Ben Bernanke spoke to Congress earlier today (May 22). Stocks went up when he started speaking, but ended up going down for the day.
Minutes were released from the FOMC's last meeting and they indicated that some of the members are willing to cut back on the Fed's massive monetary inflation in the coming months (although they didn't say it quite like that).
So there is a fear in the market that the Fed may pull back if we start to see some good economic news, which would include an improvement in unemployment. On the other hand, Bernanke also said that it is possible that the Fed could actually increase its monthly buying if the economy shows signs of trouble.
This is incredible. The Fed is already buying $85 billion per month in assets. This is approximately $1 trillion over a one year period. And yet the Fed is actually considering increasing this rate of monetary inflation? It is important to remember that the total holdings of the Fed was under $1 trillion before the fall of 2008.
The 10-year yield went up today, ending over 2%. While the rates have ticked up in the last few weeks, I don't necessarily consider this a trend. I continue to predict that rates will only spike up if one of two things happens. If the Fed stops, or significantly lowers, its pace of monetary inflation over a substantial period of time, then we could see rates spike up. Rates would go up simply because of a fall in demand for bonds. Private investors would have to pick up the slack from the Fed's lack of buying.
The other scenario where rates could spike is if we see much higher price inflation. At this point, we haven't seen consumer prices rise in correlation to the huge increase in the monetary base. We have seen stocks prices go up and we have seen real estate prices tick up. On the other hand, gold is down. Until we see gold going up significantly again or we see an increasing CPI, then I don't expect to see rates going up.
Actually, I think price inflation will be the main indicator for rates. Because as long as price inflation stays in check, then I expect that the Fed will keep up with some monetary inflation, even if it is less than what we see now. I think the only way the Fed will stop buying new debt for a sustained period of time is if we see higher consumer prices. So for this reason, I don't expect a huge jump up in interest rates until we see a higher CPI number and a higher gold price.
There isn't much we can do about the Fed's terrible monetary policy. These elitists think they can centrally plan the economy. They are simply misallocating resources on a giant scale. In the meantime, hunker down. If you can lock in a low fixed rate for your home mortgage, take advantage of it while you can. Things are going to get tough.
Wednesday, May 22, 2013
Tuesday, May 21, 2013
Why Are There Huge Excess Reserves?
I have written frequently about the massive expansion of the adjusted monetary base that has occurred over the last 5 years. I have also written about the corresponding increase in excess reserves held by banks. But I have only touched on some of the reasons on why we have seen a huge increase in the excess reserves.
I recently wrote a post about the excess reserves and how these are deposits that are available to depositors. The excess reserves are technically not "owned" by the banks in most cases. I received the following comments/ questions to that post:
"Why are the banks not lending money out? Fractional-reserve banking is the biggest scam ever and the banks make a ton of money off of it. So, why no lending? Too risky? Rates are too low to make it worthwhile? The Fed is pressuring them not to lend because it is worried that increased velocity will cause price inflation?"
I don't have all of the answers to these questions, but I have some guesses about what is happening. First, I would say that fractional reserve banking is only the biggest scam ever because it is fully backed by the government and the Fed. If there was no FDIC and no expectations of bailouts, then fractional reserves would not be a major problem, or at least not compared to what it is now.
Second, the comment did not mention anything about the Fed paying interest on the excess reserves. I only mention this because a lot of people think that this is a big factor in the buildup of reserves. However, I think the commenter here is on target for ignoring this. The Fed is only paying .25 percent interest on reserves. This is practically nothing and is not much of a deterrent for banks to lend.
Third, the last sentence/ question may be on the mark, but we can't know for sure. "The Fed is pressuring them not to lend because it is worried that increased velocity will cause price inflation?" I have thought for a while now that the Fed likes what the banks are doing. The Fed can say things and pretend that they want to encourage more credit and lending, but having these massive excess reserves is what allows the Fed to keep creating massive amounts of money while keeping price inflation relatively low.
So it is impossible to say if the Fed is telling the banks not to lend behind closed doors. The Fed is buying $40 billion per month in mortgage-backed securities, which is essentially a bank bailout. It would not be surprising if the Fed were calling the shots, at least with the major banks.
