World Awash in Clueless Analysis 8/25/21

  12 hours ago, MisFit Kid said:

“Submitted for your approval” / I dont want to hear about it later………..(van halen song)

ie…….Reverse Repo

https://mishtalk.com/economics/there-is-a-negative-demand-for-deposits-to-the-tune-of-1-1-trillion-dollars

Thanks for posting that. I know that you were goading me. I appreciate the opportunity to re butt.

The linked post is just more clueless drivel. Ignorant garbage.

The excess cash, is, as I’ve pointed out many times, a direct result of the Treasury paydowns that began on February 23. It’s temporary, and will disappear as soon as the Treasury starts reissuing T-bills in amounts greater than expirations. That’s coming, and we know when, but I’ll reserve the timing analysis and outlook for Liquidity Trader subscribers.

The rest of it is just insane gobbledygook. Of course banks don’t lend deposits. Deposits are the flip side of loans. Banks create deposits when they lend money. Both a bank asset- the loan, and a bank liability- the deposit, are created the instant a loan is made. There are always two ledger entries. This is something that virtually all economists and other observers either don’t understand, or willfully ignore.

Is lending constrained by regulatory capital rules? Theoretically yes. Can the banks raise capital if they need to in this environment? Duh. So why are they reducing their capital by buying back stock?

Furthermore, bank loans ex repo loans, have risen by $300 billion, or just over 3%, since January. That’s not too shabby. The idea that banks aren’t lending is crap.

QE is not a “swap,” except to the extent that any transaction you can imagine is a swap. QE creates new money, and it gets spent. It’s not just “lying there on the Fed’s balance sheet.” The purchased security is a Fed asset, and it pays for the asset by depositing newly imagined money. That money becomes bank deposits in the banking system PDQ through the Primary Dealer conduit and the US Treasury conduit.

These guys make like it’s ring fenced or something. It’s money. It gets spent. It circulates.

The money created by the Fed’s QE purchase is always reflected in three places. One is the Fed’s balance sheet as an asset. The other is as a deposit liability of the Fed. The third is as a cash asset either at the Primary Dealer account at the Fed, in the US Treasury’s cash account (also a Fed liability line item), or in what’s called “Other deposits of depositary institutions,” which are bank reserve deposits.

When any entity transacts and money transaction with another, one guys bank deposits get a debit, and the other entity gets a credit. If they have their deposits at different banks, the banks credit or debit each other’s reserve account at the Fed. The money moves, but the Fed’s reserve liability deposit is unchanged.

When the Fed buys a security from a Primary Dealer, it creates a deposit in the dealer’s account at the Fed in payment for the purchase. The dealer then uses that cash to buy assets from others. The payment for the asset goes into the seller’s bank account.

This dealer purchase involves a simultaneous transfer of the cash from the dealer’s Fed account, to the reserve deposit account of the seller’s bank at the Fed. The Dealer deposit and the reserve account are Fed liabilities backed by the asset the Fed purchased. The Fed liability is then simultaneously present in the banking system as a bank deposit, and begins to circulate there.

A second conduit for the Fed’s new QE cash is via the US Treasury. The dealer uses some of the newly printed QE money to buy newly issued debt from the US Treasury. The QE cash that the dealer just got from the Fed then goes into the US Treasury account at the Fed. The Treasury soon spends that cash to pay its normal outlays, whether a social security payment, a government worker salary, or to buy a Trident missile from a defense contractor. That’s another conduit for the QE cash to reach the banking system.

The idea that QE cash is dormant is absolute hogwash. The people who say that simply refuse to connect the accounting dots. There’s no reason not to. The Fed publishes the necessary data week in and week out. I know because I’ve been tracking it for 21 years. The data sets are the Fed’s H41 and H8. You can track and chart and decipher it yourself, or you can put my experience with it to work for your benefit. I do the heavy lifting so that you can read and understand it.

Lending is an entirely separate activity that is not constrained by a bank’s deposits. The reserve requirement is zero. Regulators do impose constraints based on capital ratios, but not directly by deposits.

For example, when you buy a stock on margin, you get a loan to make that purchase. At the same time, a deposit is created in the account of the seller who sold you the stock. Or when you use your credit card you get an instant loan.  The vendor who sold you the good or service gets a payment from the lender which is deposited into his bank account.

It’s completely independent of QE. QE only stimulates lending to the extent that it artificially suppresses interest rates, both short term and long term.

I have no idea what the point is that these clowns are trying to make. They don’t understand how money is created. They don’t understand double entry accounting. They are clueless. If their point is that QE is harmful, a point on which I heartily agree, they are going about supporting that idea in completely the wrong way.

If they are arguing that QE is deflationary, or something else other than that it works to inflate asset prices, they are wrong.  QE will stop working when it becomes insufficient to support Treasury prices and yields at current levels. This can be projected by connecting the dots and doing the arithmetic. It’s not even higher math. It’s basic accounting, with a little addition and subtraction.

Yes, the Fed stopped publishing money supply data weekly. But it still POSTS FED BALANCE SHEET DATA, and COMMERCIAL BANKING SYSTEM AGGREGATE DATA WEEKLY. I track it, publish it, explain it, and develop a specific outlook based on it at Liquidity Trader.

There’s an orderly process to these things. People could understand it if they wanted to. But they don’t. They’d rather play with themselves.

This is a syndicated post, which originally appeared at Stool Pigeons Wire at Capitalstool.com. View original post. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.