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1.1 Trillion Dollars of Negative Demand for Deposits

negative demand
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EDITOR NOTE: In a move that makes no sense whatsoever, the Fed is simultaneously giving $120 billion a month in cash-injecting repos to the banking industry while also undertaking a $1 trillion cash drain through reverse repos. Stuffing banks with cash, combined with pushing effective interest rates to near zeros, has led to a negative demand for deposits, where banks are no longer interested in taking clients’ money. This makes the QE repos as head-scratching as they are counterproductive. Unsurprisingly, New York Fed President John Williams said that the reverse repo system is “working really well.” The practices may be working well for Big Banking which is now so flush with free money they can’t even take anymore. However, it is in no way working well for the American economy of the people. 

Repos and QE Q&A

Repos are a cash injection by the Fed to banks. The Fed gives cash to banks in return for collateral, typically short-term treasuries. The Fed's QE program is accomplished by outright purchases (but that is effectively the same as short term repos continually applied).

Reverse repos are the opposite. It's a cash drain from banks. Thus, the Fed has unwound over $1 trillion of its QE program.

Q: Is the Fed still continuing QE?
A: Yes, to the tune of $120 billion a month.

Q: Is the Fed simultaneously doing a $120 billion monthly injection coupled with a $1 trillion drain?
A: Yes, exactly

Q: Does this make any sense?
A: Of course not.

negative demand

Smooth Functioning!?

The Fed has been pumping $120 billion a month into banks and has now taken back nearly a year's worth of QE.

Nonetheless, New York Fed President John Williams said that the reverse repo system “was working really well,” and that there were “really, no concerns about that. We expected that to happen. It’s working exactly as designed."

Banks are So Stuffed With Cash They Tell Companies: No More Deposits

On June 10, I commented Banks are So Stuffed With Cash They Tell Companies: No More Deposits

Some banks, awash in deposits, are encouraging corporate clients to spend the cash on their businesses or move it elsewhere. It's a strange case of "No More Cash Please".

“Raising capital against deposits and/or turning away deposits are unnatural actions for banks and cannot be good for the system in the long run,” Jennifer Piepszak, then-CFO of JPMorgan Chase & Co., said on a call with analysts in April.

In recent months, banks including BNY Mellon have focused on moving clients from deposits into money-market funds. The money-market funds, in turn, need new places to park all that new cash and earn some interest. But rock-bottom interest rates have pushed them into storing it back at the Federal Reserve overnight, in a facility that pays them zero return and had been largely ignored for the past three years

Negative Demand for Deposits

The Fed is conducting huge, escalating amounts of reverse repos because there is a negative demand for deposits from financial institutions. 

The Fed pushed interest rates (Effective Fed Funds Rate) to nearly zero, currently 0.10%.

Non-banks (especially money market mutual funds) are getting clobbered. The one-month T-Bill rate is 0.04%. If their expenses amount to more than 0.04% or they pay more than 0.04% they are losing money on deposits.

In addition, banks have capital requirements. 

It's important to note that deposits are a bank liability. Banks have to hold capital (raise money) to offset those liabilities. 

The Fed is forcing trillions of dollars down the throats of financial institutions that the institutions do not want and cannot use. 

Working Really Well?!

This seemingly ridiculous process is allegedly:

  1. working really well
  2. as expected with no concerns
  3. exactly as designed
  4. thereby supporting the flow of credit to households and businesses
https://twitter.com/MishGEA/status/1410693849198985216?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1410693849198985216%7Ctwgr%5E%7Ctwcon%5Es1_c10&ref_url=https%3A%2F%2Fmishtalk.com%2Feconomics%2Fthere-is-a-negative-demand-for-deposits-to-the-tune-of-1-1-trillion-dollars

Free Money To Banks

As of June 2021, updated on July 27, 2021 (the Fed stopped daily and weekly updates), Total Reserves of depository institutions was $3.85 trillion.

The Fed does update daily the Interest Rate on Reserve Balances, currently 0.15%

On March 26, 2020, the Fed eliminated the requirement that banks hold reserves on deposits.

On that date I reported Fictional Reserve Lending Is the New Official Policy.

Since there are no excess reserves, all reserves = excess reserves.

The Fed is paying banks 0.15% free money on $3.85 trillion. Annually that is $5,775,000,000.

Why the Scramble to Get Rid of $1.1 Trillion?

Only banks get 0.15%. Other financial institutions scrambling to get rid of cash previously did not get anything at all.

The Fed had to start paying the money market funds something via reverse repos otherwise the overnight rate would drop into negative territory and money market funds would have to charge customers for deposits

Amusingly the Fed says this is working really well, as expected, with no concerns.

Why Don't Banks Lend the Money? 

Banks do not lend from deposits, a liability. Besides QE is a swap and not their money to lend.

Originally posted on Mish Talk

All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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