Bernanke is trying every way he can to get banks to lend (printing coupled with a multitude of lending facilities and Fed programs).
It’s easy enough to prove the printing: Base money supply is up about $1.8 trillion since the start of the recession.
Base Money Supply
Money Multiplier Theory
The Money Multiplier Theory (an incorrect theory) suggests this money would be lent out 10 times over causing rampant price-inflation and GDP growth.
Alternate (Correct) Bank Lending Theory
- Banks do not lend simply because they have the money
- Banks lend as long as they have credit-worthy customers provided the banks are not capital impaired
- Reserves are not an issue. Lending comes first, reserves follow if needed.
With some charts below created by my friend “BC” let’s take a look at Bernanke’s efforts to stimulate lending.
Bank Loans Divided by Base Money Supply
Annualized Percent Change in Bank Loans Divided by Base Money Supply
Loans to GDP
Loans to GDP Annualized Percent Change
Loans to Private GDP
Loans to Private GDP Annualized Percent Change
M2 Multiplier: M2 Money Supply Divided by Base Money
M2 Velocity: GDP Divided by M2
The above charts show that it is taking more and more money just to keep the economy afloat.
US deficit spending is $1.4 trillion dollars, Bernanke is flooding banks with cash, interest rates are at record lows, mortgage rates are at record lows, and velocity of money is falling like a rock.
Of the $1.8 trillion Bernanke has added to base money supply since the start of the recession, nearly all of it is sitting parked at the Fed as excess reserves.
Interest Paid on Excess Reserves
As you can see, banks have parked close to $1.6 trillion with the Fed earning .25 percent annually. This is free money to the banks to the tune of $4,000,000,000 per year for doing nothing.
In short, banks would rather have $4 billion in free money at a measly .25 percent than make much more money by lending it out. This indicates two things:
- Money Multiplier Theory is nonsense
- Banks are still capital impaired and/or banks have no credit-worthy borrowers who wish to borrow money
If and when banks do start lending, it will not be because all those excess reserves have tempted them. Rather it will be because banks feel they have credit-worthy borrowers.
In the meantime, debt deflation rolls on, distorted of course by global central bank stimulus everywhere one looks, notably (the Fed, ECB, China, Bank of England) and coming up shortly, the Bank of Japan.
As I have stated before, competitive global currency debasement is a good environment for gold.
Let’s wrap this up with one final chart.
Total Credit Market
As you can see the total credit market is well over $50 trillion. Yet a large number of misguided souls believe printing $1.8 trillion of which $1.6 trillion is parked as excess reserves will cause hyperinflation.
It won’t. Hyperinflation is a political event, not a monetary one. Besides, the US has more gold than any other nation. For further discussion, please see Hyperinflation Nonsense in Multiple Places.
Yes, the US is going to have a “debt moment”, just as Europe is having one now and Japan will have soon enough. However, that moment may be quite a long ways away (or not), but hyperinflation will not be the result when it happens.
Mike “Mish” Shedlock
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