Ben Bernanke and his cohort central bankers built a Brave New World (SOMA, SOMA, SOMA!) where central bank money printing would boost stock prices and the wealth created would trickle down to workers and cause a booming economy. If you doubted that, you are now seeing proof that maybe this world was a little bit of Lewis Carroll’s Alice in Wonderland along with the Aldous Huxley. Here’s what that could mean for your trading and investments now.
The Fed’s balance sheet remained virtually unchanged last week as the central bank finished up its regular mid month MBS purchase settlements, offsetting some creative and mysterious spaghetti pushing that cut assets. The Fed recorded a $15 billion drop in other assets, along with a long footnote about a few of the old alphabet soup programs that were instituted in the wake of the financial crisis. Most of these have been consolidated into the Fed’s standard balance sheet line items. The $15 billion reduction in “other assets†smells like a write down of the dregs of those special purpose programs that were never repaid. In today’s balance sheet terms, that’s not even a rounding error.
And so the games go on. The Fed entices the banks to move money from their regular deposit accounts (aka reserves) to RRP accounts or Term Deposits with the incentive of an extra basis point or two above the interest paid on excess reserves (IOER). They are supposedly testing the “operational readiness†of these programs as tools to raise interest rates. In reality, shifting excess funds from one balance sheet line item to another, with only difference between them being an infinitesimal difference in the required holding period, is a shell game. To the holders of the funds it’s all short term money, readily accessible, if not in an instant, in a day. And since they are excess funds for which they have no use, what difference does it make what they are called or whether they are demand deposits or 7 day term deposits?
