The Fed has been busy buying up the toxic waste of bad mortgages from the banks to the tune of $85 billion per month. There is no loan demand so the banks leave the cash they received for the toxic waste sitting in reserve with the Fed earning 0.25% interest. At the same time, the banks freed up cash from their loan loss reserves and put that money into the stock market. Voila! Dow 15,000.
ART CASHIN: I Was Out With My Drinking Buddies Last Night, And We Were All In A Frenzy About This Chart
Failure To Achieve Escape Velocity – The FoF Trading Division (Local 410) was in a bit of a frenzy yesterday as they circulated a chart from the St. Louis Fed showing that monetary velocity continued to fall and had slipped to a level lower than at the depths of the recession in 2009. I have been greatly concerned about this lack of velocity for years. Here’s what I wrote back in 2010:
Pushing On A String – The Fed’s Frustration – Chairman Bernanke may not be sleeping well. In 2002, he famously said that to stave off inflation, the Fed could even drop tons of money from helicopters. That was hyperbole, of course, but the Fed’s version of the helicopter plan has not been working out very well. It’s as though they dropped the money on the lawn and the homeowner raked it up and put it all in a garage – and then went back to bed.
The Fed has tripled its balance sheet. Banks are sitting on nearly a trillion dollars of excess reserves. Corporations are sitting on over a trillion dollars in cash. Yet, the monetary base has remained stagnant for months. The broad money supply (M3) has actually fallen significantly this year.
Money has no velocity today. The money supply can only grow if you spend it or lend it. Instead, it sits idle in that garage.
Here’s what that chart looks like via the St. Louis Fed:
Cashin also references the comments of Barry Ritholtz of the Big Picture:
Recently, my friend, Barry Ritholtz, did an extensive and enlightening review of those stagnant free reserves in his terrific blog – The Big Picture. Here is a bit from the opening:
Robert D. Auerbach – an economist with the U.S. House of Representatives Financial Services Committee for eleven years, assisting with oversight of the Federal Reserve, and now Professor of Public Affairs at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin – notes  today:
There is a massive misconception about where the Bernanke Fed’s stimulus landed. Although the Bernanke Fed has disbursed $2.284 trillion in new money (the monetary base) since August 1, 2008, one month before the 2008 financial crisis, 81.5 percent now sits idle as excess reserves in private banks. The banks are not required to hold excess reserves. The excess reserves exploded from $831 billion in August 2008 to $1.863 trillion on June 14, 2013. The excess reserves of the nation’s private banks had previously stayed at nearly zero since 1959 as seen on the St. Louis Fed’s chart . The banks did not leave money idle in excess reserves at zero interest because they were investing in income earning assets, including loans to consumers and businesses.
Barry said: . The banks did not leave money idle in excess reserves at zero interest because they were investing in income earning assets, including loans to consumers and businesses.
That means most of this money is going to assets, ie, commodities? It has been said that 2/3rds to 3/4ths of QE goes to speculation.
And people wonder why main street does not recover? Really?
US Service Sector Growth Slows to 3-Year Low in June
The pace of growth in the U.S. services sector slowed in June to its weakest level in over three years as new orders nearly stalled, though a jump in employment provided an encouraging sign for the labor market.
The Institute for Supply Management said on Wednesday its services index fell to 52.2 last month from 53.7 in May, short of economists’ forecasts for a gain to 54.
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