What is Ample? Fed Answers Bank Reserves Question In Dumbest Possible Way | Rafi Farber

What is ample? What is abundant? The Federal Reserve wants to know. They want to know when the federal funds rate will start to move very quickly once bank reserves reach a certain level. They want to know how many extra bank reserves they need in the banking system in order to satisfy monetary policy requirements so that the federal funds rate doesn’t change radically like it did in September of 2019. And so they’re trying to figure out how much money, how much extra money, how many extra dollars really does the banking system need to keep the federal funds rate in place as a policy lever.

So a few guys and gals of the Fed came together and came up with all these indicators that determines how many reserves are required in order to keep monetary policy within certain ranges. The problem is, it’s all stupid. We have this article here from Liberty Street economics. So in case you’re confused, this is about liberty and we’re talking about freedom here and the freedom to have a policy rate that won’t be affected by the amount of reserves in the system, basically. So we have this title when our central bank reserves ample. Which is ample? Which is ample? By four people here.

We have Guerra Fanzo, Domenico Gianani, Gabriela Spada, and John C. Williams. And there’s the Eccles building. Look at that. Isn’t it pretty? We have the question. Ample reserves in the slope of the reserve demand curve. What does ample reserves mean? Based on this FOMC announcement from 2019, we can interpret the notion of ample reserves in terms of the static, not static, of the elasticity, static elasticity, in terms of the elasticity of the federal Fed funds rate. Just so you know that federal means Fed. Funds rate to change in the changes in the supply of reserves.

So basically, if the federal funds rate, the rate at which banks loan to each other, set by the Federal Reserve every night, if that does not respond to changes in reserves, then reserves are ample. If it changes with respect to reserves, then reserves are not ample. And just to show you, they have this helpful little chart here. This is the federal funds rate. And this is the amount of reserves. If reserves are scarce in this section, the slope is high, meaning as reserves get lower and lower and lower, the federal funds rate goes higher and higher, faster and faster.

The slope of the federal funds rate over the reserves amount is very, very high. And ample reserves is over here in the middle where the slope is a little bit less, but it’s still negative. And so as reserves get scarcer and scarcer towards this side of the curve, that means that the federal funds rate goes slowly higher, but not as high and not as fast as when reserves are scarce. And over here is abundant. And so it doesn’t really matter what reserve balances are up to this point. If reserves are around these levels, then they can be less or more and the federal funds rate will not move.

And so what the authors want is to get to ample rather than abundant. They want this monetary policy regime of ample, but not abundant because this is too loose. But they don’t want scarce because that’s what happened in September 2019. And so they have this new set of indicators that determines when something is ample and when something is abundant, even though the definitions of ample and abundant are basically the same thing. Which is ample? Newspeak, you know, whatever. So we have this article. It is titled, again, Liberty Street economics, a new set of indicators of reserve ampleness, August 14th.

This is the day after this article from August 13th with this little chart here. And now we have August 14th, a new set of indicators for reserve ampleness. And let’s go to these sets of indicators. You’re just going to read the bullet points and then I’ll go into why this is all dumb and how they’re missing the two point two trillion dollar elephant in the room and don’t say a word about it. Oh, excuse me. Good morning. Don’t you feel foolish? Well, how long does it usually take you? I don’t remember. What are these indicators? Late payments.

This is how you know when reserves are going from ample to scarce. You have to print more money. So late payments is one indicator. Banks, intraday overdrafts, another indicator. Domestic borrowing in the Fed funds market, another indicator. And upward pressure and repo rates is the fourth indicator. And now looking at the suite of measures jointly, we have this Spiderman graph down here. This is a very self-explanatory. We have here elasticity and average interest rate overdrafts. Fed funds barbers. We provide late payments and look at Spiderman. Spiderpink, Spiderpink does whatever a Spiderpink does. If we read the paragraph explaining this Spiderman chart, following Spiderweb chart shows the four complementary indicators together with the absolute value of our measure of the elasticity at four different points in time.

September 2019, blah, blah, blah, 2024. For each indicator, the point of the respective acts in the innermost dash Pentagon represents the level of most abundant reserves during 2014, 2024. Okay, we’re going to the indicator. The point on the X, the Pentagon corresponds to the bottom set of the red button. So you got it? Good. Now you can understand why this is all crap. This is the amount of reserves in the system. We can see here that from 1984, which was a good year for George Orwell, and 2008, September 17th. Look at that. It’s the same date as the Repocalypse.

Remember that was September 17th, 2019. Well, look at this. Well, let’s zoom in here in a second. I just found this. So reserves started to rise from $9 billion, basically zero, to $47 billion on September 17th, 2008. And it was 11 years later that they exploded again because the federal funds rate was out of control. But anyway, let’s zoom back out. So we can see here that from 1984, the beginning of this data on this chart, until September 17th, 2008, reserves were basically zero. They were not ample. They were not abundant. They were scarce. And still the federal funds rate didn’t really move much.

January 4th, 1984, the first data point here, we have $22.3 billion in reserves. And September 3rd, 2008, even less, $11.906 billion. So basically zero the entire time. And so why didn’t the Federal Reserve federal funds rate respond to the amount of reserves in the system? Who knows? But now you need a whole bunch trillions of dollars in reserves in order for the federal funds rate to stay within range. And here is where the federal funds rate started to get out of control in September 2019. It went from whatever it was, 2% to like 6% overnight because there were not enough reserves, even though there were like $1.4 trillion in reserves, but it’s not enough anymore.

