The Federal Reserve (FED) is deflating bank reserves. A year ago, they were $540 billion higher than now. At this time bank reserves are $1,661 billion. The FED has been deflating by not reinvesting in securities when they mature. It has done this to the tune of $345 billion in the past year, causing bank reserves to fall by $345 billion. The term “deflation” applied to bank reserves simply means their amount is being reduced. It does not mean deflation of prices of capital goods, financial claims, commodities or consumer goods. Bank reserves are not money. They are very short-term assets of banks that are held at the FED and that pay interest,
The U.S. Treasury has increased its deposits at the FED by $184 billion over the past year. That has caused bank reserves to decline by $184 billion. Adding $345 billion to $184 billion, we get $529 billion. These two factors explain nearly all of the $540 billion decline in bank reserves.
The Bernanke-Yellen FED inflated bank reserves to incredible amounts. It began doing that in September, 2008. Before that time, bank reserves were a mere $10-$15 billion most of the time. One year later, reserves were $868 billion. They peaked at $2,809 billion on July 30, 2014. For a graph, see here.
In reaction to this deflation of bank reserves, one school of thought is that of economist Stephen Moore: “… Powell should hold an emergency meeting of the Federal Reserve Board and immediately cancel the rate hikes. Better yet, the Fed should announce ways to inject money into the dollar-starved economy.” Trump is in this inflation of reserves school or at least he favors halting the deflation. He has criticized Powell and the FED’s deflation many times, at least 18 times in the past year.
The idea that the FED stabilizes anything, be it money, prices or economic activity, is a fairy tale. The alternative is a free-market monetary system. Hayek put it this way:
“As a result I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else.”
11:10 am on December 30, 2018 Email Michael S. Rozeff
