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    "Those reserves are the source of the next stage of credit creation."

    In a sense they always are the "source" of the next loan because banks can always get them and the Fed will always accommodate them provided inflation is anchored. In this sense, there is always the potential for high inflation. However, in fact, reserves are not the actual source of lending at all. Creditworthiness is. Reserves are simply the grease in the payments system and a required amount must be held. Nothing more. Their scarcity and requirement to hold them sets the overnight rate, but they are never required to crate loans. Again, the Fed is always accommodating as long as inflation is anchored.
    Mar 8 08:22 PM | 2 Likes Like |Link to Comment
    "The Fed has no way out."

    Keep telling yourself that, chief. Sure they do. They are already experimenting with a reverse repo tool and they can always pay more interest on excess reserves effectively setting a non zero funds rate. And they can hold assets till maturity, no problem, if they choose to do so.
    Mar 8 12:19 PM | 1 Like Like |Link to Comment
    "...the excess reserves might tempt banks to make loans in sufficient quantity to cause untoward inflation. But there's plenty of time and ways to deal with that problem"

    Until they hit their capital constraint, sure. If inflation becomes a problem, the Fed can pay more interest on excess reserves effectively setting the funds rate immediately higher without shrinking the balance sheet. It can, and just might, hold them to maturity while offering their experimental reverse repo to mop up liquidity in an orderly fashion.
    Mar 8 12:05 PM | 3 Likes Like |Link to Comment
    "It is a liquidity nightmare if they are released too quickly but banks are indeed capable of lending and expanding credit on their basis."

    The process you describe about cash being exchanged for securities is correct. I do understand the idea banks hold their reserve deposits at the Fed, but I'm not sure of the significance of that. They are basically used to make the payments system function so those who hold cash can actually clear transactions. And to do that, they have to hold reserves at the central bank (or withdrawn and hand carried between creditor and debtor.)

    Lending is a different story. Banks are not restrained by reserves, they can always get them. And certainly not today when they already have them. The excess reserves are a necessary part of meeting the demand for cash and accommodate the market's desire for lower borrowing costs in a sluggish economy. The Fed has accommodated low borrowing costs, maybe overly so. It has unintended consequences. One of which is the government not tapping into that pool of low cost borrowing. Another is the global dollar carry trade leaving our own domestic economy high and dry.

    The liquidity nightmare seems to be the flood of dollars flowing around the globe. I mean its a boom today, but eventually it will hurt to see the good times come to an end on tightening (or reverse repo) as rates rise.

    I am not sure what you mean by reserves being "released." Released from what? Their function is to sit there in the banking system ensuring the payments system functions smoothly. The cash has already been "released."
    Mar 8 11:58 AM | 4 Likes Like |Link to Comment
  • Better Dollar Tone Coming [View article]
    Thank you, Mr Chandler, I was looking for a credible report on the dollar and I am pleased you report a better tone coming. I mean, with our modest but sustained growth and all.
    Mar 8 09:15 AM | Likes Like |Link to Comment
    "These are monetary reserves above the Federal Reserve's reserve requirements that exist for all intents and purposes outside the financial system as they are not in circulation."


    "Excess reserves are the proverbial napalm that could catch fire at any minute unpredictably, and the pile just keeps growing."

    So, if they "catch fire" like an Olympic swimming pool full of "proverbial napalm" then they will explode, "outside the financial system as they are not in circulation?"

    I am not sure I understand the connection or the harm involved. I mean I do, but not in the context or being in awe of the Fed's balance sheet. Or our national debt for that matter.

    Excess reserves are the necessary result of the payments system when the Fed buys bonds. The cash on the other side of the balance sheet is what is supposed to "explode" as it is inside the financial system. It's just not exploding into the economy boosting Wal Mart's profits and wreaking havoc with inflation.

    "Because QE is designed to increase money supply in circulation, roughly the M2 numbers."

    So, QE is designed to give us our money back we loaned to the government so we can spend our savings in some form of wealth effect? Wait, something sounds fishy about that. The government's central bank issued us money in exchange for our bonds. Who did they tax to get the money? Yea, they created it from thin air, but is it a loan? So, now the government is holding their own debt - the money we once loaned to them cuz they needed it, apparently. And now they don't need it and want us to have it? And they did that by taxing the rich, maybe? I mean, they had to get money from somewhere to give us our money back, didn't they?