With all of that said, it does make some sense why the banks have built up huge reserves, even if the Fed weren't instructing them to do so. While the recession ended officially, it is obvious that the economy has been under duress since at least 2008. There is a lot of fear. People are scared about unemployment and reduced wages. People are trying to get out of debt and save some money. In other words, the demand for money has increased. Velocity has been slower since the fall of 2008. This goes hand in hand with the banks not lending as much.
In addition, it is not just a decision by the banks not to lend. There are two sides to this transaction. People and businesses are also reluctant to borrow. Again, this all ties to together with the higher demand for money.
When there is a loan, the interest rate serves as the price of that loan. With these massive excess reserves, it means that the lenders and the borrowers are not meeting in the middle. Lenders will only lend for so low of a rate. Borrowers are not willing to borrow at the rates available, even though the rates are low. This is a generalization. Of course, there are some people who are borrowing money for 30 years to buy a house.
It is also important to know that some borrowers simply can't qualify. While lending standards are probably still below where they ought to be, the banks have become a little bit stricter since the housing bust. People with really bad credit can't just walk into a bank and borrow money for a house, unless they have a huge down payment as collateral.
Lastly, it was less than 5 years ago that the banks were on the verge of insolvency. Or maybe you could say they are always insolvent, but it was becoming apparent back in 2008. So the banks are building up reserves as a way to hedge against more trouble ahead. It gives them more cushion for more defaults or a run on the banks. We saw companies like Lehman go down so quickly. It is understandable that banks would want more of a cushion in case something goes wrong. They don't want a direct bailout and all of the bad publicity that goes with it. That is why the Fed is doing it in a controlled and more underhanded way now by buying mortgage debt.
I don't know if this build up in excess reserves will last, but the Fed's massive monetary inflation is still doing great harm to the economy, even if price inflation stays relatively tame.
I recently wrote a post about the excess reserves and how these are deposits that are available to depositors. The excess reserves are technically not "owned" by the banks in most cases. I received the following comments/ questions to that post:
"Why are the banks not lending money out? Fractional-reserve banking is the biggest scam ever and the banks make a ton of money off of it. So, why no lending? Too risky? Rates are too low to make it worthwhile? The Fed is pressuring them not to lend because it is worried that increased velocity will cause price inflation?"
I don't have all of the answers to these questions, but I have some guesses about what is happening. First, I would say that fractional reserve banking is only the biggest scam ever because it is fully backed by the government and the Fed. If there was no FDIC and no expectations of bailouts, then fractional reserves would not be a major problem, or at least not compared to what it is now.
Second, the comment did not mention anything about the Fed paying interest on the excess reserves. I only mention this because a lot of people think that this is a big factor in the buildup of reserves. However, I think the commenter here is on target for ignoring this. The Fed is only paying .25 percent interest on reserves. This is practically nothing and is not much of a deterrent for banks to lend.
Third, the last sentence/ question may be on the mark, but we can't know for sure. "The Fed is pressuring them not to lend because it is worried that increased velocity will cause price inflation?" I have thought for a while now that the Fed likes what the banks are doing. The Fed can say things and pretend that they want to encourage more credit and lending, but having these massive excess reserves is what allows the Fed to keep creating massive amounts of money while keeping price inflation relatively low.
So it is impossible to say if the Fed is telling the banks not to lend behind closed doors. The Fed is buying $40 billion per month in mortgage-backed securities, which is essentially a bank bailout. It would not be surprising if the Fed were calling the shots, at least with the major banks.
With all of that said, it does make some sense why the banks have built up huge reserves, even if the Fed weren't instructing them to do so. While the recession ended officially, it is obvious that the economy has been under duress since at least 2008. There is a lot of fear. People are scared about unemployment and reduced wages. People are trying to get out of debt and save some money. In other words, the demand for money has increased. Velocity has been slower since the fall of 2008. This goes hand in hand with the banks not lending as much.
In addition, it is not just a decision by the banks not to lend. There are two sides to this transaction. People and businesses are also reluctant to borrow. Again, this all ties to together with the higher demand for money.
When there is a loan, the interest rate serves as the price of that loan. With these massive excess reserves, it means that the lenders and the borrowers are not meeting in the middle. Lenders will only lend for so low of a rate. Borrowers are not willing to borrow at the rates available, even though the rates are low. This is a generalization. Of course, there are some people who are borrowing money for 30 years to buy a house.
It is also important to know that some borrowers simply can't qualify. While lending standards are probably still below where they ought to be, the banks have become a little bit stricter since the housing bust. People with really bad credit can't just walk into a bank and borrow money for a house, unless they have a huge down payment as collateral.
