Question for the Fed: Where Has All the Money Gone?

Gimme fuel, gimme fire, gimme that which I desire,

Can’t fight the need for speed,

I’m loose, I’m clean, I’m burning lean and mean, and mean.

Ignite the open trail,

Excite, exhale, comin on, hot from hell, yeah hot from hell.

-Metallica “Fuel for Fire”

Where has all of the money gone? We know that the world should be running out of green ink any day now due to the Treasury printing money 24/7, but with all of this money coming into the economy we would have expected runaway inflation. Up to now we have seen, for the first time in decades, steady deflation. In fact as you can see in the chart below, since 3/1/09 YoY CPI has been negative. (click on chart to enlarge)

CPI 12-Month % Change

One reason why we have not seen any inflation is due to the personal savings rate going up and private sector leverage going down. For baby boomers and really anyone who has been investing for the last 15 years, things are looking bad. From 1995 to now, investors using a 70/30 stock bond mix, rebalanced monthly and adjusted for inflation, have seen a CAGR of only 3.89%. Add to that the debt loads that most people have, and it makes sense that the personal savings rate has shot higher and from all estimates looks to be going higher still. (click on chart to enlarge)

Personal Savings Rate

So the question remains where has all the money gone? Looking at the WSBASE which defined by the St Louis Fed as the sum of currency in circulation, reserve balances with the Federal Reserve Banks, and service-related adjustments to compensate for float-it is obvious that overall money supply has absolutely exploded to the upside. (click on chart to enlarge)

WSBASE

So where has all of this money gone if not into the general economy? In a relationship first pointed out by Andy Kessler, the WSBASE has tracked tradeable assets like the SP500 and corporate bonds since the March bottom. If you look at the two charts below you can see that movement in the WSBASE has led the SP500 and Dow Jones Corporate Bond Index by about a month. (click on charts to enlarge)

SP500 and WSBASE

DJCB and WSBASE

When no one else wanted to own assets the Fed stepped in and became the buyer of corporate assets and has been the fuel that has driven this market higher. In a vacuum this is not a bad thing, but we are not in a vacuum. With the government putting all of the money into tradeable assets and not into the real economy, we end up with a market that could go down in flames at any moment. What happens if the Fed backs away and stops buying? If they stop buying, we run the risk of everything falling again and taking us right back to where we were.

The Fed in their infinite wisdom and bubble loving culture, continues to trade one bubble for another. This time however, it appears as thought the bubble has not only been engineered by the Fed, but they have been the driving force behind it all. As opposed to the housing bubble–where the Fed lowered rates and left them low but allowed people to build the bubble with their stupid home buying–this time the Fed lowered the rates, borrowed the money, and is spending the money. Unfortunately for us when the bubble pops “the money” is really our money, and we come out on the losing end….again.

Disclaimer: The Macro Trader is long SPY, LQD, HYG, DBV, and UDN

Comments

[EUARTE:]

We have to tame and then get rid of the Fed!

Oct 01 10:26 AM

[ctjaeger:]

"With the government putting all of the money into tradeable assets and not into the real economy, we end up with a market that could go down in flames at any moment."

The government has been buying many of the "tradeable assets" from banks. Look at excess reserve levels in relation to WSBASE, they correlate pretty well. So the money is at the interim point in getting to the "real economy". Once (or if) banks start lending again, those dollars will enter the productive economy. If lending is not resurrected - by looser credit policy and/or an uptick in demand - the money will start flooding the "real economy".

The fact that consumers are saving more, spending in a more conservative manner, and deleveraging means that it will be a while before consumer demand reaches anything like the unsustainable levels we've seen over the past 10 - 15 years.

So, the issue isn't necessarily what the Fed is buying, it is what is happening with the money that the sellers are receiving.

Oct 01 11:11 AM

[MikeX:]

Money was used to write off bank losses. More of that will happen. What does that mean? It means money is dissapearing at record speed. When we default, when we pay of debt, money dissapears. Banks create money when we borrow. When we pay back it is gone. That is how deflation hits when the borrowing stops. This is a deflationary crash. It is caused by the credit inflation of the last 50 years. Economy is addicted to bank credit. When credit expansion stops, economy stops. Explained:

www.tradingstocks.net/...

