Really Scary Fed Charts: The Master Plan

The M1 money multiplier (MULT) has gone into free fall and is now below 1. Translation: Now each $1 increase in the monetary base (AMBNS) results in the money supply increasing by LESS than $1. This is further evidence of OBSCENE hoarding by the banks.

The Federal Reserve is desperately attempting to increase the monetary base (AMBNS) by injecting liquidity into the banking system via additional reserves. The banks on the other hand are stockpiling this liquidity as excess reserves (EXCRESNS) and therefore not passing it on.

The monetary base has exploded because of excess reserves have exploded. On January 2009 the monetary base was $1 692.63 billion and excess reserves $767.42 billion. Subtracting excess reserves from the monetary base would result in a base of $925.21 billion. This number is very nearly inline with the level ($870.99 billion) and rate of change (1%) of the monetary base prior to the implementation of the Quantitative Easing policy.

The velocity of money is collapsing.

The Quantity Theory of Money holds the following:

“The determinants and consequent stability of the velocity of money are a subject of controversy across and within schools of economic thought. Those favoring a quantity theory of money have tended to believe that, in the absence of inflationary or deflationary expectations, velocity will be technologically determined and stable, and that such expectations will not generally arise without a signal that overall prices have changed or will change.”

M * V = P * Q

M is the total amount of money in circulation in an economy during the period.
V is the velocity of money in final expenditures.
Q is an index of the real value of final expenditures.
P is the price level associated with transactions for the economy during the period.

Example (1):

Let’s do some simple math:
M = $100. That is all the money in this economy.
V = 2. This economy turns things over fairly briskly.
Q = $100. This is the real value of all the stuff produced by this economy.

To solve for P we must re-arrange the formula:

P = (M * V) / Q
P = ( $100 * 2) / $100
P = 2

In this simple test economy the velocity of money has resulted in a doubling of the price level (P). Therefore, inflation is 100%. The money moves so fast in this economy that it creates the PERCEPTION that there are really $200 dollars in this economy chasing $100 dollars of real value and the goods and services are end up trading accordingly… at inflated prices!

Now let’s crash the velocity of money, but leave EVERYTHING else the same. Ceteris Paribus.
Example (2):

M = $100. That is all the money in this economy.
V = 1. This economy turns things over much more slowly now.
Q = $100. This is the real value of all the stuff produced by this economy.

P = (M * V) / Q
P = ( $100 * 1) / $100
P = 1

Simply by reducing the velocity of money we have reduced the price level (P). In this economy there is now ZERO inflation!

The Ivory Tower Academics over at the Federal Reserve know this all too well…

After a credit bubble AND asset price bubble of obscene proportions the Federal Reserve is desperately seeking to avoid deflation at all costs. They cannot bear contemplating the consequences of deflation on the enormous debt left behind.

The Federal Reserve has very little direct control over the velocity of money (V). They can only encourage the faster turnover of money and not coerce it. The usual trick is to cut rates and provide liquidity. However, when economic agents are stuffed, they’re stuffed. It’s that simple. If economic agents can’t find a profitable way to deploy these funds, they will simply refuse to do so… zero interest rates and ample liquidity be damned!

Since the main objective is to prevent deflation first and cause inflation second, the Federal Reserve must maintain and even increase the general price level in the economy (P).

The Federal Reserve is the monopoly provider of money (M). Having direct control over this variable allows them to manipulate it at will. They can do all sorts of fancy stuff, but in the end all they’re doing is digitally “printing” money.

Now let’s double the amount of money (M) in the economy from the previous example (2), Ceteris Paribus.

Example (3):

M = $200. That is all the money in this economy.
V = 1. This economy turns things over much more slowly.
Q = $100. This is the real value of all the stuff produced by this economy.

P = (M * V) / Q
P = ( $200 * 1) / $100
P = 2

Doubling the money supply to $200 brings the price level (P) back to the original level when the velocity of money (V) was higher as in the first example (1).

The real world of course is much more complex. We do know that the velocity of money (V) has cratered as can be seen in such variables as MULT. The Federal Reserve is clearly trying to pick up the slack by increasing the supply of money as can be seen in such variables as AMBNS.

