“Liquidity trapped”: banks drown in money without borrowers – Anonymous speculators
Back in mid June – I wrote an article highlighting both the glut of savings and the cash imbalance problems that grossly distorted the American banking system.
To give you a bit of background: I wrote about the huge sum (the nearly $ 600 billion at the time) that various American banks were stationed in the Overnight Repo-Facility of the American Federal Reserve (aka ORRF – the last resort of banks and money markets to park excess liquidity that they do not make better use of). Meanwhile, the Treasury continued to empty its cash account. The result is a rising tide of liquidity that spreads throughout the banking system.
So, how has it been since?
Well, to date ORRF holds roughly twice as much (almost $ 1.1 trillion) while banks are having an even harder time finding places to invest.
Or – said in another way – every night, various banks and investors park more than $ 1 trillion at the New York Fed.
And this trend doesn’t seem to be slowing down any time soon. . .
Well, to put it simply: there was Billions of dollars’ value of pandemic aid injected into the economy over the past 19 months. And most of that money is still struggling to find housing.
So – banks have seen their deposits grow faster and faster – while their ability to reinvest those dollars in assets (loans) increases. slower and slower.
That’s why – even with mainstream financial media constantly talk about growing the economy and full of cash consumers – I remain skeptical.
It’s because – in theory – both a growing economy and low interest rates should lead to a growing demand for loans. (That is: banks should have no problem finding borrowers in this environment).
But – on the contrary – the demand for loans has remained very anemic.
(Remember: banks use deposits as ammunition to create loans. And the difference between the two is actually their profit margin. So the cost of deposits accumulating in weaker credit – it’s not. profitable for banks).
Just take a look at Assets of U.S. commercial banks in the past 20 months. . .
The weakness of commercial lending relative to the increase in public debt indicates that although banks to loosen their loan needs to low record – demand for credit in the real economy remains very sluggish.
This forced the banks to of them desperate options:
Either by buying government debt at extremely low yields (banks bought a record $ 150 billion in Treasury bonds in the last quarter). Or park unused money (currently over $ 1,000 billion per night) in the Fed’s ORRF for next to nothing in return (0.05%).
Also – making matters worse – the Fed keep on going always pumping more money into the banking system via $ 120 billion in monthly quantitative easing (aka QE).
(Reminder: QE is when the Fed purchased bank bonds and sells in cash in return. So all those monthly bond purchases left the banks with even more money / reserves and less treasury bills / collateral).
All of this left shores stuck between a rock and a hard place:
That is: they are full of cash while struggling to find attractive ways to deploy this ever-growing pool of cash.
And until banks have better alternatives, their bond purchases and the use of ORRF will increase; thus pushing yields Lower and lower. (Meaning: there is far too much unused cash in the system for it to become a liability for banks. So all assets with positive returns – even the public debt which barely yields 1% – is quickly swallowed up).
So – in short – the banking system is drowning in a flood of deposits.
Businesses, consumers and investors all continue to place huge amounts of money in banks. However, then they have nowhere to invest everything.
And while the mainstream financial media continue to tout the idea that as the economy recovers, so will loan demand. I remain very skeptical.
Yet – still – the Fed continues to inject reserves into the system. Hoping that it will eventually be loaned to the economy and stimulate demand.
But that is not what is happening. . .
Instead, all it does is create waves of unintended consequences (such as moral hazard, wealth inequality, asset bubbles, and debt bondage).
In reality – the Fed is doing more harm than good at this point.
Like the infamous classical economist – John Maynard Keynes – would say: the economy is stuck in a liquidity trap. (That is, when further central bank easing becomes ineffective due to already very low rates combined with consumers / businesses continuing to save and will not borrow).
So I continue to expect lower yields, lower growth, and debt deflation. Because like I said before – it is not the money supply that is the problem. But the lack of places to put everything.
So, for now, it’s hard to believe that anything will really change, except for the ever-increasing liquidity glut and dwindling lending in the real economy.
But – as always – time will tell. . .
PS – in April, I wrote to Premium SA subscribers that I was on long bonds because I expected the savings glut and the Treasury imbalance to weigh on returns. I still believe it and I maintain my positions.