Free Money
0.05% is not much, but it is free, well sort of. It’s free to banks but at taxpayer expense. Someone always pays for free stuff.
How Much?
Annualized, it’s $519,500,000 free money.
On a daily basis it’s “only” $1,423,288 free money.
Q&A
Q: Mish, can I get in on this?
A: No, silly, unless you are a bank or large financial institution.
What Are Repos?
- Repos are a cash injection by the Fed to banks. The Fed gives cash to banks in return for collateral, typically short-term treasuries. The Fed’s QE program is accomplished by outright purchases (but short term repos continually applied is essentially the same thing).
- Reverse repos are the opposite. It’s a cash drain from banks. Thus, the Fed has unwound over $1 trillion of its QE program.
Please, No More Cash!
On June 10, I commented Banks are So Stuffed With Cash They Tell Companies: No More Deposits
Repos result in cash deposits to banks. Those cash deposits are a liability. In some cases banks pay interest on deposits and in all cases banks need to raise capital to hold deposits.
No one wants the cash but the Fed keeps cramming it down their throats. And despite a red hot housing market, $40 billion of the monthly $120 billion cram is agency (housing) related.
To top it off, at the June FOMC meeting the Fed increased the amount it pays banks on reverse repos from 0.0% to 0.05%. The Fed also hiked the amount it pays on excess reserves to 0.15% from 0.10%.
Those actions were all but guaranteed to increase demand for Reverse Repos.
What About Excess Reserves?
I am glad you asked.
As of March 26, 2020, Fictional Reserve Lending Is the New Official Policy
On March 26, the Fed eliminated the requirement that banks hold reserves on deposits.
Fictional Reserve Lending Flashback
I wrote about this in December of 2009 in Fictional Reserve Lending and the Myth of Excess Reserves.
The flashback is amusing as I reference a number of people worried about hyperinflation.
There never were any reserves in the first place to speak of. The Fed simply made it official policy. Curiously, that means …..
Any Reserves = Excess Reserves
The reserves are essentially fictional and the Fed stopped reporting on excess reserves. Nonetheless the Fed still pays Interest on Excess Reserves.
Hmm. A quick check shows the Fed discontinued the Interest on Excess Reserves series yesterday.
It also discontinued Interest on Required Reserves, for the simple reason there are no requirements.
Is Today August 2?
That may seem like a strange question given the calendar says today is July 30.
I ask because we have a new series called Interest Rate on Reserve Balances (IORB)
Here is “Today’s Observation“.
How Much Reserves Are There?
For some reason it’s not reported.
Although we have an up to date “Interest Rate on Reserve Balances” we do not have an up to date measure of “Reserve Balances”.
The Fed discontinued Total Reserve Balances on September 10, 2020.
That number was reported weekly. All we have now is Monetary Base; Reserve Balances (BOGMBBM) reported monthly.
Telepathic Lines Are Open
I am taking reader questions telepathically now. Questions are pouring in.
Q: Mish, I thought you said “There are no reserves”.
A: More accurately, there are essentially no reserves as the following chart shows.
Total Credit Market Debt Owed
As of then end of 2021 Q1, the total credit market was $84.56 trillion.
That is “backed” by $3.85 trillion in base money reserves.
The reserve ratio was widely believed to be 10%. It never was. If one considers monetary base reserves as bank reserves, the ratio is 3.85 / 84.56 = 4.55%.
At one point the Fed discontinued that series. I am surprised they brought it back in full glory for everyone to see.
What About QE?
The Fed’s liabilities are not legal tender. Those deposits do not even count.
On July 19, I addressed Peter Schiff’s claim in Will the Fed Balance Sheet Get Spent into Circulation Causing Inflation?
QE has widely distorted all the monetary numbers.
Also see Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money.
Another telepathic question just came in.
Why Get 0.05% When You Can Get 0.15%?
Above, I did a calculation based on over $1 trillion in Reverse Repos.
But if interest on reserves is 0.15% why the demand at 0.05%?
That’s a great question.
Only banks get 0.15%. Other financial institutions scrambling to get rid of cash previously did not get anything at all.
The Fed had to start paying the money market funds something otherwise the overnight rate would drop into negative territory.
We can’t have money market funds charging people for deposits now can we?
Working As Designed
New York Fed President John Williams said that the reverse repo system “was working really well,” and that there were “really, no concerns about that. We expected that to happen. It’s working exactly as designed.”
Free Money Take II
How much “free” money are we really talking about?
In addition to the previous calculation at 0.05% we must also factor in free money at 0.15%.
Q: How much money is that?
A: We cannot really say for sure because as noted above, the Fed stopped reporting on bank reserves. All we have is monthly base monetary reserves.
However, if we accept the end of month base monetary reserves as the current measure of bank reserves, then we can make the following calculation.
0.15% * $3.85 trillion = $577,500,000.
Wow!
Yeah, but that is annualized. On a daily basis, it’s only $1,582,192 per day.
Still Wow!
Yes, but please note how deserving banks are.
God’s Work
Please recall my November 12, 2009 post God’s Work and Goldman’s Prayer
While acknowledging the role of banks in the financial meltdown, the CEO of Goldman Sachs [Lloyd Blankfein] said recently he believes his company is doing “God’s work.”
LLoyd’s Prayer
Our chairman who art at Goldman
Blankfein be thy name
Thy rally’s come, God’s work be done
In the Dow as it is in the Nasdaq
Give us this day our daily gain
And forgive us our frontrunning, as we punish those who frontrun against us
And bring us not under indictment
But deliver us from regulators
For thine is the cash flow, and the power, and the bonuses, forever and ever.
Amen
I hope that has inspired you to pray for more free money to banks. God’s work is all they do.
Looking Ahead
Yesterday, I reported US 2nd-Quarter GDP Exceeds Pre-Pandemic High But Huge Concerns Remain
Among those concerns are evictions, the end of huge unemployment insurance benefits, and a rise in the Delta variant of Covid.
Also note The Impact on Spending of Three Rounds of Free Money is Waning
Clearly, we need more free money all around to keep this Ponzi scheme running smoothly.
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Mish
“As of then end of 2021 Q1, the total credit market was $84.56 trillion. That is “backed” by $3.85 trillion in base money reserves.”