However, it STILL isn’t nearly that simple. The Federal Reserve creates what is called High Powered Money. For that money to be useful it needs to be transmitted into the economy. If the transmission mechanisms don’t work, it is utterly useless. Bank hoarding on a grand scale is just such a failure to transmit. Printing without transmission cannot result in inflation. (ZERO velocity = ZERO money)

FUN FACT: Ben “Helicopter” Bernanke is well aware of this problem. In a famous speech he posited that to circumvent this problem all the Federal Reserve had to do was employ “A money-financed tax cut [which] is essentially equivalent to Milton Friedman's famous “helicopter drop” of money.” Basically print money to finance a tax cut. This immediately puts money directly into the hands of consumers. Hence the famous nickname “Helicopter Ben”.

To make matters worse technology and financial innovation has resulted in what is now referred to as the Shadow Banking System. Since money and debt are fungible, that is to say that money is debt and debt is money, non-bank financial institutions were able to borrow, leverage up and then lend out on the grandest scale ever in human history. With such financial innovations as securitizations, new accounting gimmicks such as off balance sheet accounting, and new vehicles such as structured investment vehicles, this system literally PRINTED money! The broadest measures of money supply increased dramatically.

As part of the current de-leveraging of the ENTIRE financial system this money is being DESTROYED as they are called in and liquidated or go into outright default. This has the added consequence of smashing the very asset prices the shadow banking system used as collateral.

The Federal Reserve is therefore also in the race to merely REPLACE the amount of money (M) being destroyed as the shadow banking system implodes. To actually increase the money supply AND make up for the reduction in money velocity (V) the Federal Reserve has to print AND transmit truly astronomical amounts of money.

This is a race no central bank can win. Deflation cannot be avoided. Unfortunately, neither can the ultimate tsunami of inflation that will sweep across the globe after.

There you have it. The Federal Reserve Master Plan: Print money to offset collapsing velocity and the money/debt currently being destroyed and transmit it at all costs to keep asset prices from falling.

DEFINITIONS:

M1 Money Stock (M1): The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the Treasury and depository institutions), minus cash items in process of collection and Federal Reserve float.

Adjusted Monetary Base (AMBNS): The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories. This series is a spliced chain index; see Anderson and Rasche (1996a,b, 2001, 2003).

M1 Money Multiplier (MULT): The M1 multiplier is the ratio of M1 to the St. Louis Adjusted Monetary Base.

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.

BORROWED RESERVES:

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.

TOTAL RESERVES:

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…

CONCLUSION:

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!!!

Federal Receipts and Outlays: The New Scary Chart?

I will begin tracking Federal Receipts and Outlays as displayed in the above chart. My theory is that receipts are going to absolutely crater going forward as corporate, personal and property taxes implode despite possible tax increases by Obama. Federal Outlays are going to go parabolic from here as the government begins to spend money faster than a ninja gone apeshit.

The most dangerous developments will become visible through the behavior of Interest outlays on the federal debt (red line). I fully expect that somewhere a tipping point will be tripped and real interest rates will blow out, despite deflationary pressures, as foreign appetite for US debt disappears. The worst will come when that appetite not only wanes, but turns to revulsion and that debt is puked back up as confidence in the ability to pay is finally lost.

This will then become the new Scary Chart.

My scary charts series here.

Really Scary Fed Charts: NOV, US Bankrupt?

Fed Defies Transparency Aim in Refusal to Disclose (Update1): “The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that's a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.”

While the Fed may be refusing to name individual firms, we can just look at the data from the Federal Reserve Bank of St. Louis to pin down exactly where the $2 trillion of emergency loans went. We can also determine how that in turn was deployed.

Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) went from $290.105 billion in September to $648.319 billion in October. That is a 123.50% increase in just one month or a 1481.73% annualized increase. That is also 4.7% of GDP (2007). Currently, there is no evidence at all that the pace of borrowing is slowing down. Obviously, there is an upper limit somewhere.

Non-Borrowed Reserves of Depository Institutions (BOBNONBR) went from -$187.305 billion in September to -$332.750 billion in October. That is a 77.65% increase in just one month or a 931.82% annualized increase. That is also 2.4% of GDP (2007). In plain simple English: Banks are insolvent as a group. The money coming out of the ATM is money borrowed from the Fed. Currently, there is no evidence at all that the health of banks is improving.

Total Borrowing (BORROW) and Non-Borrowed Reserves (BOBNONBR) have clearly blown past each other as the ponzi scheme that was the US financial system finally and suddenly unraveled. This is EXACTLY what happened in Japan. This is EXACTLY how Japan ‘liquefied’ it’s overleveraged, overextended and insolvent banks. Creating the infamous Japanese ‘zombie’ banks resulted in deflation and economic stagnation that is now referred to as the Lost Decade.

