20
Jan
2016
*Free Advice* Readers Know Why Monetary Base Is Down
Dennis Gartman is warning people that the monetary base is sharply down. That seems odd, since the Fed hasn’t been selling assets, right? It’s the same thing that we figured out (due to helpful comments from two of our readers) regarding reserves:
Bank reserves count as part of the monetary base. So when the Fed’s reverse repo operations temporarily suck reserves out of the system, it shows up as a reduction in the base too.
I think Gartman makes some sense – equity prices seemed to benefit a lot from all the money creation and ZIRP the Fed did. Dr. Murphy’s prior post seems to support that idea. Equities might take a hit if higher interest rates mean there are more investment options and there is less of a tendency to reach for yield in equities. But, we were booming in 2007 with a monetary base of $800 Billion. Why anyone would think $3.5 Trillion in 2016 is not still way more than enough monetary base for the economy is a mystery to me.
Which should (in theory) tie up liquidity and thus prevent short term lending and spending.
However, in this case since such a lot of excess reserves are sitting slopped around anyhow… who cares? Well, I guess the Fed can doggedly keep doing it until it starts to work, the problem is they need to promise some profit to the party that is going to repo those bonds. This means, given the higher interest rate environment, the Fed must make a loss on the reverse repo operation (I think), so the Fed is drying up liquidity by injecting money into the system… which kind of feels weird. Like using a hose to dry off after getting out of the bath.
“So when the Fed’s reverse repo operations temporarily suck reserves out of the system, it shows up as a reduction in the base too.’
Why has the volume of reverse repo operations increased during this time period ?
The Fed is using reverse repos to raise the Fed funds rate. http://www.nytimes.com/2015/09/13/business/economy/the-feds-policy-mechanics-retool-for-a-rise-in-interest-rates.html
Reverse repos come in about half way through the article.
How much is M3?