The Mickey Mouse Economics Of The Federal Reserve, Part 3

Here is one more piece of the Mickey Mouse economics that surround present day Keynesian central banking. To wit, the commercial banking system now has zero “required” reserves but nonetheless currently sports $3.1 trillion of actual reserves on deposit at the Fed.

You can’t make this up. In March 2020 the Fed relieved the commercial banking system of any reserve requirements at all, yet here they sit with trillions on deposit at the Fed—a condition which is truly something new under the sun.

Thus, on the eve of the Great Financial Crisis in Q4 2007, the banking system had just $15 billion of reserves on deposit with the Fed, and virtually all of those were “required” reserves. So why in the world have reserve balances increased by more than 200X since then when the asset base of the banking system stands at just 1.82X its pre-crisis level (Q4 2007) and nominal GDP is only 1.75X its Q4 2007 level?

Q4 2007 Versus Q3 2022:

• Bank reserve balances at the Fed: $15 billion vs. $3.13 trillion=209X;

• Total commercial bank assets less reserves: $10.83 trillion vs. $19.72 trillion= 1.82X

• Nominal GDP: $14.72 trillion vs. $25.79 trillion =1.75X

These obviously are not run-of-the-mill ratio disparities.The post-2007 break-out of bank reserves relative to their historic baseline and the underlying macro-economy is flat-out freakish as the chart below makes abundantly clear.

Of course, every dollar of these massive reserves was plucked from thin digital air in the course of the Fed’s unhinged monetization of the public debt during the last 15 years. So what we have here is still another manifestation of the Mickey Mouse economics of the Federal Reserve.

Commercial Bank Reserve Balances on Deposit At The Fed,1960 to 2023

Moreover, in the face of the absurdity embedded in the above chart, Fed apologists make some truly screwball rationalizations.

Foremost among these is the claim that the Fed’s massive bond buying campaigns of recent years are a case of “no harm, no foul”.

Since this massive growth of high-powered money (i.e. Fed credit) did not lead to anything close to a commensurate rise in bank loan books, the wild-eyed money-printers domiciled in the Eccles Building are supposed to get a free hall pass. Running the printing presses red hot, it is alleged, is not so inflationary after all.

Baloney!