Total Borrowings (BORROW) can be broken down into its various sources. Discount Window Borrowings of Depository Institutions from the Federal Reserve (DISCBORR) are one such source. Discount Window Borrows went from $140.291 billion in September to $403.541 billion in October. That is a 187.65% increase in just one month or a 2251.75% annualized increase. Interestingly enough, the discount window wasn’t really tapped until September, with borrowings in August only being $18.078 billion. Clearly, this is a new source of funds for financial firms and may have to do with the fact that Bernanke has removed the negative stigma of tapping the window. He has also made almost everybody and his mamma eligible. Collateral requirements have also been severely degraded to the point where a dead donkey would probably qualify.

Federal Reserve Discount Window:
FAQs
Collateral Margin Table

Term Auction Credit (TERMAUC) is just one of the many facilities desperately created by Bernanke. Borrowings went from $149.814 billion in September to $244.778 billion in October. That is a 63.39% increase in just one month or a 760.66% annualized increase. That is also 1.8% of GDP (2007).

Term Auction Facility:
FAQs
Terms and Conditions fro Term Auction Facility
Term Auction Facility Schedule

Excess Reserves of Depository Institutions (EXCRESNS) went from $60.051 billion in September to $267.902 billion in October. That is a 346.13% increase in just one month or a 4153.49% annualized increase. That is also 1.9% of GDP (2007). From June up to September, Excess Reserves hovered around the $2 billion mark. This rather large and sudden jump can signify only one thing: BANK HOARDING. Having completely ‘done their asses’ by extending cheap and easy credit to anybody and anything that could fog a mirror, these super-star banksters are now sitting on their cash, paralyzed by fear. They also know that their sham accounting can only postpone the inevitable and they are clearly gearing up to take further significant losses on their balance sheets. Eventually that CDO made up of dead MBS’s, made up of dead condo loans now sitting in a Level 3 Asset Bucket is going to be marked to market. The banksters must hoard desperately…

The Board of Governors Monetary Base (BOGAMBNS) went from $900.672 billion in September to $1126.244 billion in October. That is 25.04% increase in just one month or a 300.54% annualized increase. For all you gold-bug hyper inflationistas that are drooling over this chart: This is NOT, I repeat, NOT inflationary. This is in fact EVIDENCE of DEFLATION! (Ha! They don’t teach that in school.) First, see the EXCRESNS chart for evidence of bank hoarding behavior. Second, debts AND assets are being liquidated. This results in a massive increase of cash and cash equivalents. However, this process destroys both debt and assets values. Simplified, money is being destroyed on a grand scale. What BOGAMBNS is measuring is but a small component of what qualifies as ‘money’ that HAPPENS to wildly increase as ‘money’ in the broader sense is annihilated.

Reserve Balances with Federal Reserve Banks (WRESBAL) jumped from $260.924 billion in September to $493.633 in October. That is a 89.19% increase in just one month or a 1070.24% annualized increase. That is also 3.6% of GDP (2007). This is the result of a fancy new rule that Bernanke stuck into the TARP rescue package legislation. The Federal Reserve now pays interest on deposits. Since the banksters don’t trust each other anymore they take that hoarded cash and dump it on the Fed. The Fed then turns around and dumps it back on them thru the various facilities. The entire circle jerk is paid for by the US taxpayer. By paying interest on the reserve balances, the Fed is effectively recapitalizing the banks by stealth. The money for the interest of course comes straight out of your pocket. (To pay the interest, the Treasury issues more debt which you pay for thru increased taxes… later. Don’t worry though; a re-run of American Idol is probably on tonight. So everything will be just fine. Just don’t get off the couch you complacent fat bastards. Don’t you dare rock the boat; especially now that it’s sinking.)

Reserve Bank Credit (RSBKCRNS) has jumped from $1054.506 billion in September to $1740.17 in October. That is a 65.02 % increase in just one month or a 780.27% annualized increase. That is also 12.6% of GDP (2007). To pay for all these fun facilities and to create these ‘zombie’ banks, the reserve bank credit now sits at $1.7 trillion. Don’t worry though, wards of the state such as Fannie Mae (FNM) and AIG (AIG) are doing just fine…

Fannie Mae Reports Record Loss After Asset Writedowns (Update3): “Fannie Mae posted a record quarterly loss as new Chief Executive Officer Herbert Allison slashed the value of the mortgage-finance provider's assets by at least $21.4 billion and said it may need to tap federal funds next year.