Oct 01 02:27 PM

[Donald Ingram:]

There is NO WAY in the world that the Fed can replace the amount of money that is disappearing by way of credit destruction (deleveraging/saving) by the consumer. Although the Fed is trying. About all they are accomplishing is the destruction of the dollar, which looks like they will be successful at!

Oct 01 02:44 PM

[The Recusant:]

MikeX -- "When credit expansion stops, economy stops." Yes, in the rational world. However, in our world the government will just print more money and "helicopter" it in the way of tax breaks and incentives to the population to booster the sagging spending. The reasoning, to boost sales that in turn boost employment, seems logical until you factor in the inflation that such actions cause down the road. The Fed buying treasury notes and corporate bonds is ludicrous and just accounting smoke and mirrors to boost the market and bank profits. The current world reserve of cash is 70% in U.S. dollars and IOUs (treasury notes). For many decades the U.S. has been printing fiat money that is not anchored to anything but the production value of the U.S. But now our manufacturing leadership in the world is gone and those dollars are only reminders of an inflated and failing economy. If and when other countries begin to dump our dollars, we will be sold off to foreign countries and the influx of all those dollars will cause a serious inflation if not a hyper-inflation.

So, what's to do? First we must anchor the currency to keep from applying a fiat dollar bandaid to every injury our economy suffers. Gold would be a good choice since it has been the standard for thousands of years and is still the metacommodity and sole de facto currency. But the system for anchoring it to gold would have to be dramatically different than the gold standard that existed after the American Civil War and up to the Great Depression. By anchoring the dollar we would check the creation of fiat dollars and curb the unscrupulous paper deals of the banks.

Much has been written of the Austrian school of economics lately. Darn if they aren't right!

We've had a "silent" inflation going on for decades. There is something terribly wrong with our country. End it...buy gold.

Oct 01 03:06 PM

[The Geoffster:]

"...the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”.
-Thomas Jefferson

Oct 01 03:14 PM

[Gary A:]

The Federal Reserve is an arm of the BIS in Basel. They are a bunch of criminals who allowed off balance sheet banking in the first place. I would hope that at some point our military would show them the door.

Oct 01 08:55 PM

[kmarkt2:]

What is the difference between the drug lords of the Medillin Cartel and the Finance Lords of Wall Street ?
Answer: the former is prosecuted as a criminal, the latter hailed as a saviour, a talent to be consulted at the corridoors of Capitol Hill, notwithstanding the pantomine of appearing at Congressional Hearings, when summoned - a class act, without repurcussion personal or corporate.
Similariies between these Lords - they both peddle toxic assets, the latter, in doses that sucked out the blood from +5 million unemployed and wealth skewed and families destroyed; the former, in doses on a 10ml syringe - both equally deadly with little chance of making good.
Such is the simple reality without the need to understand the maths of complex derivatives - if a new index, such as misery index could be underwritten and traded, I would like to be at the front doing the short selling. I hope the FED can give me a $B for my innovative instrument.


On Oct 01 11:11 AM ctjaeger wrote:

> "With the government putting all of the money into tradeable assets
> and not into the real economy, we end up with a market that could
> go down in flames at any moment."
>
> The government has been buying many of the "tradeable assets" from
> banks. Look at excess reserve levels in relation to WSBASE, they
> correlate pretty well. So the money is at the interim point in getting
> to the "real economy". Once (or if) banks start lending again, those
> dollars will enter the productive economy. If lending is not resurrected
> - by looser credit policy and/or an uptick in demand - the money
> will start flooding the "real economy".
>
> The fact that consumers are saving more, spending in a more conservative
> manner, and deleveraging means that it will be a while before consumer
> demand reaches anything like the unsustainable levels we've seen
> over the past 10 - 15 years.
>
> So, the issue isn't necessarily what the Fed is buying, it is what
> is happening with the money that the sellers are receiving.

Oct 02 04:16 AM