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Saturday, January 10, 2009

Really Scary Fed Charts: Fun With Reserves

Non-Borrowed Reserves of Depository Institutions (BOGNONBR) first went negative in January 2008. Negative Non-Borrowed Reserves for the first time in history was both surprising and nerve wracking. In October 2008 Non-Borrowed Reserves hit -$332.797 billion and looked set to plunge further. However, by January 2009 Non-Borrowed Reserves were back in positive territory at $167.388 billion. The two month swing of $500.185 billion both rather large and rather sudden to put it mildly.

Non-Borrowed Reserves are a measure of banking system reserves, consisting of Total Reserves (member bank deposits in Federal Reserve Banks, plus vault cash), less funds borrowed (Borrowed Reserves) at the Federal Reserve Discount Window. With the creation of the Term Auction Facility (TAF) borrowed reserves did a moon shot and non-borrowed reserves went cliff diving because TAF loans are categorized as borrowed reserves.

For Non-Borrowed Reserves to pull out of their steep dive either Total Reserves would have to increase significantly or Borrowed Reserves would have to decrease.

Note: The Federal Reserve created a series of Non-Borrowed Reserves that adjusted for the effects of the Term Auction Facility called Non-Borrowed Reserves of Depository Institutions Plus Term Auction Credit (NONBORTAF) which now stands at $605.715 billion.


Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) seem to have peeked (for now) at $698.786 billion in December 2008. As of right now, January 2009 they stand at $653.565 billion, a reduction of $45.225 billion or 6.47%. This is the first reduction in demand for loans by banks from the Federal Reserve since the crisis started.

Since these are funds borrowed by member banks from a Federal Reserve Bank for the purpose of maintaining the required reserve ratios a reduction could be a good thing. This could be the very first glimmer of hope…

Depository Institutions with insufficient reserves will borrow from the Federal Reserve to meet their legal Reserve Requirements. Normally, an increase in borrowed reserves signals tighter Federal Reserve credit policy and potentially higher interest rates for bank borrowers. When the Federal Reserve provides less credit to the banking system, banks must borrow to maintain the required reserves. These loans, in the form of an Advance or Discount by a Federal Reserve Bank, are normally collateralized by Treasury securities.

However, this time around it was NOT the Federal Reserve that “tightened credit policy” but rather Mr. Market. This is the ultimate fate of each and every credit bubble. It cannot be prevented and it can only be delayed for so long. The course adopted even now by the Federal Reserve is of course the same desperate delaying action it has always employed…

Most of the Borrowed Reserves came from the Federal Reserve Discount Window. Discount Window Borrowings of Depository Institutions (DISCBORR) have exploded from a long run average of just one or two hundred million to a peak of $403.541 billion reached in October 2008. Since then Discount Window Borrowings have dropped to $215.239 billion, a decline of 46.67%.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."–Ludwig von Mises

Clearly, Borrowed Reserves did not decrease nearly enough to allow Non-Borrowed Reserves to scream into positive territory.


Bank of Governors Total Reserves (TOTRESNS) started going exponential in August 2008 after spending years in the $40 billion dollar range. From August 2008 through to January 2009, Total Reserves increased from $44.134 billion to $821.238 billion, an increase $777.104 billion or a 1 760.78% increase in just five months. The rate of change has slowed dramatically recently from a peak month over month change of 206.98% to “only” 34.74%.

This of course is exactly what the Federal Reserve intended when they embarked on a policy of Quantitative Easing.

The single largest component of Total Reserves is now Excess Reserves of Depository Institutions (EXCRESNS). In order to protect against unexpected deposit outflows banks are required to maintain a certain level of funds in reserve. Anything beyond this required level of reserves falls under the category of Excess Reserves. The Federal Reserve is hell bent on stuffing the banks so full of money they have no choice but to turn around and start lending it out…

That is THE MASTER PLAN that is supposed to save the world! Yep. Not even kidding.

The banks of course can’t find anybody or anything with the appropriate risk reward profile to lend more money to. They also can’t lower their lending standards any further, having scraped the bottom of the barrel with such brilliant ideas as “Subprime Lending” and “NINJA loans”. So they’re doing the only thing they can: HOARDING. Parabolic Excess Reserves are the consequence. Ben “Helicopter” Bernanke is furiously pushing on a string…


The combination of a parabolic increase in Total Reserves and the stagnation of Borrowed Reserves had the effect of catapulting Non-Borrowed reserves back into positive territory.
The jump in Total Reserves has manifested itself as giant pile of Excess Reserves at the banks.