In its first report since being seized by the U.S. government in September, Washington-based Fannie said its third- quarter net loss widened to $29 billion, or $13 a share, the largest for any U.S. company this year.
[ snip ]

[ snip ]
Treasury Secretary Henry Paulson pledged to invest as much as $100 billion in each company as needed to keep their net worth positive.
[ snip ]

[ snip ]
Fannie's financing agreement with the Treasury constrains its ability to issue debt, capping the total outstanding amount at 110 percent of the balance as of June 30. Fannie estimates that limit as $892 billion. As of Oct. 31, Fannie had $880 billion in total debt outstanding.”

Worried yet? You should be. Weep for the shortest lived super power ever. Weep for your country, for it has quickly and quietly imploded. The United States of America is bankrupt.

Don’t believe me? Read the paper title Is the United States Bankrupt? by Laurence J. Kotlikoff of the FEDERAL RESERVE BANK OF ST. LOUIS. (The paper may be somewhat complex for the laymen. I will post a simplification of the arguments and math in another post.)

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same
8) Really Scary Fed Charts About to Get Crazy Scary
9) Really Scary Fad Charts: OCT, Now Crazy Scary

Really Scary Fed Charts: OCT, Now Crazy Scary

“Policy makers are trying to prevent “Great Depression II” by stemming the financial industry's contraction.” –Jim Bianco, Bianco Research

Once a month I update and add to a regular series of posts I call Really Scary Fed Charts. I must confess, I missed the September update.

On September 11th in Really Scary Fed Charts About to Get Crazy Scary, I wrote:

“I can tell you right now that going forward these charts are about to go from just “really scary”, to “crazy scary”.

At the time the Federal Reserve was contemplating all sorts of fun new ways to increase the cash it provides to banks and brokers.

The most recent was announced yesterday:

Fed to Provide Up to $540 Billion to Aid Money Funds (Update6): “The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.

“Short-term debt markets have been under considerable strain in recent weeks” as it got tougher for funds to meet withdrawal requests, the Fed said today in a statement in Washington. A Fed official said that about $500 billion has flowed since August out of prime money-market funds, which with other money-market mutual funds control $3.45 trillion.

The initiative is the third government effort to aid the funds, which usually provide a key source of financing for banks and companies. The exodus of investors, sparked by losses following the bankruptcy of Lehman Brothers Holdings Inc., contributed to the freezing of credit that threatens to tip the economy into a prolonged recession.”

Why the desperate move? Why do money market funds matter so much?

“U.S. money-market mutual funds held more than 63 percent of outstanding unsecured commercial paper and 39 percent of asset- backed commercial paper at the beginning of September, according to Alex Roever, a New York-based analyst at JPMorgan.”

Without liquid money market funds, companies won’t find willing buyers for their unsecured commercial paper and asset backed commercial paper. Companies that are unable to sell such paper may suddenly find themselves in a terrible liquidity crunch with receivables incoming, but too far out and unavoidable expenses such as payroll pending.

So how many different “facilities” does the Fed now employ?

(Want to know more? Click on “WTF?” beside each facility. Surprised? Confused? Angry? Click on “FAQ” beside each facility and have all your questions answered.)

1) Term Auction Facility (TAF) –WTF? –FAQ

2) Primary Dealer Credit Facility (PDCF) –WTF? –FAQ
3) Term Securities Lending Facility (TSLF) –WTF? –FAQ
4) Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCP MMMF) –WTF? –FAQ
5) Commercial Paper Funding Facility (CPFF) –WTF? –FAQ

As you can imagine, all these facilities have made the Fed charts go from just scary, to crazy scary. To be honest, the worst charts are still to come because the month of October was the scariest and craziest to date, with the Fed intervening almost daily.

Non-Borrowed Reserves of Depository Institutions (BOGNONBR) continue to plummet. This makes sense as under capitalized banks continue to hemorrhage money via outright losses and write downs of over valued assets. The result is that these banks now have to borrow money from the Fed to maintain their reserves so that when you go to the ATM money actually comes out…

This also explains why all interbank lending rates from LIBOR and EURIBOR to HIBOR all did moonshots. You see, there were few banks capable of lending in any size, and even fewer willing.

Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) is the obviously the opposite of BOGNONBR. The numbers are pretty close, plus or minus a couple of billion. Therefore, the borrowed money is clearly flowing straight into the banks where it is desperately needed to keep them liquid.

The BORROWvBOGNONBR chart illustrates the relationship on a single chart.

On top of that, Discount Window Borrowings of Depository Institutions from the Federal Reserve (DISCBORR) have only just recently spiked hard. Discount window borrowings are rapidly approaching $150 billion, despite holding steady at low levels throughout most of the crisis. Clearly, things are getting worse.