Lastly, it was less than 5 years ago that the banks were on the verge of insolvency. Or maybe you could say they are always insolvent, but it was becoming apparent back in 2008. So the banks are building up reserves as a way to hedge against more trouble ahead. It gives them more cushion for more defaults or a run on the banks. We saw companies like Lehman go down so quickly. It is understandable that banks would want more of a cushion in case something goes wrong. They don't want a direct bailout and all of the bad publicity that goes with it. That is why the Fed is doing it in a controlled and more underhanded way now by buying mortgage debt.
I don't know if this build up in excess reserves will last, but the Fed's massive monetary inflation is still doing great harm to the economy, even if price inflation stays relatively tame.
Monday, May 20, 2013
Gold Manipulation and Long-Term Expectations
I have seen a lot of stories, mostly by gold bugs, who blame the recent fall in the gold price on manipulation. Usually it refers to manipulation by either the big financial institutions, or the Federal Reserve itself.
I understand why gold advocates want to call foul and blame the whole thing on manipulation. Perhaps they are right to a certain degree and that there are people in the establishment trying to bring down, or at least hold down, the price of gold.
But we also have to realize that just because you are an advocate of having some gold holdings and gold investments, it doesn't mean we have to make excuses or find someone to blame whenever the price doesn't move in our favor. The gold price went up from under $300 per ounce to over $1,900 per ounce in a 12 year period. It shouldn't be that big of a surprise that it went back to just under $1,400. Almost nothing goes straight up. It is often two steps forward and one step back. Sometimes you take more than one step back. This can play out over years.
Even if there is manipulation in the gold market, then people should see that as a wonderful buying opportunity. If the price is being artificially suppressed, then that means it is a good time to buy. You will make money just by having market forces correct the artificial price.
If the price of gold is being manipulated by some big players, including the Fed, then this is limited. You can only short a market so much for so long. Eventually, buyers of physical gold will win out. If there is strong enough demand for physical gold, then the paper market will have to reflect this at some point.
So, with a long-term view of this, I would not worry about the drop in the gold price and I would not worry about possible manipulation. I would concentrate on the fact that the U.S. government's debt and spending is huge, that the Fed is creating $85 billion per month in new money, and that real interest rates (interest rates minus inflation) are negative.
I do not need to make excuses when the price of gold goes down. I don't recommend it for short-term trading in most cases. If you have a longer-term view of things, then you should not worry about the price of gold dropping in terms of U.S. dollars. If you are light on gold holdings for your investments, then you should take it as another opportunity to buy more.
I understand why gold advocates want to call foul and blame the whole thing on manipulation. Perhaps they are right to a certain degree and that there are people in the establishment trying to bring down, or at least hold down, the price of gold.
But we also have to realize that just because you are an advocate of having some gold holdings and gold investments, it doesn't mean we have to make excuses or find someone to blame whenever the price doesn't move in our favor. The gold price went up from under $300 per ounce to over $1,900 per ounce in a 12 year period. It shouldn't be that big of a surprise that it went back to just under $1,400. Almost nothing goes straight up. It is often two steps forward and one step back. Sometimes you take more than one step back. This can play out over years.
Even if there is manipulation in the gold market, then people should see that as a wonderful buying opportunity. If the price is being artificially suppressed, then that means it is a good time to buy. You will make money just by having market forces correct the artificial price.
If the price of gold is being manipulated by some big players, including the Fed, then this is limited. You can only short a market so much for so long. Eventually, buyers of physical gold will win out. If there is strong enough demand for physical gold, then the paper market will have to reflect this at some point.
So, with a long-term view of this, I would not worry about the drop in the gold price and I would not worry about possible manipulation. I would concentrate on the fact that the U.S. government's debt and spending is huge, that the Fed is creating $85 billion per month in new money, and that real interest rates (interest rates minus inflation) are negative.
I do not need to make excuses when the price of gold goes down. I don't recommend it for short-term trading in most cases. If you have a longer-term view of things, then you should not worry about the price of gold dropping in terms of U.S. dollars. If you are light on gold holdings for your investments, then you should take it as another opportunity to buy more.
Saturday, May 18, 2013
10 Tips for Rental Real Estate Investors
I am an advocate of getting involved in investment real estate, if you are in the right position to do so. Here are 10 basic tips that I have if you are considering buying rental properties.
