Everyone knows “a tsunami of Fed liquidity” been driving markets upwards since March. So why do I keep asserting the Fed’s recent stimulus had little real-world effect (ignoring a powerful placebo effect? (see post here) Because that Liquidity Tsunami is wholly absent from the Fed’s Balance Sheet. There is just no math-based support for the “liquidity” narrative. All that leaves is the placebo effect. Powerful as long as everyone believes in it. That is the real danger of the “liquidity” narrative. It rests on magical thinking, not hard dollars.
Stick with me for a few paragraphs here. It is actually pretty simple.
The Fed has printed a huge amount of money. They doubled their asset base – adding $3.2 Trillion to their balance sheet in the past year. That basically created $3.2 trillion of “new” money – 16% of US GDP (~$20 trillion). Follow this link to the Fed’s balance sheet. All these numbers come from their data.
90% of the Fed’s money has never left the building. The Fed wrote checks to the US Treasury and to US Commercial banks. They deposited those checks back AT THE FED. They have just left it sitting there un-moving. No Tsunami. Just a stagnant lake.
90% of that Asset increase has ended up in two “Liability” accounts. Bank Reserves and the US Treasury. Depositing the Fed’s checks back at the Fed. Most of that money is still sitting there. It never hit the markets because it never left the building.
- The banks have parked an additional $1.45 Trillion of excess reserves at the Fed (“Other deposits held by depository institutions”). Banks have not lent that money on. Instead, the Fed’s own data show they have severely tightened lending standards (some truly horrifying Fed “lending standards” charts here). Bank lending is down big (excluding the government-guaranteed PPP loans). If the banks haven’t lent it out, that money can’t have hit “the markets.”
- The Treasury has parked an additional $1.4 Trillion in what amounts to the US Government’s checking account (U.S. Treasury, General Account). Meaning that money hasn’t been spent. I believe (could be wrong) that a lot of it is parked long-term to backstop various Treasury lending programs (like PPP and the so-far-unused commercial lending programs). But we definitely know that un-spent money can’t have hit “the markets.”
- $265B went to new “cash” money (“Fed Bank Notes Outstanding).” That is actual cash in circulation. So its hard to see how it would be in the markets, Not a lot of people buy (or sell) stocks with cash.
- This Fed chart shows the trend lines for Bank Excess Reserves, the Treasury’s General Account, and cash in circulation.
So we’ve got 90% of that Tsunami of Liquidity sitting stagnant on the Liability side of the Fed balance sheet. The Asset side shows how much money hit the markets
That is, in market terms, f**ing peanuts. Enough to buy maybe ~5% of Apple. About 1/4 of Tesla. Except the Fed actually spent it in the the even-larger debt markets, so its impact was even less consequential.
All the Fed’s open market interventions are listed below as of September 10th 2020. This are the TOTAL Fed purchases (in $ millions) in open, public markets (vs buying assets from banks, which is addressed above).
|Net portfolio holdings of Corporate Credit Facilities LLC8||44,790|
|Net portfolio holdings of MS Facilities LLC (Main Street Lending Program)8||38,899|
|Net portfolio holdings of Municipal Liquidity Facility LLC8||16,543|
|Net portfolio holdings of TALF II LLC8||11,147|
The Fed’s balance sheet expansion has enabled the massive fiscal stimulus we have seen – the $600 a week unemployment benefit and the PPP loan program. Those have had a big impact. But those have been direct payments into the Real Economy. You could argue (probably correctly) that some of that money found its way into markets. But the typical “wall of liquidity” narrative conjures up some powerful direct action by the Fed and assumes these payments out of the picture. Once you realize that 90% of the Fed’s money never left the building, you realize just how powerful that “real economy” stimulus has been. Stimulus that is now ending because the Republicans can’t get their act together and the Democrats aren’t interested in helping them out of the ditch they’ve dug. (see post here)
So what are people talking about when we hear of this “wave of liquidity” unleashed by the Fed? What is this magical “liquidity” anyway? It is literally magical – magical thinking. Extremely powerful, but wholly emotional in nature. Which is probably why market types prefer the precise-sounding term “liquidity.” Shying away from the Keynes’ more honest term “animal spirits.”
Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
More in my next post.