The Term Auction Credit (TERMAUC) facility has been capped at $150 billion since June. With nowhere else to turn, desperate banks may be turning to the discount window (DISCBORR). Just a theory…

Adding it all up (or as much of it as the Fed wants you to be able to add up) Total Borrowings of Depository Institutions from the Federal Reserve (TOTBORR) is about $450 billion. Put in context, the IMF, World Bank and CIA World Factbook list US GDP at about $13.8 trillion. That means, total borrowings stand at about 3% of GDP.

Don’t even worry about it though. The gubbermint has got everything under control…
The banks don’t trust each and rightly so. Each bank has marked their own toxic assets to fantasy and know full well all the others have done the same. Each bank knows they’ve overextended and over leveraged themselves during the credit bubble and know full well all the others have done the same.

With the passage of TARP came a small provision that allows the Fed to pay interest on deposits. So these scared banks have plowed back into the Fed banks all the cash they’ve been hoarding as can be seen by Reserve Balances with Federal Reserve Banks (WRESBAL)

An interesting debate took place in the post Really Scary Fed Charts: MAY, False Alarm? between Calculated Risk, MarketTicker and myself:

“Over at CalculatedRisk they are being interpreted as a “false alarm” in Non-Borrow Reserves and the Fed’s Balance Sheet.

Over at MarketTicker they are being interpreted as evidence that “the system as a whole is insolvent” in Tall Tale Tuesday.

While I’m not sure (yet) that “the whole system is insolvent”, I definitely do NOT think this is a “false alarm”.”

The clear winner, much to my dismay, would have to be MarketTicker.

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same
8) Really Scary Fed Charts About to Get Crazy Scary

Really Scary Fed Charts About to Get Crazy Scary

“This could be the mother of year-ends. The markets will need extraordinary actions to get through it.” –Brian Sack, Macroeconomic Advisers

“If banks are unwilling to lend to other banks, then they are unwilling to lend to you and me.” –Stan Jonas, Axiom Management Partners

Once a month I update and add to a regular series of posts I call Really Scary Fed Charts.

Although I won’t update the charts until September 15th when the data comes out, I can tell you right now that going forward these charts are about to go from just “really scary”, to “crazy scary”.

Fed May Expand Funding Aid to Banks in a ‘Mother of Year-Ends’: “The Federal Reserve may have to increase the cash it provides to banks and brokers, already a record, to help them balance their books at the end of the year.

Six bank failures in the past two months and rising concern about Lehman Brothers Holdings Inc.'s capital levels pushed lenders' borrowing costs to near a four-month high yesterday. They may climb further as companies rush for cash to settle trades and buttress their balance sheets at year-end.

One option is for banks and brokers to increase the loans they take out directly with the Fed; the central bank reports on the figures today. Officials could also offer options on its biweekly loan auctions or introduce special repurchase agreements to straddle the end of the year, economists said.”

Already about half the $800 billion Federal Reserve balance sheet is spoken for through the alphabet soup of liquidity facilities: TAF, TSLF, and PDCF. The Fed is fast running out of options and money.

This year, the Grinch almost certainly will steal Christmas...

The Really Scary Fed Charts Series:
1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Really Scary Fed Charts: MARCH
4) Really Scary Fed Charts: APRIL
5) Really Scary Fed Charts: MAY, False Alarm?
6) Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
7) Really Scary Fed Charts: JULY, More of the Same

Really Scary Fed Charts: JULY, More of the Same

Last month: Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
This month: Things got a little worse….

The really big question is: Just how long can the Fed keep doing this?
Take a close look at the Federal Reserve Balance sheet here.

Maiden Lane LLC is the product of the Bear Stearn’s bailout and is worth $29 billion. A good chunk of that will be lost. No doubt about that.

Outstanding debt on the Term Auction Facility (TAF) is now $150 billion and climbing.

Related Posts:
TAF, TSLF, PDCF Explained.
Fact Sheet: Bush Stimulus Package

Really Scary Fed Charts: JUNE, 'Just' 1% of GDP Now

In my last update Really Scary Fed Charts MAY: False Alarm? I presented two different views on the continued rapid deterioration of the U.S. financial system.

Over at CalculatedRisk they are being interpreted as a “false alarm” in Non-Borrow Reserves and the Fed’s Balance Sheet.

Over at MarketTicker they are being interpreted as evidence that “the system as a whole is insolvent” in Tall Tale Tuesday.

