The Fed’s balance sheet remains flat. It was virtually unchanged on the week last week, notwithstanding all the meaningless shifting of money from one line item to another.
Interbank Fed Funds lending continues to be virtually non-existent, down 90% from 2008 peak levels as the Fed continues to promote the myth that it has raised rates. Most banks are still so loaded with cash that they have zero need to enter the overnight funding markets.
The banks who are borrowing are the distressed exception. With all the excess cash in the system, those banks who need to borrow in the Fed Funds market are like households who borrow from payday lenders. They borrow because they have no other choice. This is hardly indicative of the market as a whole, where there is no bank borrowing.
In spite of the Fed’s balance sheet being flat, bank loans are soaring. This excludes loans to finance securities, which have been flat. Isn’t it strange that credit to business and individuals is soaring and GDP growth is slowing? Based on the latest official release, GDP growth is down to around 2% from 3% in 2014, and the real time tax data that we track suggests that real growth is now less than 1%.
According to economists, credit growth and economic growth go hand in hand. According to reality it doesn’t, and in fact, too much credit apparently is associated with slow or no growth. As we know from our experience of a decade ago, extremely rapid credit growth leads to extremely rapid, and devastating, correction.
Unfortunately, bankers are always the last to learn that lesson and since there’s been no moral rectification of the last credit bubble, we’re having another one in rapid succession moral hazard at pillar of salt proportions.
This one is now on the doorstep of correction. Given that it has metastasized to a much greater degree than the last one, the end result is likely to be far more damaging, especially since the world’s central banks have used up their monetary trickery and their credibility in bringing us to this point. Even if they tried to stop a collapse by printing more money, it’s doubtful that enough players have enough faith in them to buy into the con one more time.
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