http://www.federalreserve.gov/releases/h3/current/h3.htm Take a look at this. Required reserves just increased this past two weeks 5.2% !! Remember, as all of this new based money is circulating through the banking system, reserves are not 'removed' from the system. They are merely moved from the excess reserves category to the required reserves one. 3B of required reserves increase probably approximates to 30B of new aggregate money the banking system created alone in the last few weeks. Once the maximum lending multipliers are reached (leaving out the shadow banking system, where there are no reserve requirements) there will be next to no excess reserves, but all required reserves. If the Fed were to let the money multipliers max out with the existing money base, we'd see 1T+ of required reserves and next to none in excess reserves. The # to watch going forward will be the required reserves.
I'm not following you. Most of the excess reserves are excess in name only as the banks put aside extra reserves against the losses they expect across their loan portfolios. The fact that these are getting converted to required reserves suggests they are taking the losses for which the excess reserved were intended, which just confirms that said excess reserves were never really excess.
Required reserves rises as the deposit base rises. Required reserve + excess reserves = total reserves. The Fed policy (of printing money) increased total reserves, but did not change required reserves. Required reserves are a function of the composition of the deposit base. I have no doubt banks many banks are not lending because in actuality they are insolvent, sitting on portfolios marked too high. But that affects their capital, not reserve requirements. The deposit side (liabilities) is unchanged, so required reserves should be static in the event a bad loan (asset) is realized. Problem is the banks need to scramble for more capital to meet reserve requirements. The deposit component of the money supply is increasing if the required reserves are increasing (which they are), which tells us that bank lending is increasing to some extent -- at least the type that is under the radar of 10% reserve requirements. [again, says nothing of the securitization type lending that multiplies money away from the bank deposit side of things... probably next to nil money creation happening there (or destruction, as debt pays off)]
Instead of looking at required reserves and make conclusions about the deposit base, might as well look at the deposit base. M2 growth in the past 3 months was 0.5% at seasonally adjusted annual rates http://federalreserve.gov/releases/h6/Current/ The required reserves component is affected by things like how much of the deposit base consists of checking account money compared to savings account money, CDs, etc
Those #s are consistent. M2 up 40B non seasonally adjusted m/m. Perhaps though this is a seasonal effect, as money demand increased during the holidays and is now rebounding after spiking down. More cash, more velocity coming back. M1 up 12B non seasonally adjusted m/m. If this is a trend and not a one-off we should start seeing some price inflation in the next few months, assuming we don't have contraction in other aggregates (counted in not-reported m3).
Yes but I 'm looking at the bigger picture. In my view the trend in total reserves matters more than the trend in required reserves when the banks are hoarding excess reserves against future losses and also because the Fed is paying them to sit on said reserves. I believe you have to see falling excess reserves in this context to signal a sustainable uptrend in the deposit base as these excess reserves are injected into the economy via new credit issuance. So if you see excess reserves falling in concert with rising deposits I believe that will be more meaningful.
Actually falling excess reserves could be due to new credit issuance or to the Fed pulling back said reserves. So in my view you would be better off watching private debt issuance directly or anticipating that metric using employment, new housing starts, and perhaps some high frequency lending metrics.
Sounds interesting - any chance you can give me a quick primer on the significance of each measure, and your interpretation of the trend? Thanks!
In simple terms consumer cash flows lead everything else in the real economy. The sequence to watch is money rates, then employment and consumer debt issuance. We have low money rates, but employment is not rising yet and consumer debt issuance is still falling. If you want simple metrics to monitor these two components, just watch the employment insurance claims data and new home sales or housing starts. The claims data leads employment and net new mortage debt outstanding dominates the consumer debt issuance metric. A simple observation provides confirmation to this sequence in the current cycle. If you chart the 4 week average of initial unemployment claims agains the $SPX you will see the $SPX bottomed within a few weeks of the top in the 4wkma of IUC. Also you will see that the SPX$ cratered in the first quarter of 2009 because IUC was looking a bit parabolic. The next phase of the cycle will come with a combination of falling unemployment and rising new home sales. If you see these two signals in combination with steady money rates, just hold your nose and own beta until the Fed raises rates. Or perhaps better said, your best return on risk management in that context is predicting when the Fed will raise rates or otherwise restrict liquidity.