Hot Money and Speed Bumps

Posted by Jack Crooks - Black Swan Capital LLC

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“QE created a surge in excess reserves: In September 2008, central banks opened up liquidity facilities to alleviate the stress from frozen fixed income markets. These operations resulted in the build-up of ‘excess reserves’ (ER) and an expansion in central banks’ balance sheets. In the past, such a build-up in ER would have been ‘sterilised’ by central banks by selling government securities. This time around, however, that was not done for two reasons. First, we have argued that central banks have pursued QE with the intention of increasing the growth of money, given near-zero policy rates, while more ER would push overnight rates lower. Second, the sheer size of the increase in ER relative to the size of government securities held by or available to the Fed that could be used to drain reserves was at least partly responsible for central banks not being able to drain excess reserves (see Keister & McAndrews (2009), Haubrich & Lindner (2009)). Under these extenuating circumstances, the Fed even turned to the Treasury for assistance and the Supplemental Financing Program was created to help drain ER (see Appendix for details on how the SFP worked and how its wind-down will push up excess reserves).

But why have excess reserves stayed so high? Could be a supply-side issue… Tautologically, commercial banks are holding on to excess reserves because they cannot put the funds to better use. However, this does not help us in identifying whether supply or demand is the source of the problem. While reserves may be higher than required by regulators, banks may not consider them ‘excessive’ in an economic sense, as argued by Friedman and Schwartz (1963).  Commercial banks could be hoarding this cash with a ‘precautionary motive’, much as consumers increase savings when uncertainty around their income stream increases. This would be a problem on the supply side of the loanable funds market.”  – Manoj Pradhan

FX Trading – Video Edit: The Global Stimulus and Emerging Markets Show


The latest G-20 communiqué said nothing new. You know … where the leaders told us they’re not yet ready to rein in the stimulus they’ve provided to their respective economies. 


Dominique Strauss-Kahn, head of the International Monetary Fund, is spewing all kinds of commentary this morning. 

On one hand, he’s affirming the position taken by the G-20 to remain supportive till a legitimate recovery ensues. 

On the other hand he’s stressing the fact that there should be a coordinated effort to peel back stimulus amidst a firm recovery.

….read more HERE.