Friday, October 2, 2009
Another update in a very long-running theme. This chart shows the latest data on bank reserves, which are the high-powered money that the Fed creates and which banks can use to expand their lending (and thus expand the amount of money in circulation). Many worry about the day when the Fed starts to reverse its liquidity injections, but that is tomorrow's problem. What we have today, after one year of the most incredibly aggressive monetary policy that would ever have been conceivable, is that bank reserves are TEN TIMES higher than they were just before the Lehman collapse last year.
The Fed remains fully committed to ensuring that there is no shortage of money in the system, and thus very little risk of deflation. Yet I continue to see many respected pundits and investors worrying about deflation. I continue to think their fears are misplaced.
The only way to really know whether there is an excess or a shortage of money is to look at market-based indicators of the value of money, such as the value of the dollar vis a vis other currencies and against gold and commodities, the slope of the yield curve, swap and credit spreads, and breakeven spreads. With the sole exception of breakeven spreads, all the other indicators say that we have a relative abundance of money in the system. TIPS spreads are merely saying that inflation is going to be a little below average in the years to come, and thus one might infer that the Fed is only a tiny bit less accommodative than it has been in years past.
Posted by Scott Grannis at 8:04 AM