Another month and another couple billion later, the Fed Charts just keep getting scarier.

Last month Total Borrowings of Depository Institutions from the Federal Reserve (BORROW) were around $140 billion.

Total Borrowings now amount to about $155 billion

Allow me to put that into context:
1) The entire Bush stimulus package was $145 billion.
2) The stimulus packages was 1% of GDP

How comfortable are you with the fact that stricken financial firms have borrowed the equivalent of 1% of GDP from the Federal Reserve? (Oh sweet baby Jesus, you better hope Ben ‘Helicopter’ Bernanke really really knows what he’s doing…)

Last month Non-Borrowed Reserves of Depository Institutions (BOGNONBR) were around negative $90 billion.

The balance sheets of almost all financial institutions, whether they are depository institutions or prime brokers, will deteriorate further. They have to. The vast majority of their balance sheets are now in the Level 2 or 3 asset buckets. I can’t imagine that these assets are currently being undervalued or even conservatively valued.

That’s just now how these fellows roll.

It’s Wall Street.

Clearly the credit crunch is far from over… (BORROW/BOGNONBR)

Most of this nightmare is the result of Bernanke’s new, innovative, and numerous liquidity facilities.

Related Posts:
TAF, TSLF, PDCF Explained.
Fact Sheet: Bush Stimulus Package

Really Scary Fed Charts: MAY, False Alarm?

The scary Fed charts are making the rounds on various blogs now.

Over at CalculatedRisk they are being interpreted as a “false alarm” in Non-Borrow Reserves and the Fed’s Balance Sheet.

Over at MarketTicker they are being interpreted as evidence that “the system as a whole is insolvent” in Tall Tale Tuesday.

While I’m not sure (yet) that “the whole system is insolvent”, I definitely do NOT think this is a “false alarm”.

CalculatedRisk: Non-Borrow Reserves and the Fed’s Balance Sheet: ““This graph, from the St. Louis Federal Reserve, shows the non-borrowed reserves of financial institutions. Looks like some serious cliff diving, but with a little research, we discover this graph is misleading.

The explanation is pretty simple. The Federal Reserve decided to classify the TAF and the primary dealer credit facility as borrowed reserves (see this table). If we back out these collateralized borrowings, you get the total reserves, and that has been very steady. False alarm.”

My Comment: First, lets start with “total reserves have been steady” if you exclude the Term Auction Facility (TAF). This, as I understand it, should not be done. This facility was specifically designed for depository institutions to replenish reserves:

Term Auction Facility (TAF): “Under the term auction facility (TAF), the Federal Reserve will auction term funds to depository institutions. All depository institutions that are eligible to borrow under the primary credit program will be eligible to participate in TAF auctions. All advances must be fully collateralized. Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). Bids will be submitted by phone through local Reserve Banks.”TAF FAQ

The TAF is currently at $100 billion and that has been drawn (Chart: TERMAUC). Bernanke raised the TAF limit to $150 billion on May 2nd. (Fed Officials Warn About Inflation, Say Markets Still Unsettled) Obviously there is a need for this liquidity. The chart measures exactly what it should: Non-Borrowed Reserves. The TAF is so large now, that Non-Borrowed Reserves are deeply negative.

What does this mean? Is “the system as a whole insolvent”? I would say POSSIBLY. We don’t know for sure YET and it may take years before we find out.

The Federal Reserve requires collateral from those borrowing through the TAF. We need to first understand the collateral, and margin rules on that collateral to determine how risky the TAF facility is.

Collateral FAQ
The Discount and PSR Margins Table

A good chunk of what can be used of collateral is low risk and transparent. For example, US Treasuries and Fully Guaranteed Agencies, Government Sponsored Enterprises, International Agencies, Brady Bonds, Foreign Governments, and Foreign Government Agencies are all liquid, can be valued and are transparent in the sense that you know what it is you’re holding.

BUT, then things get sketchy and they get really sketchy really quickly.

Municipal Bonds are mostly good collateral. I say mostly, because municipal defaults are generally very low. HOWEVER, the last 5 years of revenues and the projections of all future revenues are based on an illusion. That illusion was of perpetually rising real estate prices and therefore perpetually rising property tax income. Furthermore, the churn in real estate, the sheer volume of sales, also generated a large, non-reoccurring revenue stream from one time transaction taxes. Municipal expenditures rose with these income increases and future projections, on which bonds were floated, extrapolated this income stream into infinity. Some municipals are already under severe stress as their tax bases collapse. (See Tax Assessors Nightmare of at Mish’s for an in depth analysis of the pending tax implosion.)

