The Fed’s balance sheet went through the normal mid month fluctuations last week as MBS are paid down early in the month and then are replenished at mid month. There has been essentially no change in the total size of the balance sheet since QE officially ended a year ago. And there will be no material change going forward until the Fed either decides to start shedding assets (not gonna do it) or until it restarts QE (somewhat more probable than shrinking the balance sheet).
Loan growth in the US continues to surge in the nonfinancial realm. But in the repo and securities financing arenas, there are signs that the plunge in stock prices is beginning to affect animal spirits in the carry trade arena. Interbank Fed Funds continue to disappear, and now loans to non banks for carrying securities (mostly fixed income) have started to crack.
Meanwhile in spite of all the ECB’s money printing and insane ranting about doing whatever it takes for as long as it takes, the ECB’s extreme measures continue to have zero results in the European banking system. Corporate borrowing is down and bank deposits are shrinking. Much of the cash the ECB is printing for their QE program is apparently being put to good use to bury debt, not to praise it. There’s absolutely no growth in the European banking system. Just released data for August shows that deposits are down since the inception of QE in March.
Central bankers in Europe (and Japan) continue to refuse to recognize reality. They rant and rave and threaten to print money until they turn blue. But secular forces have finally rejected the can kicking and force feeding, and the speculation they engender. European financial institutions are showing they understand the sobering reality that the party is over and that it’s time to pay the piper. They have realized that their very survival is at stake, and their only option is to attempt to behave prudently in the interest of self preservation even if it is already too late. There is nothing that the central bankers can do about that, regardless of how long they continue their money printing threats and tantrums. The institutional public has finally begun to express its revulsion. This is a trend that must run its course.
