Monday, December 22, 2008

Pushing on a String Revisited

Through several posts, I had mentioned that the availability of funds did not imply the use of funds. Unless the Federal government is going to make all of the economic decisions, it is incapable of insuring that the money supply is replenished to the same extent to which it is being depleted by bad loans.

The first graph depicts the ratio of total reserves to required reserves. A bank makes virtually no money holding on to reserves. In theory, they would rather make loans than just let the reserves sit with the Fed. For the last 20 years, the ratio has been about $1.03:$1.00 (banks held only 3 extra cents in reserves over the stated minimum).

The second graph contains the same data, but includes the last few months. The number is astonishing: $12.10 to $1.00 as of November and about $16 to $1 currently.

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