    Most of the money the Fed makes available is not for consumption. It's supposed to circulate through the investment community including lending it back to the government. The other half of the money circulating in the economy comes from bank lending and government spending. That's why M2 is high and velocity is low. And since the latter did not materialize (deficit fear and credit worthiness and lending standards), we are going to be at the zero bound longer than we should have (thank our fearless leaders in congress for being effective only at blocking each other's initiatives and not much else.)

    Meanwhile what are investors to do with all that free cash? If all those reserves sit motionless in the banking system, won't we be loosing money? (Rhetorical) Well, we invest it where growth IS occurring and we simply make more of it. And as long as the punch bowl is nearby and we're on a winning streak, we're gonna be all in. If congress would serve up some finger food, that would be so nice. But, I guess we'll just have to order Chinese.

    There's more, in fact so many thoughts to comment on. This article exemplifies why it is so important to understand the US monetary system so thing like the Fed's balance sheet and the size of our debt make sense. When they make sense, large numbers are not something to fear.
    Mar 8 09:10 AM | 4 Likes Like |Link to Comment
  • Bernanke's Wealth Effect Or A Credit Bubble? [View article]
    "Former Chairman of the Board of Governors of the Federal Reserve System, Ben Bernanke argued that the way to speed up economic growth was to create a consumer "wealth effect" and this would drive consumption spending, which would lead to business investment, and so on and so forth."

    He also argued with congress not to worry about the deficit because of the same effect.

    "But, this is not all. Credit seems to be flowing out to the entire world."

    That's correct. US domestic monetary policy has sought returns globally financing the hot and cold EM growth surge and leaving our domestic economy stagnate. QE had been very much like throwing spaghetti against the wall leaving the US to lick the stain left by its own currency. Making money available is one thing, where it is spent matters entirely. The government was supposed to avail itself of lower rates and spend domestically. It did not. So, our money went where it was treated better.

    Today, our own rates are too low. We need to compete with EM for our own dollar flows to bolster the meager but sustained domestic growth and low inflation. Otherwise we'll be addicted to Fed stimulus FOREVER and become nothing more than a cheap source of global dollar funding with absolutely nothing to show for it.
    Mar 7 10:50 PM | 2 Likes Like |Link to Comment
  • Week In FX Europe - Is It Time To Admit Euro Defeat? [View article]
    Draghi has the jaw bones of Arnold Schwarzenegger. His "what ever it takes" comment essentially made safe EMU peripheral debt without ever employing OMT and its conditionality to strapped EMU sates. And now inaction is not bad news, it's good news. And this should have been little surprise to those who understand the ordoliberal thought that prevails in the EMU and ECB.

    The entire region suffers from higher unemployment and can barely eek out any positive growth numbers. Half of it's member states are distressed to some degree, politically and economically. Greece has defaulted, is on life supporting bail outs, and is in depression from which it is very difficult to recover. US growth might not be stellar, but it is persistent. We've been growing and bringing down unemployment since the crisis. And the dollar cannot catch a break. It's all about returns, US rates are too low.
    Mar 7 10:32 PM | Likes Like |Link to Comment
  • The Wal-Mart Economy [View article]
    Wealth transfer is an essential mechanic of a functioning single currency monetary union like the US. It smooths out capital flow log jams inherent in the EMU (that has no federal transfer mechanism) that were partly responsible for Greek default. The Greek government had to borrow its money supply from its trading partners at interest. And remember the controversy over target2 balances? Much of the EMU's money accumulated in Germany so the periphery had to keep expanding lending, government borrowing, and rely on German tourists to sun bathe on their beaches.

    Yes, the have to be able to sell and earn import revenue to keep their money supply at a level that is not deflationary. It's called competitiveness and that means low domestic wages, low prices (promoting exports), and it means the Greeks will be less wealthy than their highly productive core EMU partners with a large trade surplus and export revenue. They will not be able to consume as much of the global and EMU output as wealthy advanced nations do enjoying our wealth. Olive oil might be cheap, though, so that's good.

    It goes beyond wealth and competitiveness, not everyone can be a net exporter. Olive oil can hardly compete with BMWs.
    Mar 7 10:11 PM | Likes Like |Link to Comment
  • 3 Questions About QE Answered; No One Is Ducking Anything [View article]
    Stryder, there are a few current articles discussion the need for income distribution. They do so from a different free market perspective, but it's interesting from an MMT point of view. Our ability to redistribute income at the federal level is an essential transfer mechanism allowing our wealthy monetary union to avoid capital flow problem in the EMU.

