ABCP Money Market Fund Liquidity
Facility, Commercial Paper Funding Facility, Money Market
Investing Funding Facility, Term Asset-Backed Securities
Loan Facility, and Term Securities Lending Facility
Options Program.
None
of these existed earlier. All are new experiments devised
in response to the debt crisis.
Fact #5. The
single biggest new facility is the Fed's purchases of
mortgage-backed securities (MBS). This massive operation
began on January 7 of this year with only $10.2 billion.
Now, just nine months later, the Fed has bought up a
cumulative total of $924.9 billion, the largest money
infusion by any central bank into any single market sector
of all time.
Simply put, the Fed has been buying up
virtually all the junk and nonjunk mortgages it can lay
its hands on.
Fact #6. Mr.
Bernanke would have you believe that he can carefully
control how the banks use all this free money, with an eye
toward preventing a sudden bout of inflation.
In
practice, however, he's doing nothing of the sort.
For
example, the theory is that if the Fed merely arranges for
the U.S. Treasury Department to borrow back most of the
excess bank reserves, the Fed could keep the money out of
the banks' hands, prevent them from multiplying it with
big lending, and ward off the ultimate inflationary
consequences.
But,
as pointed out by
Econbrowser.com, the reality is that the Treasury is
absorbing only a small fraction of the banks'
bloated reserve balances (green area in chart).
The
bulk of those reserves (green area) are readily available
to start multiplying through lending — and to set off an
uncontrollable vicious cycle of too much money chasing too
few goods.
Fact #7. If
the bank lending were mostly to American businesses, it
might at least help rebuild the U.S. economy. However,
right now, the only big lending we see is to finance a new
speculative fever that has swept the globe — the borrowing
of cheap dollars to buy high-yield investments. (See Mike
Larson's "Easy-Money
Fed Fueling Dollar Carry Trades" and "Getting
Inside the Fed's Head.")
Fact #8. The
nation's money supply is exploding. In August, money in
circulation and in checking accounts (M1) expanded at the
breakneck speed of 18.6 percent compared to the year
earlier. That was ...
-
Three times faster than the average M1 growth rate of
the 1970s, which helped create the worst inflation of
our era;
-
Over SIX times faster than theaverage M1 growth
rate during the half century prior to September 2008;
and
-
The single fastest M1 growth rate ever recorded
by the Federal Reserve.
The Consequences
This
overabundance of high-powered money flooding into the
nation's banking system and money supply can have only one
consequence: To cheapen the value of each dollar you
own.
Yes,
Mr. Bernanke has temporarily tamped down the Wall Street
debt crisis. And yes, he has managed to replace fear with
greed ... convert the flight to safety into the lust for
risk ... and transform falling markets into rising
markets.
But
look at the price we are paying:
-
The solvency concerns regarding major financial
institutions have now been replaced by looming solvency
threats to the U.S. government itself.
-
The debt crisis of 2007-2008 has been transformed into
the dollar crisis of 2009-2010.
Clearly, in this environment, following traditional
investment norms with conventional investment vehicles
could be dangerous; and evidently, an entirely different
approach to investing is now a must.
For
specific instructions, be sure to view (or review) our
recent 1-hour video,
Washington's War on the Dollar. But do not delay. It
goes offline this week.
Good
luck and God bless!
Martin
P.S.
Here's the proof of the 45-to-1 acceleration in reserve
growth: On December 21, 1994, the cash currency and
reserves at U.S. banks was reported by the Fed at $426.6
billion. Subsequently, it took 5,012 days for that figure
to double, reaching $849.9 billion on September 10, 2008,
the Fed's last reporting period prior to the failure of
Lehman Brothers.
Following that date, however, as the Fed responded with
new, unprecedented open market operations, it took a mere
112 days to double, reaching $1,702.2 billion on December
31, 2008. (To return to the article above,
click here.)
Fed
data series: U.S. aggregate reserves of depository
institutions plus the monetary base. To download my
spreadsheet showing the Fed data and my calculations,
click here. |
