2009-11-09

Inflation or Deflation - 8

Bernanke is printing like a madman, and has so far added more than $1,000,000,000,000 in the global pool of dallars. We can see that the monetary base had kind of stabilized between $1.6 trillion and $1.8 trillion, but they have recently been printing even more. Just $200 billion, a drop in the bucket of what Bernanke is promising. That's what we call inflation (source: Fed).


Bernanke decided about 2 years ago to pay interest on the money that depositary institutions keep at the Fed. The fact that those institutions borrow the money at 0% from Bernanke and who then pays them to store it at the Fed doesn't seem to chock anyone. Nonetheless, it took about 2 years of accrued interest on those reserves, and the introduction of Mark-to-Fantasy to replace Mark-to-Market to recapitalize by 50% the banks. With the losses on Option-ARMs and CRE coming now, chances are that this chart is going to spike up very soon (source: Fed)


Notice that there is about $9 trillion worth of bank credit today, and that there were about $9.5 trillion a few months ago. Also look at the trend that has been broken. Credit moved from litterally nothing to about $10 trillion between 1975 and 2007. This broken trend is highly deflationary (source: Fed).


The phantom excess reserves of banks keeps growing.
Three reasons for that:
  1. those reserves are not real as mark-to-market has been replaced by mark-to-phantasy
  2. the money that banks have is deposited at the Fed where it stays liquid, risk free, and yet bring interest thanks to the good will of Bernanke
  3. banks are not lending (and for good reasons!) to insolvent people and companies.
This is again, highly deflationary(source: Fed)
The two following charts are really the same one, but with different scales: the first is in nominal terms while the second percentage. It just shows how quickly the credit river dried out and credit contraction took place (source: Fed & Fed)


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