    This is one of the things taxation does, rather than provide 'funding.' And of course is a very hotly debated ideological topic. But, it's in fact an essential mechanism to a single currency like the dollar, nothing ideological about that mechanic. It one way a monetary union functions smoothly.
    Mar 7 09:54 PM | 1 Like Like |Link to Comment
    Nicely said, Stryder. Thanks for posting your comment.

    If your interested and have not done so, there is a whole boat load on information on this site. A literal gold mine, ironically enough.
    Mar 7 02:48 PM | 2 Likes Like |Link to Comment
  • The Wal-Mart Economy [View article]
    "...why does almost nobody think they are not the solution?"

    I'm with ya on this one, coindog. Been arguing the same. Interest rates are the flip side of returns on lending. Both have to be marketable to work. The problem seems to be the Fed is accommodating the market's demand for lower rates in a sluggish growth domestic economy. So, it goes elsewhere. It's interesting the US has experienced modest growth since 2008 and fairly tame inflation while the EMU is in a world of hurt with much of it's periphery under stress and higher unemployment.

    Among the EMU's many problems from Greek default to the Cyprus deposit raiding to still not much word on the banking union nor on fiscal compacts, it has hardly grown at all recently. Yet, the eruo rallies and the dollar falls hard on ECB policy. And especially on ECB jawboning "whatever it takes" to make safe euro sovereign debt. It's all designed to attract private capital without expanding the money supply (and talk of accessing private capital markets at some point and they are in depression.) Now, the US can achieve the same despite QE, but I think it has to taper to do so.

    I think the key is to let rates tick up a bit to where this magic occurs. Back in May last year, rates spiked on taper talk. Something interesting happened. Credit availability spiked up as well. And during the following months of global dollar tightening, EM even tightened policy to re-attract private capital. It's all about private capital as opposed to Fed funds. This is what I mean when I say we need to sell MBS to the world instead of our central bank.

    Higher rates are not just a sign of a strong economy, they help cause it by attracting private capital. Of course, return are better with growth and some inflation (which could be assisted by government spending.) The US has a modest amount of both. Private capital flows are arguably more effective at creating jobs and stoking inflation than mere Fed asset purchases.
    Mar 7 01:04 PM | Likes Like |Link to Comment
  • The Wal-Mart Economy [View article]
    Maybe we should get back to the one earner household, eh? That'll free up jobs for robots. Not really sarcastic, kind of though. Maybe it'll be seen as a tad sexist, but I didn't specify which sex stays at home. Still, the concept hearkens back to the good ole days, doesn't it? Leave it to Beaver and the values of our greatest generation? Can't be all bad, we were a great nation then, regardless. Maybe we'd have less school bus violence today.

    I live in an emerging market. The poverty is fierce. Here, small business is largely some kid digging through the dump scrounging for recyclables. It's good work if you can get it offering maybe $20 a week. Seriously, though, the amount of self employment from scrounging recyclables, to utilizing the public rail system in unique ways for self employment, to offering rides on home built 'public' transport, to retailing retail in a local kiosk is amazing.

    So many people do it, private operated "public" transport clogs the streets and there are three kiosks on every corner, practically. No one waits for their unemployment or disability check, there are very few if any issued. And through it all, they maintain a value system that would put US inner city gangsters to shame.

    Hey, SU...more free thinking. :)
    Mar 7 11:37 AM | 2 Likes Like |Link to Comment
  • A Tale Of Two Economies And A Market That Doesn't Care [View article]
    "The disparity in income helps the government though, as the high earners pay a much higher percentage in taxes."

    Well, the government doesn't need the revenue, it's simply redistributed so the working poor, retired, and welfare recipients can spend, too.
    Mar 7 09:38 AM | Likes Like |Link to Comment
  • U.S. Labor Market: What Is Going On? [View article]
    "Simply put, on top of those cyclical factors, is a demographic change. Those baby boomers are retiring."

    Excellent graphic, the point was well made. I suspect, also, undocumented - thus likely unreported - employment is not reflected in the stats. Undocumented workers spend some money domestically, though I have no thoughts on how significant that might be. There are a lot of jobs that should come open as baby boomers retire, and many of that generation are highly skilled and doing well in retirement. It seems the next generation should move into those jobs while undocumented workers fill in the unskilled labor market. I suspect we talk of amnesty for that reason, we need the workforce (often enough a low wage workforce) to help domestic competitiveness.
    Mar 7 09:35 AM | Likes Like |Link to Comment