Base Money

[oddlots]

Here's another one of those fed charts we're always getting into a twist about. This one isn't non-borrowed or borrowed reserves of depository institutions - never did figure out what they, ultimately, showed. This is the monetary base:

Percent change

So I'm going to go out on a limb and say this is inflationary. Anyone care to disabuse of that notion? My understanding is that over the last year the fed has been quite careful to control the money supply and have instead trashed their balance sheet to soak up crappy assets. It would seem that phase is decisively over.

No doubt I have got this completely wrong. (Self-taught gardener yes, self-taught banker no.)

[jimmygu3]

Re: Base Money

Here's another one of those fed charts we're always getting into a twist about. This one isn't non-borrowed or borrowed reserves of depository institutions - never did figure out what they, ultimately, showed. This is the monetary base:

Don't see the chart.

[*T*]

Re: Base Money

broken link to graphic...

[oddlots]

Re: Base Money

Thanks for the fix Fred. I'm not sure how this is related (would a big increase in Fed's lendings increase the money supply? If the answer is no I'm going to give up on trying to understand any of this)...

Brad Setser's blog today discussed the huge increase in the Fed's balance sheet:

In a post called "Extraordinary Times" he writes:

In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:
Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);
Increased its “other assets” by about $80b (from $98.67b to $183.89b);
Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);
That works out to the provision of something like $370b of credit to the financial system in a two week period. That may be a bit too high: the outstanding stock of repos felll by $40b (from $126b to $ 86b), leaving a $330b net change in these line items. But that is still enormous.
The most that the IMF ever lent out to cash strapped emerging economies in a year?
$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).
The most the IMF ever lend out over two years?
$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)
This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lend out these kinds of sums over such a short-period.


(Incidentally, he notes that there is no sign of at least official Capital flight; the custodial account figures continue to rise.)



Link: http://tinyurl.com/5ya45g


I posted this elsewhere but it seems germaine. One of Setser's regular posters - London Banker - had this very illuminating thing to say in the comments:

I’ve been speculating all week that the pressure being used on the Congress to pass the Paulson Plan is the threat of Fed illiquidity. As of two weeks ago, the Fed had lent out more than $600 billion of its $800 billion balance sheet Treasuries against crap MBS collateral. The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan. As a bonus, the Paulson mark-to-maturity price becomes the implicit Level 3 price for capitalisation of all the firms and banks in the system, giving them some breathing room to stay in business. Everyone wins except the poor American taxpayer.
The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.


That explains a couple of things: 1) the strange kind of evasion of what the urgent problem is 2) why sensible comments like why don't we just re-capitalise the banks a la Sweden don't seem to gain any traction

[jtabeb]

Re: Base Money

The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.

One can only hope that this would be the final nail in the Fed's coffin.

One can hope so, at least.

[Supercilious]

Re: Base Money

I'm not sure how this is related (would a big increase in Fed's lendings increase the money supply? If the answer is no I'm going to give up on trying to understand any of this)...

It's very simple to understand this issue if you wear a tinfoil hat (as I do) and begin to shout "End the Fed!' whenever you find an opportunity

IMHO, what we have now is a liquidity crisis. If you have a big bullion bar, worth $1 mil today) and tomorrow the gold price goes down 5% (and you believe the price of gold is going down on a long term) you go and sell that bar for $950,000. You get rid immediately of the yellow shiny junk.(goldbugs are going to lynch me for the last statement)

If 5% of the high risk tranches of a $1 mil CDO disappear (foreclosures of NINA mortgages) and you believe home prices are going down (more foreclosures)you don't/can't get $950,000 by selling that CDO. You get a terrible headache, because nobody wants to touch toxic paper.
If yo are really desperate you can do what Thain did with Merill's toxic stuff. You beg a sharky hedgie to buy that CDO from you for $220,000, but only if you agree to lend him the money for the deal.

Just a few years ago these CDO's were being gulped in an instant. CDO packagers could not keep pace with demand. There was no problem in selling your CDO for hard cash in a minute. Basically the same was with Auction Rate Securities; the best thing since the sliced bread.

Now let's look at the liquidity pyramid:




Ben can turn derivatives from highly liquid good money to solid toxic ice in one stroke of the pen.

Let's consider the total area of the triangle as the total volume of liquidity (which is not the same with M3) in the global financial system.

If you have the derivative (red) sector disappearing fast AND if the fed is not compensating with an equal rate of dumping treasuries (yellow sector) , the total volume of liquidity (total area of the triangle) decreases and you get to the surreal situation where Ben keeps dumping treasuries and Finster's FDI shows deflation.

Ben can dump as many treasuries as he wants in order to satisfy his obsessive-compulsive printing behavior (having chili for breakfast), but that may not result in inflation as long as derivatives become illiquid (disappearing from the triangle) at a faster rate.