1) If you don't have more than a couple of thousand dollars in liquid savings, then I would forget the idea. It might still be possible for you to be successful, but you will be sweating it out a lot at the beginning. All it takes is one little thing to go wrong. You might not get it rented out right away. You might have emergency repairs. You might have bigger closing costs than you expected. Your insurance might be higher than you originally thought. Save some more money before buying a rental property.
2) If you do take the plunge, don't try to get the highest rent possible. If you are trying to get $1,000 per month and it sits empty for two months, you would have been better off renting it at $900 per month and getting someone in there right away.
3) If you find a tenant who is low maintenance and pays you on time every month, then don't be anxious to raise the rent. You are better off keeping the person happy and staying in there longer. Continuity is important. If you can find a long-term renter, then be happy, even if you are charging on the low end.
4) When you first buy a place or if you are getting new tenants, then you should certainly clean it up and make necessary repairs. But don't go high end. Most people looking to rent are not looking for high end things. You don't have to buy stainless steel appliances. You don't have to get expensive hardwood floors. You don't know what your tenants will be like. You don't want to spend a lot of money on something that may not be well cared for.
5) If you had bought a place five or ten years ago, you may have actually been better off getting a variable rate loan. However, I see this as a risky move now. If interest rates move higher quickly, you are going to want have a fixed rate loan. I would recommend locking in a fixed rate loan, unless you are planning to pay off your mortgage very quickly.
6) For most people starting out, you should probably get a 30-year loan. While the interest rate might be a little better on a shorter-term loan, allow yourself the flexibility. You want to have manageable payments, particularly at the beginning.
7) While I recommend a 30-year mortgage for most people to start, don't be afraid to pay off your loan in the longer term. Isn't that the ultimate goal? Eventually, you will want to have rental property that is owned free an clear so that you can make a substantial income from the rent you charge.
8) If you have a lot of cash in the bank, I am not opposed to buying a rental property free and clear, as long as you will still have plenty of cash left over. Not only do you avoid paying interest on a loan, but you can also find better deals with the ability to close quickly. Most sellers would be willing to sell for a few thousand dollars less to someone who is willing to close within a couple of weeks, as opposed to a couple of months. Having cash in the bank allows this possibility.
9) You should generally buy rental properties that are located in a decent neighborhood. You will be more likely to attract good tenants who will pay on time and take care of your place. In addition, do not buy in too nice of a neighborhood or buy too big of a house. You will get a better return on your money with a basic 3 or 4 bedroom house than you will with a 6 bedroom mansion.
10) You should generally only buy a place that will generate positive cash flow, assuming you are making a down payment of somewhere between 10 and 20 percent. You should definitely not purchase anything that is going to produce negative cash flow on an ongoing basis. It simply doesn't make sense and it is a bad use for your capital.
1) If you don't have more than a couple of thousand dollars in liquid savings, then I would forget the idea. It might still be possible for you to be successful, but you will be sweating it out a lot at the beginning. All it takes is one little thing to go wrong. You might not get it rented out right away. You might have emergency repairs. You might have bigger closing costs than you expected. Your insurance might be higher than you originally thought. Save some more money before buying a rental property.
2) If you do take the plunge, don't try to get the highest rent possible. If you are trying to get $1,000 per month and it sits empty for two months, you would have been better off renting it at $900 per month and getting someone in there right away.
3) If you find a tenant who is low maintenance and pays you on time every month, then don't be anxious to raise the rent. You are better off keeping the person happy and staying in there longer. Continuity is important. If you can find a long-term renter, then be happy, even if you are charging on the low end.
4) When you first buy a place or if you are getting new tenants, then you should certainly clean it up and make necessary repairs. But don't go high end. Most people looking to rent are not looking for high end things. You don't have to buy stainless steel appliances. You don't have to get expensive hardwood floors. You don't know what your tenants will be like. You don't want to spend a lot of money on something that may not be well cared for.
5) If you had bought a place five or ten years ago, you may have actually been better off getting a variable rate loan. However, I see this as a risky move now. If interest rates move higher quickly, you are going to want have a fixed rate loan. I would recommend locking in a fixed rate loan, unless you are planning to pay off your mortgage very quickly.
6) For most people starting out, you should probably get a 30-year loan. While the interest rate might be a little better on a shorter-term loan, allow yourself the flexibility. You want to have manageable payments, particularly at the beginning.