Corporate Bonds Rated AAA are generally fine. On average only 23.3% of all bonds rated AAA were downgraded to AA over a 5-year horizon. This means that the collateral pool will gradually shrink as AAA corporate bonds slowly get downgraded as economic fundamentals deteriorate. Basically as AAA rated bond that gets downgraded won’t be eligible at the TAF any longer. So when the 28 day period expires, the bond is swapped back by the Fed. Default is almost impossible in such a short time frame.

BUT, that assumes that AAA today is as solid and reliable as AAA used to be years ago. Even sudden implosions, such as that of Bear Stearns, don’t tend to be a problem because the ratings of such firms generally aren’t high enough. Bear Stearns had been rated A+ before it imploded and therefore Bear Stearns debt wouldn’t have been eligible as collateral. The ratings agencies don't exactly inspire much confidence in their skills.

Further down the list we hit Asset Backed Securities, Commercial Mortgage Backed Securities, Mortgage Backed Securities, and Collateralized Mortgage Obligations. THIS is where the wheels come off…

First, OBJECTIVELY valuing these instruments is damn near impossible. That is WHY these markets have seized up. Second, they are not transparent. To figure out and hunt down the underlying assets in these derivatives of derivatives is also damn near impossible. Even worse is the fact that both AAA rated and NON-AAA are eligible when we already know that even AAA ratings in these instruments are deeply FLAWED and UNRELIABLE. Unlike corporate bonds, these instruments can suddenly collapse without warning. Therefore, the Fed really is taking a big risk on these.

Furthermore, the ‘haircut’ on all this collateral is ridiculously LOW. Most are only 1% - 3%. The lendable value of the worse of these is still 70% and that is only when there is NO MARKET PRICE AVAILABLE. I can tell you this, when there is no market price, there is also no way in hell the instrument is worth 70 cents on the dollar. No price and you can generously assume you’re not going to get more than 50 cents on the dollar and I say that would be a best case scenario.

“A more interesting chart was present by Dr. Janet Yellen this morning showing the Fed's balance sheet.

This graph shows that about half the Fed's U.S. Treasuries have been committed to fight the liquidity crisis.”

My Comment: Interesting indeed. Frightening as well. The Fed has basically traded in high quality instruments, US treasuries, for low quality instruments that the market doesn’t want at all or is pricing at levels deemed unacceptable by those market participants still denying reality. The Fed has committed half of its $800 billion balance sheet to battle the RESIDENTIAL real estate bubble implosion. The COMMERCIAL real estate bubble implosion has yet to get well underway. Revolving credit, such as credit card debt has yet to implode as well. Job losses have yet to accelerate. The recession has yet to gather steam.

I’ve said it before, The Fed Is Almost Out Of Ammo, Citigroup and UBS Too.

Total Borrowings of Depository Institutions (Chart: BORROW) are fast approaching $150 billion. This does not include the effect of the $50 billion increase in the TAF limit to $150 billion.

This has already pushed Non-Borrowed Reserves (Chart: BOGNONBR) to a NEGATIVE $100 billion. This is likely just to get worse as the balance sheets of financial institutions continue to deteriorate.

The balance sheets of almost all financial institutions, whether they be depository institutions or prime brokers WILL DETERIORATE further. They have to. The vast majority of their balance sheets are now in the Level 2 or Level 3 asset buckets. As I said in Bulltrap: ABCP, and Level 3 Bombs, I can’t imagine that these assets are currently being undervalued or even conservatively valued.

That just NOT how these fellows roll. This is Wall Street man! Privatize the profits, and socialize the losses!

Related Posts:
Really Scary Fed Charts: APRIL
Really Scary Fed Charts: MARCH
Fed CHANGES Really Scary Fed Charts
Really Scary Fed Charts, Why Bernanke Will Furiously Cut

Really Scary Fed Charts: APRIL

Ok, it’s time for that monthly installment of REALLY SCARY FED CHARTS.

All data is sourced DIRECTLY from the Federal Reserve Bank of St. Louis.

Things have NOT improved. Start at the top, click on the charts and work your way down. This time around I’ve gone with more pictures and less words. There really isn’t much to say except for, “Oh SHIT.”

To all INFLATIONISTS: I’ve almost ALL these charts are for you. Each MASSIVE write down is the DESTRUCTION of credit and money. Since these write downs go straight to the bottom line, this results in the MASSIVE de-leveraging of these HIGHLY leveraged corporations. Because they ALL have to de-leverage at the same time, risky assets (from simple equities, to real estate) all find themselves CONTINUOUSLY OFFERED, with NO SUSTAINED BID. This is DEFLATIONARY.

