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Bernanke’s Legacy: A Record $1.3 Trillion In Excess Deposits Over Loans At The “Big 4” Banks | Zero Hedge
The history books on Bernanke’s legacy have not even been started, and while the euphoria over the Fed’s balance sheet expansion to a ridiculous $4 trillion or about 25% of the US GDP has been well-telegraphed and manifests itself in a record high stock market and a matching record disparity between the haves and the have nots, there is never such a thing as a free lunch… or else the Fed should be crucified for not monetizing all debt since its inception over 100 years ago – just think of all the foregone “wealth effect.” Sarcasm aside, one thing that can be quantified and that few are talking about is the unprecedented, and record, amount of “deposits” held at US commercial banks over loans.
Naturally, these are not deposits in the conventional sense, but merely the balance sheet liability manifestation of the Fed’s excess reserves parked at banks. And as our readers know well by now (hereand here) it is these “excess deposits” that the Banks have used to run up risk in various permutations, most notably as the JPM CIO demonstrated, by attempting to corner various markets and other still unknown pathways, using the Fed’s excess liquidity as a source of initial and maintenance margin on synthetic positions.
So how does the record mismatch between deposits and loans look like? Well, for the Big 4 US banks, JPM, Wells, BofA and Citi it looks as follows.
What the above chart simply shows is the breakdown in the Excess Deposit over Loan series, which is shown in the chart below, which tracks the historical change in commercial bank loans and deposits. What is immediately obvious is that while loans and deposits moved hand in hand for most of history, starting with the collapse of Lehman loan creation has been virtually non-existent (total loans are now at levels seen at the time of Lehman’s collapse) while deposits have risen to just about $10 trillion. It is here that the Fed’s excess reserves have gone – the delta between the two is almost precisely the total amount of reserves injected by the Fed since the Lehman crisis.
As for the location of the remainder of the Fed-created excess reserves? Why it is held by none other than foreign banks operating in the US.
So what does all of this mean? In a nutshell, with the Fed now tapering QE and deposit formation slowing, banks will have no choice but to issue loans to offset the lack of outside money injection by the Fed. In other words, while bank “deposits” have already experienced the benefit of “future inflation”, and have manifested it in the stock market, it is now the turn of the matching asset to catch up. Which also means that while “deposit” growth (i.e., parked reserves) in the future will slow to a trickle, banks will have no choice but to flood the country with $2.5 trillion in loans, or a third of the currently outstanding loans, just to catch up to the head start provided by the Fed!
It is this loan creation that will jump start inside money and the flow through to the economy, resulting in the long-overdue growth. It is also this loan creation that means banks will no longer speculate as prop traders with the excess liquidity but go back to their roots as lenders. Most importantly, once banks launch this wholesale lending effort, it is then and only then that the true pernicious inflation from what the Fed has done in the past 5 years will finally rear its ugly head.
Finally, it is then that Bernanke’s legendary statement that he can “contain inflation in 15 minutes” will truly be tested. Which perhaps explains why he can’t wait to be as far away from the Marriner Eccles building as possible when the long-overdue reaction to his actions finally hits. Which is smart: now it is all Yellen responsibility.
The Status Quo system is failing. Its collapse will be messy. Starting to call things what they really are is a necessary first step to working with this reality.
Longtime correspondent Harun I. has offered a refreshing resolution for 2014: let’s start calling things what they actually are, rather than continue using officially sanctioned half-truths and misdirections. Language defines the context, meaning and agenda–in other words, everything. If we continue using Orwellian language, we get an Orwellian world of officially sanctioned deceptions passing as reality.
Here are Harun’s suggestions should we accept the value of Calling Things What They Really Are. This may well be one of the most insightful explanations of our financial system you will ever read:
Bank Deposit: An unsecured personal loan. The bank can do whatever it wishes with the money. The money may not be returned (ironically, people pay for this “service”).
Fractional Reserve Banking (Lending): Leverage. A bank has only a fraction of what it owes to its depositors. In a 10% fractional reserve system, the bank is only required to have ten cents of every dollar in its vaults.
The IMF is suggesting a 10% default by European banks. In a 10% reserve system, this is a reversal. Effectively, one person is going to get their money back and nine others are not. This may reset the banking system but the economic consequences due to the loss of purchasing power at such a scale will be significant.
Bank Bailout: The bank has lost its depositors money and thence government forces the public to borrow money they have a) already earned, b) from the very banks that supposedly have no money, and c) do so at interest (which must be borrowed). Effectively it is a failure and therefore a default.
Bank Bail-in: Every dollar placed at a bank is a dollar it owes to someone (liability). When the bank has lost all or a portion of its depositors’ money, it cannot return what it owes. Rather than forcing the people that are owed money by the bank to borrow money to put back in their accounts, the bank merely points out that it doesn’t have the money. This is a default.
Default = Default.
Money: Has no other purpose than to allow people to trade things they have worked to make or services they have performed. Holding on to it may allow one to trade for more or less of a particular good or service in the future. Money is a promise but not a guarantee that it will be exchangeable for something in the future. It is credit and debt.
Without a tangible good or service to trade money is worthless. If I have made a fine overcoat and you, with your skills in carpentry, have made an exquisite chair, we can trade these things directly. In this case money is worthless. It does not work the other way around. Goods and services do not become worthless in the absence of money. My coat will still have value even if I choose to wear it to keep warm. Your chair will have value even if you just choose to sit in it.