Corollary, if Ben finds a cork for himself, and the dumping of treasuries stops completely, but he smooches the rate with skill and art, he can put a load of those frozen derivatives in Wall Street's microwave ....and guess what ?... the derivatives (red) area of the triangle expands fast and we may have an inflationary shock with no bailouts and no treasuries river flowing from Hank.

It is my, tinfoil hat, opinion this is actually done on purpose, in order to change the internal distribution of the liquidity pyramid. I described before in detail, my screwball theory, called the Fed's Hammer Drill.

This is a very real crisis.

Not sure I can agree with that. IMHO this is not a real crisis at all it's completely phony, from the beginning to the bailout(s).
You can call it a very serious crisis, an extremely grave one, but it's not real, as I've tried to explain here.

The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lend out these kinds of sums over such a short-period.

Or it tells a story of extraordinary determined intervention to replace frozen derivatives with fresh printed new power money (treasuries). You say tomato, I say tomatoe..

(Incidentally, he notes that there is no sign of at least official Capital flight; the custodial account figures continue to rise.)

The Fed's Hammer Drill Theory has a simple explanation for this "surprising" development, and also there are some interesting additional details becoming apparent lately, but I don't want to get off topic.

Everyone wins except the poor American taxpayer.

That is actually the most important point that drives me completely crazy and compels me to yell: "End the Fed!"

The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.

There is no real danger whatsoever of Fed becoming illiquid. They can bailout the FDIC, they can bailout the Fed, hell ... now they want even to bailout foreign banks ... wtf are they going to do next ??? are they going to bailout Fraudi and Chinese SWF's???:eek: That's charity with taxpayer's money, and they ar every good at it.

That explains a couple of things: 1) the strange kind of evasion of what the urgent problem is

There is no urgency whatsoever because there is no real problem. It's only scare tactics used in a Problem-Reaction-Solution scenario, which is masterfully applied to us.

2) why sensible comments like why don't we just re-capitalise the banks a la Sweden don't seem to gain any traction

All this phony "catastrophic" threat is nothing else that a cover for the real intention of the Illuminati - which is to .... flood the international financial system with treasuries.

This is all what they care about. That's why they don't care about any sensible comments.

That's why until recently they were saying that "Deficits don't matter"- and they were right: if your real intention was to flood the markets with treasuries, deficits would not be an issue.. by the contrary .. the more the merrier.

Remember it's all phony... it's all Problem-Reaction-Solution

[c1ue]

Re: Base Money

The problem we have right now is very straightforward.

As EJ and others, including myself, have been saying for a long time - the basic function of FIRE institutions has been corrupted into a Ponzi scheme.

Others more radical, including myself, have been saying that the entire US financial system/FIRE economy is net insolvent.

However, due to the use of various accounting tricks, the actual insolvency has been concealed.

This past 3 weeks has seen the first domino of credit default swaps falling, and with it the ability to conceal is significantly reduced.

Furthermore said first domino falling has now started additional dominos: MBS crap actual market value, bank capitalization ratios after CDS/MBS/CDO actual market values entered, debt dependency for operational survival for 'industrial' companies, etc.

The Fed has been trying hard to forestall this occurrence - but again as has been noted: The Fed can provide liquidity, but cannot lend solvency.

The bailout plan is intended to address this second part.

What really annoys me is that any effort to deviate from the 'Paulson Plan' is being treated by those minions of the financial world as being somehow a Samson bring down the temple effort. And these minions are legion: many of Minyanville's writers, John Mauldin, Krugman, etc.

Certainly it is true that trouble is upon us. But where were these big mouths when the trouble was brewing? This present circumstance is NO surprise to anyone spending much time at iTulip.

The House Republican counter plan is also not ideal, but it is a step in the right direction: one where all possibilities are evaluated according to everyone's merits and the best one chosen. It certainly is motivated by less than altruistic reasons, but nonetheless that is the exact reason why democracy is supposed to work: in the clash of prerogatives, that only the common good is acceptable.

[we_are_toast]

Re: Base Money

The bailout plan is intended to address this second part.

What really annoys me is that any effort to deviate from the 'Paulson Plan' is being treated by those minions of the financial world as being somehow a Samson bring down the temple effort. And these minions are legion: many of Minyanville's writers, John Mauldin, Krugman, etc.



The House Republican counter plan is also not ideal, but it is a step in the right direction: one where all possibilities are evaluated according to everyone's merits and the best one chosen. It certainly is motivated by less than altruistic reasons, but nonetheless that is the exact reason why democracy is supposed to work: in the clash of prerogatives, that only the common good is acceptable.

