Sunday, November 8, 2009

How long will banks sit on the bomb?

Analyst Steve Saville points out that the Fed has increased bank reserves 100-fold over the last 14 months - "from around $10B in August of 2008 to around $1000B ($1T) today." These reserves don't constitute an increase in the money supply because they are not available to be spent.

Fortunately, bank lending has declined on a year-over-year basis, so the potential destruction of the fractional reserve system amplifying those reserves 10-fold in the economy has yet to happen.
Even with the decline in bank lending and the general de-leveraging that has occurred within the private sector, the government-Fed tag team has managed to increase the US money supply by around 14% over the past year. If the private banks were to join the inflation party then the risk of hyperinflation would greatly increase, and hyperinflation -- leading to what Mises called a "crack-up boom" -- would be the worst of all possible outcomes.
Banks make their money on loans. How long can they stay this way?

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