It’s time for another quick look at the United States banking system. Whoops! Nothing happening there. Are they still alive?

Federal Reserve Bank Credit has increased by $1.2 trillion over the past twelve months. What has increased in the banking system? Excess reserves in the commercial banking system have increased by about $800 billion. Tracing this “stuff” a little further, in round figures, the currency in circulation outside of the banking system has increased about $100 billion over the past year, about $100 billion has gone to foreign central banks in liquidity swaps, so there is another $200 or so in funds that the Fed has pumped into the system that is somewhere in Treasury accounts. But who is counting?

I am still concerned with what the United States banking system is doing with the money that has been pumped into it. The answer is, very little!

Looking at the H.8 release

...

A new concern about the economy has surfaced recently. This new concern has to do with the changing structure of the economy and the impact this change might have on the outcome of government policy.

Specifically, the argument is that the United States economy, and that of the world, is currently going through a transitional change that only occurs once or twice every century. This is the transition that takes place in the productive structure of the economy—a sort of “tipping point”.

There is no doubt that the structure of automobile production is going to be different in the next ten years from what it was over the past fifty years or so. This shift will affect dealers, suppliers, and many other companies that are peripheral to the car-making process. But, changes are also taking place in the way that different forms of energy are

...

Over the past several months I have written regularly that the value of the United States dollar will decline over an extended period of time. The basic argument for this is that over the past forty years or so, any country that has run excessive governmental budget deficits and has not had an independent central bank has seen the value of its currency come under pressure in international financial markets. During this time, country after country has had to regain discipline over its fiscal affairs and see to it that its central bank acted more independently of the government’s budgetary affairs.

The United States has not been immune to this pressure throughout this time period. Of recent note, reference has often been made of the pressure the Clinton administration faced early on that resulted in a fiscal discipline that brought about a surplus in the government’s budget in

...

Almost everyone is looking for a tipping point. At this time we are looking for signs that the decline in the economy and in the financial markets is lessening and that we might be somewhere near the bottom. If this is the case then can the turn to recovery be far behind?

It seems that every piece of information currently being released carries with it the claim that “this decline was less than expected” or ‘the decline was smaller than the last information released.” These are taken as signs of hope.

Even the results of the Treasury’s “stress tests” on the banks are accompanied by the assessment that the major banks that have just been examined are better off than was thought. Therefore, the banking system is not in as bad a condition as feared, and, stock prices can now continue moving upwards.

Fed Chairman Bernanke is still

...

The Federal Reserve, as we know, has been pumping all kinds of reserves into the banking system. For the banking week ended May 2, 2009, Federal Reserve Bank Credit stood at $2.041 trillion. This is up from $0.894 trillion for the banking week ending September 3, 2008, an increase of $1.147 trillion.

Total reserves in the banking system jumped from $44.1 billion in the month of August 2008 to $881.8 billion in the month of April 2009. This is an increase in total reserves in the banking system of $837.7 billion.

Note that the difference between the amount of credit the Federal Reserve extended to the economy and the increase in total reserves in the banking system is $309 billion, the amount of Federal Reserve credit that ended up in coin and currency outside the banking system.

This massive growth in total bank reserves can be picked up in the year-over-year

...

“The Labor Department reported that prices received by producers of finished goods rose 0.3 percent last month, further blunting the prospect that the economy was veering into a vicious cycle of lower prices and lower wages known as deflation.” (See http://www.nytimes.com/2009/05/15/business/economy/15econ.html?hp.) Analysts continue to be amazed that we have not yet moved into a deflationary spiral, given the weakness in the economy.

The amazement is due to the fact that most analysts still perceive the decline in the United States economy as one of a collapse in aggregate demand.

The amazement would disappear if these analysts considered that maybe the decline in economic activity was, at least, partially caused by a reduction in aggregate supply. However, most economists are still locked in their retreat to a fundamental Keynesian interpretation.

The banking industry has shrunk. The automobile industry has shrunk. Many retail chains have

...

Lots of transactions went on in central banking over the past month or so, not only in the United States but in the UK and Europe. Quantitative easing is the game and, at least, the central bankers are getting more and more comfortable with this.

Credit is given to quantitative easing for the drop in the dollar LIBOR rate. The three month LIBOR now ranges between 50 and 60 basis points over the target Federal Funds rate chosen by the Federal Reserve. This is the lowest this spread has been in a long time. For the five years previous to September 2008, the time the financial markets collapsed, this spread averaged between 20 and 30 basis points.

This move reflects the efforts of the Bank of England and the European Central Bank to push short term interest rates lower and to engage in monetary actions that

...

You want to place a bet on future inflation? Well, an opportunity for you to bet on inflation is now in the works. The hedge fund Universa Investments L. P. is planning to open a fund in the near future that will allow you to back up your concern with the possibility that inflation is coming around the corner.

The fund will invest in options tied to commodities and Treasury bonds, among other things. The strategy is a “Black Swan” strategy aimed at taking advantage of wide swings in the prices of these assets.

Of course, the fund is connected with Nassim Nicholas Taleb, the infamous author of the best sellers “The Black Swan” and “Fooled by Randomness.” To Taleb, the probability that high rates of inflation might result from the stimulus efforts of governments around the world has substantially increased. This means that the possibility

...

We live in a global economy. And, unless we destroy the global economy that now exists the way the world destroyed the first global economy starting with the 1914 conflict and proceeding through the next fifty-five years or so, we will continue to face the duties and responsibilities of operating within a world economy. And, those duties and responsibilities begin with the currency of the country.

It is hard to have confidence that the United States accepts this fact.

I know that we are in a recession (depression?). I know that the immediate pressure on the Obama Administration is to “get the economy going again.” I know that the Treasury Department and the Federal Reserve, both dependent partners in the effort to get the financial system functioning, must provide whatever means it takes to avoid further deterioration of financial markets.

Still, there is a need to listen

...

It is still too early to think that we are near or past the bottom of this economic downturn. However, in my mind, we are in the “working out” stage of the downturn, especially in the current economic restructuring we are going through, and we cannot expect this stage to be a short one. 

The problem with many analysts and policy makers is that they continue to see our economic problems in Keynesian terms and think that the difficulties being experienced in banking and financial markets as a liquidity issue. Hence the search for evidence pointing to “green shoots” and for an “easing of credit.” Every day we hear when new statistics are released that the numbers just presented are “less bad” than before and this indicates that the economy is getting worse at a slower pace. An obvious sign that we are near the bottom!

In

...