1) Krugman opposed the Paulson plan.

2) The Republican plan was designed to be unworkable and is a thinly veiled attempt to let the basic philosophy of "unregulated markets know best", the same philosophy that got us into this mess, take us into the future.

3) The Paulson plan is dead! There is no Paulson plan anymore. Whatever comes out of the congress will be a combination of the administration/congressional leaders ideas.

Doing nothing as the Republicans want means a certain and immediate crash. Doing something, may mean a delay in the crash and buys me more time to get prepared.

[phirang]

Re: Base Money

1) Krugman opposed the Paulson plan.

2) The Republican plan was designed to be unworkable and is a thinly veiled attempt to let the basic philosophy of "unregulated markets know best", the same philosophy that got us into this mess, take us into the future.

3) The Paulson plan is dead! There is no Paulson plan anymore. Whatever comes out of the congress will be a combination of the administration/congressional leaders ideas.

Doing nothing as the Republicans want means a certain and immediate crash. Doing something, may mean a delay in the crash and buys me more time to get prepared.

Prepared for what? Buying more gold? Can gold retain relevance in a world where American consumption props up the vendor BRIC's and OPEC? This is the real question I have: after the next rate-cut, what's the reason to hold gold? The only catalyst for gold we've seen has been banking/brokerage crisises such as BSC and this past week in the money markets.

I think commodity reflation will occur if we do get this bailout, i.e. oil > 100, but again, that's because we're now financing our consumption by forcing foreign treasury holders to repatriate their wealth: this will piss them off, but their governments are such shit that they have no recourse.

The commodity reflation though does not imply a high gold price... I need help on the gold thesis aside from "systemic banking chaos", which is plausible yet not terribly helpful for those seeking positive real returns.

[raja]

Re: Base Money

Prepared for what? Buying more gold? Can gold retain relevance in a world where American consumption props up the vendor BRIC's and OPEC? This is the real question I have: after the next rate-cut, what's the reason to hold gold? The only catalyst for gold we've seen has been banking/brokerage crisises such as BSC and this past week in the money markets.

I think commodity reflation will occur if we do get this bailout, i.e. oil > 100, but again, that's because we're now financing our consumption by forcing foreign treasury holders to repatriate their wealth: this will piss them off, but their governments are such shit that they have no recourse.

The commodity reflation though does not imply a high gold price... I need help on the gold thesis aside from "systemic banking chaos", which is plausible yet not terribly helpful for those seeking positive real returns.

phirang,

I'm not in your league as far as understanding financial matters, but I can tell you why I'm invested in gold, FWIW . . . .

When fear builds as the recession induces in a downward spiral of economic collapse, the stock market crashes and more banks fail, people will think, "This ship's going down -- where can I put my money to keep it from turning to dust?" The first safe harbor will be Treasuries.

Treasury rates will stay low for awhile, but people will soon see inflation skyrocketing and the value of the dollar diving, so they will turn to PM as the last remaining refuge to protects their vanishing assets. What other choice do they have?

[c1ue]

Re: Base Money

1) Krugman opposed the Paulson plan.

2) The Republican plan was designed to be unworkable and is a thinly veiled attempt to let the basic philosophy of "unregulated markets know best", the same philosophy that got us into this mess, take us into the future.

3) The Paulson plan is dead! There is no Paulson plan anymore. Whatever comes out of the congress will be a combination of the administration/congressional leaders ideas.

http://www.nytimes.com/2008/09/26/op...gman.html?_r=1

Yes, Krugman didn't like the Paulson plan.

But he does believe in a bailout:

Maybe we can let Wall Street implode and Main Street would escape largely unscathed.

But that’s not a chance we want to take.
So the grown-up thing is to do something to rescue the financial system.

For all Krugman's supposed economics background, he's devoted far more articles this year to the upcoming election than the equally upcoming (and perhaps now, here) Ponzi scheme unraveling.

Why is it someone with a Ph.D. in economics - specifically trade and finance - cannot come up with a proposal? Instead must hide behind critiques of others'?

As for the Republican plan - I totally agree it is equally vague and has another agenda in mind. But at least it isn't a blank check.

As for Paulson - I very much doubt it was Paulson's original intention to have his plan go through as is.

The way executives work, you put something forward which is everything you'd like in your wildest dreams. It has components which you will be willing to give up, ideally with parts specifically tailored to trade for items you know you're going to get hit with as quid pro quo.

We don't know what Paulson's real plan is.

[tombat1913]

Re: Base Money

It is my, tinfoil hat, opinion this is actually done on purpose, in order to change the internal distribution of the liquidity pyramid. I described before in detail, my screwball theory, called the Fed's Hammer Drill.