And so the question is, why does the system need all these reserves at all? Look at this high here, $4.275 trillion in reserves. And now we’re at 3.346. And the Federal Reserve is not sure if $3.346 trillion is ample or abundant or scarce. Maybe $3.3 trillion is scarce now. Well, why would it be scarce? Well, here’s what they’re not reporting on these stupid articles in Liberty Street Economics. This, my friends, you may have seen before, this is the secured overnight financing volume. This is the repo volume. This is the rate at which banks borrow from each other in exchange for treasury securities.

You can see here that we’re up to $2.118 trillion a night now. And where’s all this money coming from? Where does $2.118 trillion come from? Who’s giving it? Who has that extra money? Well, it’s coming from those bank reserves that we saw back in this tab over here. Let’s go to that tab, $3.346 trillion. That’s the amount of bank reserves that banks have in their account balances at the Federal Reserve. And a lot of that money, $2.118 trillion of it is going into the repo market to be traded between banks in exchange for interest.

So why didn’t the article mention this big, huge thing of $2.118 trillion? Because it’s full of crap. And what are they using this money for? The ones that are borrowing all this trillions of dollars. What are they using it for? Well, we can see the answer to that in this slide. Not this slide. This one’s blank. Anyway, two-year Treasury note futures. What is this money? $2.118 trillion being used for? It’s being used to short Treasury note futures across all maturities from two-year to ten-year. These are the COTs. The blue line is leverage funds. And this is how many contracts they are short.

$2.285972 million contracts. It’s an all-time record high. Remember their apocalypse in 2019 when they ran out of money because all of it was being used to do the same thing, to short these Treasuries. We’ll go back to the volume chart in a second so you can see that volumes in the repo market were also at record highs for that time. We’re way past that now. And the amount of shorts on these Treasury notes, which they need money to fund, is long past record highs all time. We can go to five-year Treasury notes. Same thing. We’ve gone from almost zero.

What is it? 500,000 contracts back here in the beginning of 2023 to now 3.114 million. And this is the beginning of 2024 here. We crossed the 2 million contract line here. Now we’re at 3.114. It’s just been going more and more and more extreme over the past few months. We can even go to the ten-year Treasuries. And it’s also at all-time record highs, the amount of short positions. 2.009 million contracts. Even 30-year Treasury bond futures are at $497,998. I checked that. It’s also an all-time record high. So all of these markets are being shorted at record amounts, and they are playing what is called the basis trade, which I’ve gone to in previous videos.

And I’ll put a key or a link or whatever it is to that video over there so you can understand what the basis trade is. Basically, they’re selling short futures and buying spots and pocketing the difference. So let’s go back to that volume chart. We’re going back to this chart of SOFR volume, of the volume of dollars that are being traded in the overnight market that is being funded by the bank reserves that they want to remain ample or abundant. We can see here that in September 2019, September, around the time of their apocalypse was happening, we had an all-time record high and the amount of dollars being borrowed in order to fund the same basis trades that are going on right now.

Is there any worry about this? In any of the articles about ample or abundant or scarce reserves? No. Nothing! Absolutely nothing! Stop it! You’re so stupid! Going into September 2019, we see 1.281 trillion dollars. And if we go to the amount of reserves that existed back then, we zoom into 2019. Let’s do that. And we have here, it was September 2019, September 18th, 1.394 trillion dollars. And we go back here and we see 1.349 trillion, a total of 1.281 trillion. Almost all, basically, almost substantially all, like 87%, I think the exact number is, almost all of the amount of reserves in the bank system were being used to fund short positions in the two-year note treasury market and other little short positions that were being traded on the basis trade.

So basically, how do we know when reserves are ample? When are they abundant? When are they scarce? When all of the reserves are being used to fund basis trades in the treasury note market, you have scarce reserves or you can have another apocalypse. Is there anything about this in any of the articles by those four people on the New York Fred Liberty Street economics? No. Because they’re distracting you with spiderwebs and Spider-Man and all these other cartoons. And they don’t know what they’re talking about. What we do know is that the amount of funds being traded in the repo market is growing by the week.

The short positions in the treasury note market are growing by the week and quantitative tightening continues. And these trains are in the same track, hanging opposite directions. It’s going to lead to another apocalypse, which is going to lead to the final round of money printing, which is going to lead to the death of the dollar because they’re going to have to print about three, four, five trillion dollars. Really? What is the difference anymore? Let’s just get it over with so we can move on from this system of corruption and theft and get to something a little bit more stable and moral and less insane.

This is Rafi, the in-game investor. You can support me by signing up for the in-game investor on substack. Link in the description below or becoming my patron on Patreon for as little as three dollars a month for exclusive content. More religious angle on money, economics and government. This week we’re going to two. Why? When your generation has bad leadership, it is useless to complain about them because leaders not elected. They’re really appointed by God, even though it feels like you elect them. You don’t really because you have the same right to vote as any other idiot who doesn’t know what he’s doing.

And most people are idiots and therefore they do not elect leaders. They’re chosen by God indirectly. And sometimes they’re good and sometimes they’re bad. And right now they’re bad, but that’s what we have to deal with. Thank you. [tr:trw].

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