Do I have any good reason not to expect some really heavy duty inflation because of this?
http://research.stlouisfed.org/fred2/series/BASE?cid=124
Also, does anyone have an explanation for the recent reduction of reserves? I’m assuming it’s paydown of principle to the Fed, but I’m still pretty new at this.
BTW, I’m new here too. Hi. [:)]
The Rev
So far it hasn’t done too much to drive up other monetary aggregates, similar to Japan’s response. The notes portion ends up in M1 and others. The reserves do not. They have to be lent (actually lent against…) into existence to impact monetary measures, such as checking deposits.
One reason banks are not loaning is that calculation is distorted. Everyone is confused. Inflation predictions are met with deflation predictions. Thus, it is a riskier economic environment, calling for higher interest rates. Yet interest rates are held low, adding to the problems.
Another reason is that banks may be expecting further asset write-downs or failed counter-parties, and they are shoring up liquidity, especially with interest rates so low.
Another is that I believe the FED is paying them interest to simply hold reserves.
Also, regulators are giving banks conflicting advice than Congress. Regulators are telling banks to increase their liquidity, while Congress wants them to extend more home loans and small business loans.
Many things, political or economic, could cause banks to start loaning and inflation to start kicking in…along with more malinvestments.
There is really no chance for deflation, in my mind. Any bank failures will be met by the FDIC and bailouts or whatever else, filling the gap with more fiat money.
Finally, Bernanke has written about extreme measures banks can take to prevent deflation, using new money to finance government spending.
When confidence in the banks’ liquidity dropped, the banks had to increase their reserves to prevent a run on their accounts. Now that confidence has stabilized there is no need to keep reserves this big, so the banks can return the cash they borrowed from the Fed.
That makes sense, but considering how low the rediscount rate is (0.5%), wouldn’t it be more profitable for the banks simply to lend the reserves instead?
Thanks for the responses, BTW
The Rev
Not if no one with credit wants to borrow.
Sorry, but I’m not following you. Why wouldn’t anyone want to borrow? I guess I have been focusing more on the supply side of this issue. What is going to kill the demand side of the equation.
Thanks,
The Rev
Because they aren’t aware of any profitable investments to make.
It’s not so much that. It is “Why wouldn’t anyone CREDITWORTHY want to borrow?”.
Right now, many corporations and even some governments are appearing to lose this status. Many individuals are as well, as unemployment rises. Thus, there are less credit worthy borrowers.
Second, just as happened in the housing boom recently, eventually all you are left with are unworthy borrowers. Cheap credit went to credit worthy borrowers. But there was still cheap credit. Without lowering lending standards, banks couldn’t have leant the money. They assumed that tricks such as securitization would help them avoid the inherent risks. They were wrong. They are not about to repeat the same mistakes again. The credit worthy borrowers who took on debt during the boom are still in debt, and they aren’t looking to take on any more. They know there is a potential interest rate surge lurking in the distance.
Second, the price of interest is so low that from a risk-reward standpoint, the bank might prefer to sit on cash. For example, if you have a 50-50 shot of making $.01 on a dollar loan, but if the loan fails, you lose $.50, you are likely not to loan the dollar.
So, what we have is not banks being “all loaned up”, but rather, the borrowing public?
It seems to me, then, that expansion of commercial bank credit doesn’t play so much of a role in hyperinflation as expansion of the monetary base by the central bank. Would this be an accurate statement?
The Rev