This is a critical distinction — and it has been completely lost on just about everyone. We have become completely divorced from the goods and services we make and provide and the money we use to trade these goods and services. At the core of this divorce is Fractional or zero Reserve Banking.
Let’s propose that you and I traded our goods and we deposited our goods in a bank. The bank immediately pledges my chair and your coat to ten other people. Some time later I engage in a redecoration of my home and want my chair. Winter comes and you want your coat. Immediately there is a problem. The bank owes our goods to ten other people. The only way for them to resolve this situation is to either get everyone to accept a fraction of the coat and chair, which of course isn’t very practical, reduce their liability by giving one person the chair and one person the coat and the other ten people get nothing (bail in), or get you and I to bail them out by producing eleven more chairs and coats (10 plus interest).
You see, if in the definitions of bailout and bail in we simply substitute the word money with the words goods and services, the situation loses its ambiguity. When we understand internally what money represents, then we understand what the term Bank backstops really mean. A bank can only be backstopped, bailed out or bailed in, by labor because that is the only thing that “money” represents.
If we understand the definition of money then when we discuss the Federal Reserve’s leverage, e.g. 72 to 1, we immediately understand that for each unit of labor performed 72 are owed. If for each hour of labor 72 is owed, how is this ever make that up? The clever person would pipe up and say, I’ll just work for 72 hours straight. But for each of those 72 hours he has worked he now owes 72. When we understand this, we understand that it is an event horizon.
We then understand that every bit of QE (quantitative easing) is a pledge of labor someone must perform at some point in time and that the rate of performance required is impossible.
If we now understand money and leverage and are to propose debt forgiveness then we must embrace rather than bemoan austerity because austerity is the necessary result of 10 other people not getting a chair to sit in or a warm coat for the winter.
With these concepts firmly in tow we begin to see that all of this hand wringing over paying off the $17 trillion in debt is, at best, a fools errand. Yes, in public politicians try to sooth us by appearing concerned. But behind closed doors, the Fed, Treasury, the Congress and the Executive, are all trying to figure out how we are going to borrow more so that over the next doubling period (about 10 years) debt will expand to a necessary $34 trillion.
Some additional clarification may be needed to explain leverage and work. At 72 to 1 the other option is to create 72 units in the time it takes to make one. In other words, if it took you and I one month to create our goods, we must create 72 coats and chairs in that one month. Broken down into hours, if we worked at full capacity 8 hours per day to create one coat and chair, we must do enough work in that 8 hours to create 72 coats and chairs.
Ultimately, work is nothing more than an exchange of energy, and the equation for any exchange of energy is quantifiable and finite (the equation must always balance). If we measured labor output in calories instead of money, the deception disappears. People may not be willing to expend 10 calories for 1. We would also understand that 1 calorie cannot create 10.
These concepts (thermodynamics) are esoteric to the point a 5th grader would have trouble understanding. But what is easily understandable is that if we all did the same work everyday but got less food because of an increase of incoming workers, yes, we would all have food – and we would all soon become malnourished or starved.
How would people react if the Fed said that for every loaf of bread it takes out of the system 72 loafs of bread will disappear?
We must also understand that a lever transmits torque, it does not create more torque.
It is at this point of awareness that it becomes clear that to balance the equation, it is unavoidable that people are not going to get most or all of what they have been promised (austerity). It is at this point that the sober realization arises that we have to dramatically change our expectation of the future.
Credit: Allows trade of something for a promise. Regardless of whatever expectation that may exist, something has been traded or given for no service performed or product yet created. Simply, something has been traded for nothing.
Federal Reserve System: A group of secretly privately owned banks (which, logically were among those who lost all of their depositors money and most certainly compose the primary dealers), that control the global money supply by making more or less credit/money available. It is also supposed to regulate banks within its system.
Even if this system functioned as designed rather than what it has morphed into, it still reads: a subsidiary formed but not funded by member banks and sanctioned by government to lend money to corporations and member banks (to themselves) against strong collateral (which no other bank would touch). Meaning the assets they own are good, but nobody wants them (i.e. the assets are worthless). In essence, this gets those great and wonderful assets off corporation’s and member bank’s books at full value.
Today this subsidiary of the member banks (the banks that own the Fed), loans money to its parent banks to buy all sorts of debt (mostly government debt), then goes about removing that debt (asset) from its parent bank’s balance sheet by buying it from them at full price, regardless of what it would have fetched in the market place.
At the most cursory glance, one begins to see how this farcically incestuous relationship would open the door to cronyism, political capture, monetary dominance, and serious abuses of public trust. Whether there is an awakening on the part of of the public is irrelevant. This system is failing. Its collapse will be messy.
There is no need to fret over debt or the monetary system, or the Feds economic and monetary “models”. There is no need to grouse about their manipulations. These things are destined to fail and are already doing so. What we will do in the aftermath of their complete failure, however, is probably of utmost importance.”
Growth: Heavily manipulated statistics that reflect the increasing dominance of crony/State capitalism, passed off as “growth” in the real, lived-in economy. Those crony cartels that are receiving the Federal Reserve’s “free money” from quantitative easing (QE) are “growing,” and everything that isn’t receiving the Fed’s “free money” is stagnating.
I am sure you can add your own list of “calling things what they really are.”