Monday, February 9, 2009

Reserve decline may not be Fed's doing

Falling reserve balances (see previous post) may be the result of companies paying back Federal monies and/or interest payments by the private sector to the gov't (reverse flow as govt' usually a net payer of interest). Shrinking reserve balances is a sign of an "income drain" on the private sector all due to this concept of trying to "look out for taxpayers."

Remember, interest paid by gov't is an element of private sector savings. If that is going negative or shrinking because the "gov't is looking out for taxpayers," then the gov't is actually robbing taxpayers of income. This is completely lost on the financial media and most folks in Washington.

Falling reserve balances represent a de-facto tightening of monetary policy. Look at gold today, it's down $26, most likely in reaction to what has been happening. This is a potentially dangerous development for credit markets and the economy unless the gov't moves quickly to restore lost income either via higher spending or tax cuts. If this income drain persists we could see a new and very rapid period of economic deterioration.


googleheim said...

questions :

1. what is the link between gov't paid interest and private sector ?
is one example % on a Tbill backed money market ?

2. in view of elasticity of the U$D when reserve balances fall, should we expect the strengthening of the dollar on two fronts - scare-ty cats taking flight and simple less "availability" or ... ???

A second strengthening of the dollar would pounce the pound
and eulogize the euro.

It will also give a chance for more forex swaps for Fed or Treasury or whatever to make some more revenue and hopefully spit it out.

Mike Norman said...

1. Yes, it's primarily interest paid on all gov't securities.

2. Don't know how useful it would be to predict the dollar's exchange rate by looking at reserve balances. However, one could surmise that if monetary policy is actually tightening (for whatever reason), then the dollar could rally.