US Money Supply: Running On A Treadmill

A recurring question in the financial world is, "if the Fed is printing so much money why do we not yet see significantly higher prices?"

In our country we have what is known as a zombie banking system, a topic I have discussed repeatedly in the past.

In 2008 our largest banks became insolvent.  They still exist today but only as lifeless shells.  They do not make loans to small businesses, home owners, or students to create economic growth. 

Since the financial crisis began the Federal Reserve has pumped $1.8 trillion into the financial system with freshly printed cash.  This vertical growth can be seen in the chart below (chart from the Federal Reserve).

In a normal environment the banks would take this cash and lend it out into the market.  Lending to homeowners, commercial real estate investors, or small businesses allows banks to generate a high return on their capital (they can charge higher interest).  This has not happened.  The banks have taken the cash and immediately parked it at the Federal Reserve.  This can be seen in the chart below, which mirrors the first chart, showing bank reserves held at the Federal Reserve.

I'll provide a simple example on how this circular motion works.  A large bank, known as a primary dealer, purchases a treasury bond from the US government at a weekly auction.  The Federal Reserve then purchases this bond from the primary dealer with printed money (Quantitative Easing).  The large bank (primary dealer) then takes that printed cash and parks it back at the Federal Reserve (instead of lending it into the market).

The banks have $1.6 trillion sitting in cash at the Federal Reserve which could be lent out at many multiples of that through fractional reserve banking.  For example, if the banks were not zombies but real financial institutions, they could lend out at least ten times that amount creating a surge in credit and money supply in our country.

The $1.6 trillion they hold at the Federal Reserve pays them $4 billion per year in interest.  This money pays for large bank bonuses and CEO salaries, who take the free cash and keep it away from American businesses who desperately need it to grow and create jobs. 

Are you hopeful that this will soon change with our coming election?  The following shows the top campaign contributions to front runner Mitt Romney.

We know the Obama admistration is fully owned and paid for by our zombie banking system, the only hope was that a newcomer could provide a change.  Four more years of zombie banking and massive bonus pay have already been purchased and paid for no matter what the outcome is in November.

If there is no money being lent from our banking system you are probable wondering how Americans are still able to get a student loan or obtain a mortgage.  Who is doing this lending?

It is our wonderful government.  Yes, with a zombie banking system in place, it is tax payers who must lend to each other with their own money.  This is how total money and credit growth is still rising as bank lending has disappeared.

Our government has no money, it is given to them by tax payers and the shortfall is borrowed from foreigners around the world.  This will end, just as it has in Europe and just as it soon will in Japan.  Then the cost of "saving" every American during the crisis of 2008 will be crystal clear.
h/t MISH


  1. Agreed. And you haven't even touched on the issue of sovereign debt and derivatives on the other side. If Greece ever officially defaults the whole system becomes insolvent (Look at BOA and JPMorgue euro holdings). Which means we have to stay in this limbo world until a surprise default occurs or WWIII kicks off. Hyperinflation occurs if they keep it balanced enough to last another year or two. Where are you placing your bet future tense?

  2. I'm positioned right now in cash and precious metals with a close eye on additional investments based on market movement which I discussed in detail in 2012 Outlook: How To Invest.

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  3. Mr. Tuna: I look at the two graphs and I notice that it:

    1) It appears that banks are shelling out more loans. While not necessarily at the same rate of their influx in capital.

    2) I believe the banks needed to be de-leveraged which could also lead to them holding more reserves, no?

  4. The banks have been making more loans, but still a very small amount. Another reason they have not made additional loans is because they understand that lending at these prices (homes) and at these interest rates (due to Fed manipulating interest rates lower) is still an incorrect loan to make (other than to the highest forms of credit quality such large businesses or wealthy individuals). In other words they will lend to people who do not need the money.

    Deleveraging has taken place in the American banking system, which has fallen from 30 to 1 range heading into the fall of 2008 down to 12 to 1 today (still high but much better).

    Europe's banks have not deleveraged and still sit at 30 to 1 or greater in their system, which will make their debt problem far worse this year as more banks must be nationalized.

  5. It is a wonderful government. With a zombie banking system in place, it is tax payers who must lend to each other with their own money. This is how total money and credit growth is still rising as bank lending has disappeared.

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