The liquidity provided by the Federal Reserve through its policy of Quantitative Easing is stuck in the financial system. The refusal of banks to lend is the bottle neck and the only thing preventing inflation. Since there is no economic incentive to lend the financial system will continue to de-leverage and destroy bad debt. The banks have been reduced to hoarding. Therefore, despite a massive increase in money, expect DEFLATION in 2009.

NOTE: The effects of Quantitative Easing are evident in the sudden increase in the Adjusted Monetary Base (AMBNS). In August 2008 the Monetary Base was $870.99 billion. By December 2008 the Monetary Base was $1 692.63 billion, an $821.64 billion increase or 94.33% in 5 months!!!


DiverCity said...

I'm a relatively recent convert to the deflationary narrative. However, I have a nagging insecurity about how inflation could result simply from an abrupt widespread loss of confidence in the currency. Also, Peter Schiff in his most recent commentary posits an extremely scary scenario about who has been buying bonds and why, and how this portends, essentially, an economy in smoldering ruins after an episode of hyperinflation followed by the ultimate deflationary collapse. I'd be interested in your thoughts, especially of you've read Schiff's commentary.

Ben Bittrolff said...


A link to the commentary please...

DiverCity said...


Also here:

Anonymous said...

It's a very good point, and I too would be interested in your take on it.
"Since there is no economic incentive to lend the financial system will continue to de-leverage and destroy bad debt. The banks have been reduced to hoarding. Therefore, despite a massive increase in money, expect DEFLATION in 2009."
Have to agree with you, but...
Is it possible that depression could flip into hyperinflation, say next year or even half way through 2009 ? How long will de-leveraging go on for ? The Govt appears to be hell-bent on preventing bad debt from being destroyed, at least so far as concerns the favoured banks and Credit Default Swaps (AIG).
The dollar is a zero interest-paying debt from the Fed and backed only by “the full credit and faith of the USGovt”. If the US Govt loses all credibility, could the dollar then go down the gurgler because it is fundamentally backed by nothing...which would amount to the same thing as hyperinflation ? In the 1930s the dollar was backed by gold so the credibility of the US Govt didn’t come into it.
I don’t live in America although I currently hold US$s. All the currencies are extremely volatile one against another. It's more like holding stocks and shares whereas what I am really looking for is a simple store of value. I have bought gold for that reason. If you are in the wrong currency at the wrong time it can cost you plenty. I am an outsider looking in and I feel quite concerned about my holdings of US currency, although if I switch it could be even worse ! The world has never experienced an unbacked US$ in a deflationary depression. There is no history to fall back on.

Anonymous said...

You have explained exactly what I have been trying to explain to people. Alas I only have an intuitive (i.e. non economics view) of this.
The Government is inflating the 'money supply' (the amount of narrow Money)
The Market is deflating 'debt/credit' (the level of broad Money)

Narrow Money is not translating into Broad Money (via the multiplier of the Fractional Reserve System) as the Financial System is bust.

I do not think that there is an accurate measure of Broad Money claims out there due to 'financial innovation' and derivatives (contingent claims). We therefore have no real idea on the ratio of Broad Money Claims to Narrow Money measures.

"Debt/Credit is a (future) claim on Money."
As soon as this was explained to me I began to understand the difference. As what we (laypeople) call 'money' is actually 'debt' then there will be a continued destruction of this and people will continue to look to avoid risk.

Anonymous said...

You seem to always be picking on the banks. Why such a negative attitude to the banks?

Anonymous said...

Not negative just objective, which in light of recent events does appear quite negative.

Anonymous said...

Um, not to burst the deflationary bubbly, but it seems that the banks have been told "informally" by the estimable Mr. Bernanke & Mr Paulson, not to lend out the cash. So...its not really hoarding.

Now, this sets up an interesting situation. Are they going to be bound by this on 1/20 at 12:01PM? You have to take a very close look at the Bushies and the character of the people involved. I wouldn't be at all surprised if the "request" didn't have a shelf life left of a week >>> what better way to ensure Mr. Obama a very rocky start than a massive wave of hyperinflation?

Anonymous said...


Anonymous said...

For me all this sounds like the question what is “0 * infinity”. Where “0” is the velocity of money currently coming to grinding halt and “infinity” Government/Fed inflating big time. Some argue well: “0 * anything” MUST be 0 (deflationists) and others argue anything * infinity is infinite (i.e. Hyperinflation). I do not know who will be right, but “0 * infinity” is at best highly unstable!

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