Wikinvest Wire

The secret to our success

Monday, October 26, 2009

In today's commentary at Gluskin Sheff, David Rosenberg explains, among many other things, the secret to the banking sector's recent earnings success and the secret to Washington's ability to continue borrowing mind-boggling sums of money.

In answer to the question of what the banks have been doing with all the cash they've received from the central bank over the last year or so, Rosenberg offers:

The banks are deploying the cash in the government bond market, buying a net $27 billion in the latest week and $130 billion in the past 18 weeks. Meanwhile, cash reserves keep piling up and just reached an all-time high of $1.2 trillion — enough to finance the entire U.S. fiscal deficit. This is a nice back-of-the-door mechanism for how the Fed is monetizing the government’s endless need for money: bolster reserves at the big commercial banks and have these banks buy the bonds that Uncle Sam sells in order to raise the capital needed to fund all the government’s fiscal stimulus measures. Coming soon is the federal government’s plan to extend jobless benefits, increase social security payments, yet again, expand the first-time homebuyer tax credit, unveil a ‘cash for clunkers’ for other big ticket items (see Friday’s WSJ — page A8) and to provide public capital (!) to small businesses.
Of course, demand for U.S. debt may be put to the test this week as a record $182 billion in sales are planned, the bond market already signaling that this may not be as easy as the folks at the Treasury Department have been planning.

And, yes, it looks like there will be soon be a Cash for Clunkers: Appliance Edition and Popular Mechanics (Popular Mechanics?) has answers to all those burning questions on the minds of American consumers who, with the help of Uncle Sam, recently bought a car, then bought a house, and now need a new washer and dryer.

Where does all the money come from to subsidize these purchases?

Part of it comes directly from the nation's banks who, for good reason, are happy to sit with cash on their balance sheet rather than lend it out to those same consumers who might be looking to start a new business or finance a new house, a new car, or a frig.

In chart form, it looks like this:
IMAGE That appears to be about $300 billion in recent purchases of U.S. Treasuries, about on par with what the Federal Reserve has bought with money created out of thin air, the two accounting for a good chunk of the overall $1.4 trillion budget deficit announced a week or two ago.

Back to Rosenberg:
Everyone agrees that this was not a Depression, but instead was the “Great Recession”. Everyone agrees that this “Great Recession” is over and many are in the camp that a V-shaped recovery is on its way. Many commentators like Birinyi and Ned Davis believe that a powerful new bull market has just started. Yet, the Obama team is running deficits that are double in size, relative to GDP, than anything FDR ever dared to run during the 1930s. And, the Fed is far from allowing it to shrink, it actually expanded its balance sheet by over $50 billion alone just this month to an unimaginable $2.2 trillion.
A trillion here, a trillion there... Pretty soon you're talkin' about real money...

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4 comments:

Steve Waldman said...

"A trillion here, a trillion there... Pretty soon you're talkin' about real money..."

Naw... pretty soon you're talking about fake money.

kwark said...

" . . . bolster reserves at the big commercial banks and have these banks buy the bonds that Uncle Sam sells in order to raise the capital needed to fund all the government’s fiscal stimulus measures."

Huh? Isn't this more than a bit like the old Polish blanket trick - making the blanket longer by cutting off one end only to sew it on the other end?

Anonymous said...

Our leaders are geniuses -- they've invented a perpetual motion machine!

But What do I Know? said...

People get all excited when the Federal Reserve Bank monetizes debt, but no one worries when the Fed gives money to the banks to monetize debt. If we're going to do this, why not just have the Fed monetize debt at a 0% rate and be done with it? The banks are simply parasites in this trade, as far as I can see.

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