7) While I recommend a 30-year mortgage for most people to start, don't be afraid to pay off your loan in the longer term. Isn't that the ultimate goal? Eventually, you will want to have rental property that is owned free an clear so that you can make a substantial income from the rent you charge.
8) If you have a lot of cash in the bank, I am not opposed to buying a rental property free and clear, as long as you will still have plenty of cash left over. Not only do you avoid paying interest on a loan, but you can also find better deals with the ability to close quickly. Most sellers would be willing to sell for a few thousand dollars less to someone who is willing to close within a couple of weeks, as opposed to a couple of months. Having cash in the bank allows this possibility.
9) You should generally buy rental properties that are located in a decent neighborhood. You will be more likely to attract good tenants who will pay on time and take care of your place. In addition, do not buy in too nice of a neighborhood or buy too big of a house. You will get a better return on your money with a basic 3 or 4 bedroom house than you will with a 6 bedroom mansion.
10) You should generally only buy a place that will generate positive cash flow, assuming you are making a down payment of somewhere between 10 and 20 percent. You should definitely not purchase anything that is going to produce negative cash flow on an ongoing basis. It simply doesn't make sense and it is a bad use for your capital.
Thursday, May 16, 2013
May 16, 2013 - Update on Gold and Economy
The price of gold weakened this week. As of this writing, it is once again below the $1,400 per ounce mark. Meanwhile, the 10-year yield rose this week, but did retreat back down earlier today.
When gold took a big hit back in mid-April, I said that it would either recover and go on to eventual new highs or else we were going to see a recession. While nothing in economic life is a certainty, I am standing by that prediction because of the massive malinvestment created by the Fed and the huge government spending.
I don't think the slight retreat in the gold price is any indicator at this point. There is no definitive mark signaling whether we will have an artificial boom or a recession. The gold price is leaning a little more towards recession. Stocks are leaning towards a boom, although we know that can change very quickly. The interest rates are not giving a signal one way or another. Rates have been bouncing around a little, but they have still remained low.
While I maintain that you should keep a majority of your investments in a setup like the permanent portfolio as advocated by Harry Browne, I think your speculative portion will really depend on which way the overall economy goes. A continuation of an artificial boom (due to Fed money creation) will mean you want to own gold and maybe even some stocks. A recession/ depression will mean you want to be short stocks and have a strong cash position.
Outside of your investments, it is important to know that the average American is going to experience a decline in living standards, at least in the short run. We may see certain things improve such as technology with electronics, but we will see tougher times ahead in terms of employment, wages, and meeting everyday expenses.
It doesn't really matter whether we have a recession now or later. Most Americans are hurting now and they will continue to feel some pain until the government is forced to cut spending. It doesn't matter if we see roaring price inflation or we see reduced real wages. American living standards are likely to go down in the near term.
The best we can do is to try to do as well as we can relative to everyone else. And let's hope we can convince enough people that we need far less government in our lives, which is the prerequisite for a true booming economy.
When gold took a big hit back in mid-April, I said that it would either recover and go on to eventual new highs or else we were going to see a recession. While nothing in economic life is a certainty, I am standing by that prediction because of the massive malinvestment created by the Fed and the huge government spending.
I don't think the slight retreat in the gold price is any indicator at this point. There is no definitive mark signaling whether we will have an artificial boom or a recession. The gold price is leaning a little more towards recession. Stocks are leaning towards a boom, although we know that can change very quickly. The interest rates are not giving a signal one way or another. Rates have been bouncing around a little, but they have still remained low.
While I maintain that you should keep a majority of your investments in a setup like the permanent portfolio as advocated by Harry Browne, I think your speculative portion will really depend on which way the overall economy goes. A continuation of an artificial boom (due to Fed money creation) will mean you want to own gold and maybe even some stocks. A recession/ depression will mean you want to be short stocks and have a strong cash position.
Outside of your investments, it is important to know that the average American is going to experience a decline in living standards, at least in the short run. We may see certain things improve such as technology with electronics, but we will see tougher times ahead in terms of employment, wages, and meeting everyday expenses.
It doesn't really matter whether we have a recession now or later. Most Americans are hurting now and they will continue to feel some pain until the government is forced to cut spending. It doesn't matter if we see roaring price inflation or we see reduced real wages. American living standards are likely to go down in the near term.
