Rondaben
June 13th, 2008, 11:59 AM
Hey all...here is a rather frightening update on economic conditions.
The Fed Reservere published the "Aggregate Reserves of Depository Institutions and the Monetary Base" report for June 4 Yesterday. it is Located HERE (http://www.federalreserve.gov/releases/h3/Current/)if you want to see it.
Bottom Line: The state of the Banks is getting much, much worse. Banks are required to hold a reserve of money to pay customers on demand deposits (You go withdraw cash) and to conduct business. The vast majority of bank assets are tied up into loans, derivatives and other relatively illiquid products. The amount is determined as a percentage of their total assets and the types of those assets. Reserve is to be held either as Vault Cash (cash in the bank) or within the Federal Reserve "holding".
For June 4, the reserve that was required was $46 Billion. Lets take a closer look at that number....it works out to $153 for every man woman and child in the US. Forget how much money you think you have in your checking, savings, money market, etc. The bank only has $153 of that on hand. The idea is that not everyone will come at once looking to withdraw thier money and that the reserve amount will be sufficient. Big problem.
Now, look at the next column. Of that $46 Billion, how much is "non-borrowed"? You have to think backwards on this one. It is basically, how much money did the banks have to borrow to have that $46 Billion on hand? The answer: $130 Billion. They had to borrow, from the Fed primarilly, $434 dollars to keep $153 on hand. HUGE, HUGE flag.
How fast is that borrowing increasing? Banks had NO borrowed reserves in December of Last Year. May 7th they had only borrowed 85 billion. In one month they have borrowed an additional 45 Billion JUST TO MEET RESERVES.
Now lets look at all the auction facilities. These were created to help banks and brokerages deal with the amount of bad debt they had related to mortgages and derivative bets that were going south. The idea was that they would "swap" Treasury notes held by Fed for thier bad bonds--essentially the government taking on the bad debt and replacing it with good debt. It was supposed to slow down the amount of losses that banks were incurring--to stop the hemorrhaging that is apparent in the amount of money they have had to borrow simply to meet the reserve requirement.
Since they have been started, banks/brokers have conducted $150 Billion dollars worth of these "swaps" through the Term Auction Facilitiy. It is not shown on this chart, but elsewhere it comes to a total of around $440 Billion. When this mess started the Fed had around $880 Billion worth of treasuries as its "gunpowder" to deal with crises. It took 80 years to accumulate that. Half has been used in the last 6 MONTHS. Every week, the Fed "auctions" off these Treasuries to the banks and brokers to swap. The amount at Auction is currently $75 Billion weekly. At the current consumption rate, that works to somewhere between 6 and 12 weeks of Fed Reserves left.
Now...new issue...the dollar. Some of you may have been seeing the dollar strenghen this week. It is because Treasury and the Fed have been talking about possibly intervening to support it. That means raising interest rates again. Why now?
My thought is that foreign central banks have threatened the Fed over the weak dollar. So much dollar denominated debt is held that they can't let it fall more than it has already and have sent an ultimatum to Bernanke than the US Govt. that if they don't support the dollar, the central banks will dump it. The first step in defending the currency is jawboning. Actions speak louder than words, however, and they will be forced to increase interest rates sooner rather than later.
So, what does all of this mean? The Fed is in a very, very, very difficult place. They are recieving incredible pressure to raise rates from foreign banks and from the obvious inflation going on. If they do this, the banks will literally implode and the housing market will REALLY nosedive from higher rates--and the Fed has already used half of its ability to intervene to prevent the collapse. Stand pat or cut rates to help banks and the consumer and you get a rush from the dollar and massive domestic inflation that will crush the economy and consumer alike as well as spur inflation around the globe.
The Fed Reservere published the "Aggregate Reserves of Depository Institutions and the Monetary Base" report for June 4 Yesterday. it is Located HERE (http://www.federalreserve.gov/releases/h3/Current/)if you want to see it.
Bottom Line: The state of the Banks is getting much, much worse. Banks are required to hold a reserve of money to pay customers on demand deposits (You go withdraw cash) and to conduct business. The vast majority of bank assets are tied up into loans, derivatives and other relatively illiquid products. The amount is determined as a percentage of their total assets and the types of those assets. Reserve is to be held either as Vault Cash (cash in the bank) or within the Federal Reserve "holding".
For June 4, the reserve that was required was $46 Billion. Lets take a closer look at that number....it works out to $153 for every man woman and child in the US. Forget how much money you think you have in your checking, savings, money market, etc. The bank only has $153 of that on hand. The idea is that not everyone will come at once looking to withdraw thier money and that the reserve amount will be sufficient. Big problem.
Now, look at the next column. Of that $46 Billion, how much is "non-borrowed"? You have to think backwards on this one. It is basically, how much money did the banks have to borrow to have that $46 Billion on hand? The answer: $130 Billion. They had to borrow, from the Fed primarilly, $434 dollars to keep $153 on hand. HUGE, HUGE flag.
How fast is that borrowing increasing? Banks had NO borrowed reserves in December of Last Year. May 7th they had only borrowed 85 billion. In one month they have borrowed an additional 45 Billion JUST TO MEET RESERVES.
Now lets look at all the auction facilities. These were created to help banks and brokerages deal with the amount of bad debt they had related to mortgages and derivative bets that were going south. The idea was that they would "swap" Treasury notes held by Fed for thier bad bonds--essentially the government taking on the bad debt and replacing it with good debt. It was supposed to slow down the amount of losses that banks were incurring--to stop the hemorrhaging that is apparent in the amount of money they have had to borrow simply to meet the reserve requirement.
Since they have been started, banks/brokers have conducted $150 Billion dollars worth of these "swaps" through the Term Auction Facilitiy. It is not shown on this chart, but elsewhere it comes to a total of around $440 Billion. When this mess started the Fed had around $880 Billion worth of treasuries as its "gunpowder" to deal with crises. It took 80 years to accumulate that. Half has been used in the last 6 MONTHS. Every week, the Fed "auctions" off these Treasuries to the banks and brokers to swap. The amount at Auction is currently $75 Billion weekly. At the current consumption rate, that works to somewhere between 6 and 12 weeks of Fed Reserves left.
Now...new issue...the dollar. Some of you may have been seeing the dollar strenghen this week. It is because Treasury and the Fed have been talking about possibly intervening to support it. That means raising interest rates again. Why now?
My thought is that foreign central banks have threatened the Fed over the weak dollar. So much dollar denominated debt is held that they can't let it fall more than it has already and have sent an ultimatum to Bernanke than the US Govt. that if they don't support the dollar, the central banks will dump it. The first step in defending the currency is jawboning. Actions speak louder than words, however, and they will be forced to increase interest rates sooner rather than later.
So, what does all of this mean? The Fed is in a very, very, very difficult place. They are recieving incredible pressure to raise rates from foreign banks and from the obvious inflation going on. If they do this, the banks will literally implode and the housing market will REALLY nosedive from higher rates--and the Fed has already used half of its ability to intervene to prevent the collapse. Stand pat or cut rates to help banks and the consumer and you get a rush from the dollar and massive domestic inflation that will crush the economy and consumer alike as well as spur inflation around the globe.