In June of this year we wrote a White Paper on the FED Balance Sheet and the impact on Bank Excess Reserves. We are revisiting that discussion almost six months later. At the time we noted the enormous excess reserves and we noted further two things. The holding of them by the banks would retard any recovery, as we have seen in the continued unemployment stats, and that the excess money when released could cause significant inflation. The good news is no inflation and the bad news is slow recovery. We also noted that the uncertainty from the White House and Congress would result in a slow if not a negative response from small business which would further slow recovery if not result in a second dip.
We now look at the data again.
1. The FED's Balance Sheet continues to expand as shown below.
In June we hoped for a slow drop but in fact we see it continues to rise.
2. The Reserve Balances still increase as the FED pumps money into the Banks. We show that below.
In fact there has been a growing increase since August for reasons we cannot know at this stage. The data is just not there.
3. The FED holdings are shifting. The shift may be an indication of a change. We first show the distribution in June and now the one for November. These are shown below back to back.
For June we had:
For November we have:
We summarize these below for the past year:
There is a clear growth in shorter term and a decline in the long term. The trend is noticeable in the mid term yields. However there is a decline in the very short term. This may be good for mid term low inflation.
3. The Monetary Base is still a concern. The ratio of M2 to the MB is still low and declining. Frankly we had hoped for some improvement here but it is not doing so. There is no significant loan action and the Banks Balance Sheets are still weak. We show this below:
4. The Excess Ratio is still high but it seen as declining. We show this below.
These bank reserves are still much too high yet the latest numbers show a healthy decline from the summer and in fact seem to be returning at least to last fall values. These should be watched carefully.
5. The ratio of cash to checkable deposits in M1 is still volatile and on average reduced. This may not be a serious problem yet. We show this below:
The conclusion is that we are long way from a recovery. The money is still frozen and people are not spending. The uncertainty in business and the consumer driven from the chaotic actions of the Congress will most likely keep things this way through 2010. We are now looking at a 11.5% max unemployment number. We had estimated a 10.5% but the slowness in a monetary readjustment is a concern.
We now look at the data again.
1. The FED's Balance Sheet continues to expand as shown below.
In June we hoped for a slow drop but in fact we see it continues to rise.
2. The Reserve Balances still increase as the FED pumps money into the Banks. We show that below.
In fact there has been a growing increase since August for reasons we cannot know at this stage. The data is just not there.
3. The FED holdings are shifting. The shift may be an indication of a change. We first show the distribution in June and now the one for November. These are shown below back to back.
For June we had:
For November we have:
We summarize these below for the past year:
There is a clear growth in shorter term and a decline in the long term. The trend is noticeable in the mid term yields. However there is a decline in the very short term. This may be good for mid term low inflation.
3. The Monetary Base is still a concern. The ratio of M2 to the MB is still low and declining. Frankly we had hoped for some improvement here but it is not doing so. There is no significant loan action and the Banks Balance Sheets are still weak. We show this below:
4. The Excess Ratio is still high but it seen as declining. We show this below.
These bank reserves are still much too high yet the latest numbers show a healthy decline from the summer and in fact seem to be returning at least to last fall values. These should be watched carefully.
5. The ratio of cash to checkable deposits in M1 is still volatile and on average reduced. This may not be a serious problem yet. We show this below:
The conclusion is that we are long way from a recovery. The money is still frozen and people are not spending. The uncertainty in business and the consumer driven from the chaotic actions of the Congress will most likely keep things this way through 2010. We are now looking at a 11.5% max unemployment number. We had estimated a 10.5% but the slowness in a monetary readjustment is a concern.
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