The best we can do is to try to do as well as we can relative to everyone else. And let's hope we can convince enough people that we need far less government in our lives, which is the prerequisite for a true booming economy.
Wednesday, May 15, 2013
Libertarian Viewpoint of the IRS Targeting Conservative Groups
Conservatives are outraged over reports that the IRS purposely targeted certain conservative groups for more extensive audits. I don't think most libertarians are surprised by the news.
Conservatives will moan and wail over the news, but how many will actually advocate abolishing the IRS? In order to abolish the IRS, you would have to abolish the income tax. In order to abolish the income tax, you would have to significantly shrink government (digital money printing only lasts so long). In order to shrink government, you would have to downsize the American empire, particularly the interventionist foreign policy. So conservatives don't want to abolish the IRS.
This sort of thing happens all the time. This one became news. Who knows if it would have even made the news if we didn't live in the age of the internet?
This is politics. When people are given a monopoly on the use of force, that power is going to be used in bad ways.
Harry Browne often liked to quote a phrase by Michael Cloud: The problem is not the abuse of power, but the power to abuse.
It should never be a surprise when power is abused. When there is power to be obtained, it is often the worst people in society who will seek it. They want that power to control and manipulate others. We should not be shocked of revelations that some people used their power in inappropriate ways.
The only way to solve this problem is to take away power from the government. Another saying is that a government powerful enough to give you everything you want is also powerful enough to take away everything you have.
When will conservatives wake up? I could say the same thing about modern day liberals, but their whole basis is wrong to start with. It is more frustrating discussing these things with conservatives in a way. Many have a decent understanding of the dangers of big government, yet they continue to consent to it. I find that modern day liberals are actually more consistent in their views, even if wrong.
This whole IRS scandal will not change anything. People will call for more "reform" or more "oversight". We always hear these catch words that are completely bogus. Nothing significant will change until we withdraw our consent and take away the power of the government. In order to take away the government's power to do bad things, you must first take away its power to do good things.
Conservatives will moan and wail over the news, but how many will actually advocate abolishing the IRS? In order to abolish the IRS, you would have to abolish the income tax. In order to abolish the income tax, you would have to significantly shrink government (digital money printing only lasts so long). In order to shrink government, you would have to downsize the American empire, particularly the interventionist foreign policy. So conservatives don't want to abolish the IRS.
This sort of thing happens all the time. This one became news. Who knows if it would have even made the news if we didn't live in the age of the internet?
This is politics. When people are given a monopoly on the use of force, that power is going to be used in bad ways.
Harry Browne often liked to quote a phrase by Michael Cloud: The problem is not the abuse of power, but the power to abuse.
It should never be a surprise when power is abused. When there is power to be obtained, it is often the worst people in society who will seek it. They want that power to control and manipulate others. We should not be shocked of revelations that some people used their power in inappropriate ways.
The only way to solve this problem is to take away power from the government. Another saying is that a government powerful enough to give you everything you want is also powerful enough to take away everything you have.
When will conservatives wake up? I could say the same thing about modern day liberals, but their whole basis is wrong to start with. It is more frustrating discussing these things with conservatives in a way. Many have a decent understanding of the dangers of big government, yet they continue to consent to it. I find that modern day liberals are actually more consistent in their views, even if wrong.
This whole IRS scandal will not change anything. People will call for more "reform" or more "oversight". We always hear these catch words that are completely bogus. Nothing significant will change until we withdraw our consent and take away the power of the government. In order to take away the government's power to do bad things, you must first take away its power to do good things.
Tuesday, May 14, 2013
Excess Reserves Are Not "Owned" By Banks
I recently wrote a post about the massive excess reserves that have been built up by the commercial banks. The increase in excess reserves since 2008 has closely correlated the increase in the adjusted monetary base. In response to that post, I received the following comment/ questions:
"If the banks are simply holding so much of the new money in reserves, what is the point of the Fed giving it to them? To keep them solvent?"
I think the comment/ question is on the right track, but it is important to clarify what is happening. Currently, the Fed is adding approximately $85 billion per month to the monetary base. This consists of $40 billion in mortgage-backed securities and $45 billion in government bonds (longer-term).
The Fed's purchasing of $40 billion per month in mortgage-backed securities is a bank bailout. The banks are not netting $40 billion per month, but some percentage of that. We cannot know the exact number because we don't know the free market value of the securities that are being bought. But we can be fairly certain that the Fed is buying the mortgage-backed securities for more than what they would be worth in the open market.
