US deficit spending is $1.4 trillion dollars, Bernanke is flooding banks with cash, interest rates are at record lows, mortgage rates are at record lows, and velocity of money is falling like a rock.
Excess Reserves
Of the $1.8 trillion Bernanke has added to base money supply since the start of the recession, nearly all of it is sitting parked at the Fed as excess reserves.
Interest Paid on Excess Reserves
As you can see, banks have parked close to $1.6 trillion with the Fed earning .25 percent annually. This is free money to the banks to the tune of $4,000,000,000 per year for doing nothing.
In short, banks would rather have $4 billion in free money at a measly .25 percent than make much more money by lending it out. This indicates two things:
- Money Multiplier Theory is nonsense
- Banks are still capital impaired and/or banks have no credit-worthy borrowers who wish to borrow money
If and when banks do start lending, it will not be because all those excess reserves have tempted them. Rather it will be because banks feel they have credit-worthy borrowers.
In the meantime, debt deflation rolls on, distorted of course by global central bank stimulus everywhere one looks, notably (the Fed, ECB, China, Bank of England) and coming up shortly, the Bank of Japan.
As I have stated before, competitive global currency debasement is a good environment for gold.
Let’s wrap this up with one final chart.
Total Credit Market
As you can see the total credit market is well over $50 trillion. Yet a large number of misguided souls believe printing $1.8 trillion of which $1.6 trillion is parked as excess reserves will cause hyperinflation.
It won’t. Hyperinflation is a political event, not a monetary one. Besides, the US has more gold than any other nation. For further discussion, please see Hyperinflation Nonsense in Multiple Places.
Yes, the US is going to have a “debt moment”, just as Europe is having one now and Japan will have soon enough. However, that moment may be quiet a long ways away (or not), but hyperinflation will not be the result when it happens.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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In the media recently, the question is being asked: how it is that the wealthy are doing so well while the middle class is suffering in comparison? The usual villains named are outsourcing and the resulting decline of the manufacturing base. Blame also goes to NAFTA and the other trade agreements negotiated by the last three administrations.
But there is another and more fundamental reason why we have this dramatic disparity in income. If you remember Economics 101 in college and the topic about the relationship between commodities and money, you may have seen, as I did, this little formulation written on the blackboard: C-M-C vs. M-C-M. The lecture had to do with a healthy system vs. an unhealthy one. I even recall the professor using the terms ethical and unethical in this context.
In a C-M-C economy, money functions as it was intended as the medium of exchange between commodities, all kinds of raw materials, produce, manufactured goods and services. In this natural system, some of the money made and earned passes into the hands of workers and that money works its way around and through the economy, benefitting many people. In effect wages multiply in value.
In an M-C-M economy, on the other hand, money is perverted into a commodity and real commodities serve only as an artificial and unnatural medium of exchange. In other words, people use money to make more money. In these cases money does not work into the general economy for the general welfare but remains in the hands of the few, sometimes not even involving a commodity except in name only. Combine that arrangement with beneficial tax and loophole policies and the effect is multiplied and protected.
One caveat: some may recognize the M-C-M system as an expression for arbitrage, the business of buying and selling of money, usually with no commodities involved. Sometimes, arbitrage serves a useful purpose in keeping the prices of commodities in balance with different currencies, but in general those in arbitrage have little or no contact with real commodities. But there is still a danger as we have seen in arbitrage manipulation of markets.
The point here is to suggest that using money to make money with little relationship to commodity is an unhealthy practice because it bypasses the makers of products, most of whom are the Middle Class. The result is that workers are left out of the loop and there are no wages to work their magic in the economy as a whole.
Another answer given to the disparity between the rich and the middle class is the failure of so-called trickle down economics. But here again is a misunderstanding. In an M-C-M economy, there is nothing to trickle down because commodity is either not involved or only marginally involved. And if the wealthy choose not to invest in the creation of commodity, the flow of money dries up.
As my professor explained to us in that Econ 101 class, he acquired knowledge and experience to sell to an institution which paid him a salary so that he could offer courses that students were willing to buy in order to acquire knowledge and experience. It was C-M-C working in good order. It worked for me for forty years in education and can work again.
This patch also adage Japan alteration from being a feudal bund to having a retail numizmatyka Kraków thriftiness and left the Japanese with a lingering Western influence.