Also, for the last time: The Fed is NOT printing money. Nor will it. The current liquidity injections are NOT inflationary, as they are TEMPORARY and nothing more than SWAPS of one illiquid (toxic mortgage derivatives) asset for one liquid (U.S. government debt) asset.

To all BOTTOM CALLERS: The last chart is for you. We may be DEEP into the RESIDENTIAL real estate mess, but we’re only JUST GETTING STARTED in the COMMERCIAL real estate mess. Banks hold far more CRE (Commercial Real Estate) loans than they ever did Residential Real Estate.

Still want to buy financials for the LONG TERM? (Buying the short covering bounces is different.)

Calculated Risk on CRE:
Recession: CRE and PCE
FDIC Stresses Importance of CRE Concentrations
WSJ on CRE Slowdown
Fed’s Kohn on CRE
Goldman: CRE Prices May Fall 25%

Really Scary Fed Chart Posts:
Really Scary Fed Charts: MARCH
Fed CHANGES Really Scary Fed Charts
Really Scary Fed Charts, Why Bernanke Will Furiously Cut

Really Scary Fed Charts: March

In my posts Really Scary Fed Charts, Why Bernanke Will Furiously Cut and Fed CHANGES Really Scary Fed Charts, I posted some charts on the US banking system that can only be described as ‘really scary’.

Well, a new month brings new data. [EDIT: All data is sourced DIRECTLY from the Federal Reserve Bank of St. Louis.]

First the usual disclaimer: I am NOT a banking industry expert or an expert on fractional reserve banking. However, I did take my fair share of economics and finance courses and I’m definitely not retarded.

Obviously, things have deteriorated further.

Starting at the top and working my way down.
1) Total Borrowings are up from around $16 billion in December to $46 billion in February, almost a 200% increase.
2) Non-Borrowed Reserves dropped from around $25 billion in December to LESS than ZERO. I’m just going to throw this out there: That is probably NOT cool.
3) Net Free or Borrowed Reserves are around zero. While this may SEEM like an improvement, factoring the ever increasing TAF borrowings (which the Fed has removed from this data series) paints a more accurate picture. Including TAF credit, Net Free or Borrowed Reserves are approaching -$45 billion.
4) The Monetary Base has turned down. That is the monetary base is being eroded faster than it can be replaced as debt destruction continues to accelerate. The Fed is ‘injecting’ liquidity through REPO agreements. The Fed is NOT ‘printing’ money. Either way, debt destruction is exceeding liquidity injections. As I wrote in my first post:

“In the land of economics, debt and money are ‘fungible’. That simply means they are interchangeable and for all intents and purposes the same. Debt is money and money is debt. The sudden rapid destruction of debt (every write down you hear coming out of the financial sector) has the effect of destroying money. If debt is destroyed fast enough, and it will be, then you get a rather sudden contraction in money supply. This is known as DEFLATION… and it ALWAYS happens when a debt bubble bursts. ALWAYS.”

5) Despite lower rates, Household Financial Obligations (debt) as a percentage of Disposable Personal Income are still at historic highs. Can you say ‘crushing burden’?
6) The trend is not your friend. Personal Savings have been trending down for years now and have been ‘skipping’ around ZERO. A ZERO Personal Savings rate is NOT what you want to see on the eve of a GIANT financial CRISIS.

I probably don’t have to spell out to you what these charts mean for the global economy and your investments. Bottom callers in general will be come extinct. Those calling for specific bottoms, in financials and real estate for example, will become extinct first.

In US Banking System Teetering on the Brink of Collapse, Mike Whitney took my charts and analyzed them further.

“Some critics say that he just wanted to throw a lifeline to his fat-cat investor buddies on Wall Street by providing more liquidity for the markets. But that's not it, at all. The fact is, Bernanke had no choice. He's facing a challenge so huge and potentially catastrophic; that cutting rates must have seemed like the only option he had.”

We’ve had our Minsky Moment. Now go act accordingly.

Related Headlines:
Citigroup May Need Cash as Losses Mount, Dubai Says (Update2)
Dollar Falls Against Yen on Bets Fed Will Lower Rate 0.75-Point
Asset-Backed, Commercial-Mortgage Spreads Met `Ebola' (Update4)
Auction Supply `Tsunami' Portends Municipal Losses (Update3)