The Fed's buying of mortgage-backed securities is not typical. Prior to 2008, the Fed mainly purchased government debt.
The $45 billion per month that the Fed is buying in government debt must be understood. The banks are not really being "given" this money. Certain financial institutions act as brokers in selling government treasuries to the Fed. They make a commission or some kind of fee on this. In addition, the banks are being paid a quarter of one percent interest on their excess reserves. In addition, these reserves do help capitalize the banks and make it less likely for bank runs to cause insolvency.
But I keep hearing this common theme that the Fed is "giving" money to the banks. In the case of the mortgage-backed securities, this is probably true. But in the case of the Fed buying government debt, it is not really the case.
When the Fed buys government debt, it is creating digital money out of thin air and this money is going to the government to spend. The government can spend this money on virtually anything. Money is fungible, so we can't identify where specific monetary inflation is being spent. It is all part of the government spending, whether it is on food stamps, Social Security checks, military equipment, salaries, or any number of other things. But this new money ends up in the hands of individuals and corporations and most of this ends up in a bank account somewhere.
So it is important to understand that most of the money being held by banks, even the money in excess reserves, is somebody else's money. It is money deposited by an individual or some type of corporation (or I suppose a government). The excess reserves simply means that this money is not being lent out. It does not mean it is "owned" by the banks. It is money that is available to the depositors who deposited it.
So to answer the questions above, I think keeping the banks solvent is certainly one of the major reasons for the massive monetary inflation. And with the banks building up their excess reserves, this has helped to prevent severe price inflation. But it is important to know that just because excess reserves are going up, it does not mean that the banks are being "given" this money. It is other people's money. The banks are being given money when the Fed buys mortgage-backed securities that would be worth less in the open market. When the Fed buys government debt, it is not directly giving money to the banks, but it is helping to keep them solvent.
"If the banks are simply holding so much of the new money in reserves, what is the point of the Fed giving it to them? To keep them solvent?"
I think the comment/ question is on the right track, but it is important to clarify what is happening. Currently, the Fed is adding approximately $85 billion per month to the monetary base. This consists of $40 billion in mortgage-backed securities and $45 billion in government bonds (longer-term).
The Fed's purchasing of $40 billion per month in mortgage-backed securities is a bank bailout. The banks are not netting $40 billion per month, but some percentage of that. We cannot know the exact number because we don't know the free market value of the securities that are being bought. But we can be fairly certain that the Fed is buying the mortgage-backed securities for more than what they would be worth in the open market.
The Fed's buying of mortgage-backed securities is not typical. Prior to 2008, the Fed mainly purchased government debt.
The $45 billion per month that the Fed is buying in government debt must be understood. The banks are not really being "given" this money. Certain financial institutions act as brokers in selling government treasuries to the Fed. They make a commission or some kind of fee on this. In addition, the banks are being paid a quarter of one percent interest on their excess reserves. In addition, these reserves do help capitalize the banks and make it less likely for bank runs to cause insolvency.
But I keep hearing this common theme that the Fed is "giving" money to the banks. In the case of the mortgage-backed securities, this is probably true. But in the case of the Fed buying government debt, it is not really the case.
When the Fed buys government debt, it is creating digital money out of thin air and this money is going to the government to spend. The government can spend this money on virtually anything. Money is fungible, so we can't identify where specific monetary inflation is being spent. It is all part of the government spending, whether it is on food stamps, Social Security checks, military equipment, salaries, or any number of other things. But this new money ends up in the hands of individuals and corporations and most of this ends up in a bank account somewhere.
So it is important to understand that most of the money being held by banks, even the money in excess reserves, is somebody else's money. It is money deposited by an individual or some type of corporation (or I suppose a government). The excess reserves simply means that this money is not being lent out. It does not mean it is "owned" by the banks. It is money that is available to the depositors who deposited it.
So to answer the questions above, I think keeping the banks solvent is certainly one of the major reasons for the massive monetary inflation. And with the banks building up their excess reserves, this has helped to prevent severe price inflation. But it is important to know that just because excess reserves are going up, it does not mean that the banks are being "given" this money. It is other people's money. The banks are being given money when the Fed buys mortgage-backed securities that would be worth less in the open market. When the Fed buys government debt, it is not directly giving money to the banks, but it is helping to keep them solvent.
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