Not sure I can agree with that. IMHO this is not a real crisis at all it's completely phony, from the beginning to the bailout(s).
You can call it a very serious crisis, an extremely grave one, but it's not real, as I've tried to explain here.

There is no urgency whatsoever because there is no real problem. It's only scare tactics used in a Problem-Reaction-Solution scenario, which is masterfully applied to us.

All this phony "catastrophic" threat is nothing else that a cover for the real intention of the Illuminati - which is to .... flood the international financial system with treasuries.

This is all what they care about. That's why they don't care about any sensible comments.

Remember it's all phony... it's all Problem-Reaction-Solution

Wow, Captain Conspiracy Theory!

You apparently believe in this conspiring oligarchy of money masters who seek to gain world dominance through political and financial means. Ok fine, I believe there is plenty of evidence to support your theory.

You apparently believe that this group of megalomaniacs is willing the conspire against the world economy on such a grand scale as this recent financial emergency and lie to billions of people about it. Wow that takes some cajones.

All fine and dandy by my standards so long as you have good reason to believe so.

But here's what I don't understand in the least. Regarding a certain event which occured about seven years ago this month and a certain thread which no longer exists, what makes that event any different? You honestly believe that they would play games with billions of peoples pocket books but wouldn't kill a couple thousand to accomplish the same ends. You talk about problem-reaction-solution in regard to economics so matter of factly, but in this other instance it's out of the question? What the $#* gives buddy? You're obviously open minded enough to accept that this group of people exists, and is devious enough to affect peoples lives on a massive scale. Are you afraid to swim out to far into the truth pool?

I could be completely wrong about this, but it seems to me that you haven't even bothered to look into that subject in any real depth. Furthermore, I believe if you truly spent some time and looked into the subject you would change your mind. There is a movement of intelligent professionals who are speaking out, and it's growing larger by the day. It needs more intelligent people like yourself to look at the facts.

Tom

[Joy]

Re: Base Money

Oddlots,

My understanding is this is related to the AIG funding and the LEH bankruptcy. Both required immediate money creation by the FED. Of course, with this kind of money creation we should expect a lower funds rate given the extra money in the banking system. In fact, in the past 10 days the effective funds rate has been significantly below target.

The treasury has in the past few days issued enormous amounts of T-Bills to mop up this extra money. I would expect the monetary base to go back down soon.

Of course, if it doesn't this is inflationary.

[we_are_toast]

Re: Base Money

Yes, Krugman didn't like the Paulson plan.

But he does believe in a bailout:

Does he? The bailout term was originally applied to Paulson's plan and the plan the Krugman supports doesn't resemble the original.

To over simplify Krugman;
Equity in company for buying crap MBS. Since MBS isn't worth anything anyway, the government is basically buying an interest in the company to keep them afloat. Very much like an additional stock offering by the company. Also caps on exec salaries. Maybe a risky adventure, but not anything like the Paulson bailout.

For all Krugman's supposed economics background, he's devoted far more articles this year to the upcoming election than the equally upcoming (and perhaps now, here) Ponzi scheme unraveling.

Krugman has spoken often of infrastructure investment as economic stimulus but you are right that he is concentrating on politics. Politics is the reason we are in this mess, and we have no chance of getting out if we remain with the same political philosophy. Why bother proposing an alternative that is fundamentally contrary to the current political philosophy and would have 0 chance of passing in a McCain administration. He is correct to concentrate on the politics 1st and work on the plan for fundamental change later.

As for the Republican plan - I totally agree it is equally vague and has another agenda in mind. But at least it isn't a blank check.

You are correct. They did have another agenda and that agenda was simply to do nothing and let the wild, chaotic, unregulated pilliging continue. A plan that is known to be incapable of passing is no plan at all.

As for Paulson - I very much doubt it was Paulson's original intention to have his plan go through as is.

The way executives work, you put something forward which is everything you'd like in your wildest dreams. It has components which you will be willing to give up, ideally with parts specifically tailored to trade for items you know you're going to get hit with as quid pro quo.

We don't know what Paulson's real plan is.

I agree that you typically ask for more than you think you can get. But NO treasury secretary, not one, zilch, 0, none, has ever come before the congress and asked that the constitution be suspended, that he be given 700 billion dollars, and that he be allowed to spend it without question! This isn't some bargaining tool! This is an administration that thinks it's above the law and can do any thing it damn well pleases.

[Jay]

Re: Base Money

Corollary, if Ben finds a cork for himself, and the dumping of treasuries stops completely, but he smooches the rate with skill and art, he can put a load of those frozen derivatives in Wall Street's microwave ....and guess what ?... the derivatives (red) area of the triangle expands fast and we may have an inflationary shock with no bailouts and no treasuries river flowing from Hank.

Could you expound on this a bit?