Apr 19 2009
Where Did All Our Tax Money Go?
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One of our most inquisitive readers posed a great question the other day, which I think everyone in this nation should be concerned about. Reader Crosspatch noticed that our economy is not reacting as it should to the influx of all this tax payer money – and rightfully wonders where, then, is it going?
There is something REALLY bothering me about all of this. Mind you my minor was in economics. Look this graph of the Adjusted Monetary Base M0 (money controlled by the Fed), and this one of the M1 money supply. See those HUGE spikes?
Normally someone would look at those and say “holy cow, we are in for some serious inflation†because when you dump that kind of liquidity into the system that is generally what happens. Money is like any other commodity, it goes by the rules of supply and demand. When there is a greater supply of money, money gets cheaper (interest rates drop). When capital gets cheap, people generally start using it. Businesses and individuals buy things and as demand for goods goes up, their prices rise. You end up with more dollars chasing goods and services bidding up the prices of those goods and services.
But that isn’t happening. The base went up from about 900 billion to about 1.8 trillion. Lets call it a rise of a trillion bucks. But M1 only went up from, say 1.4 trillion to 1.6 trillion. Lets call that a quarter of a trillion bucks. That says that most of the money isn’t going into the economy. The banks are holding onto it for capital reserves or something.
M0: currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). M0 is usually called the monetary base – the base from which other forms of money (like checking deposits, listed below) are created – and is traditionally the most liquid measure of the money supply.
M1: currency in circulation + checkable deposits (checking deposits, officially called demand deposits, and other deposits that work like checking deposits) + traveler’s checks. M1 represents the assets that strictly conform to the definition of money: assets that can be used to pay for a good or service or to repay debt. Although checks linked to checking deposits are gradually becoming less popular, debit cards linked to these deposits are becoming more popular. Like checks, debit cards, as a means to complete a transaction through their links to checkable deposits, can also be considered as a form of money.
So it looks like most of the money the Fed has been pouring out is ending up “in bank vaults, plus reserves which commercial banks hold in their accounts with the central bankâ€
Now when you pour that kind of money into the economy, it should act like gasoline on a fire. The economy should practically explode. Never has that kind of cash ever been poured directly into the economy. But the consumer price index was DOWN for the first time in something like 50 years. Even with all that fuel being poured on, the fire still dimmed.
The economy is simply not supposed to behave that way. That money is supposed to find its way into circulation. For some reason, it seems to be sucked into some kind of a black hole. Where is it going? Why is the economy not taking off with that much cash being flushed into it?
Something about what is going on with this economy isn’t passing a basic smell test. 2+2 is supposed to equal 4, not 3. There is something going on that we are not being told about.
I wanted to add another mystery to this puzzle, which was the never explained stock market run that  apparently started the economic crash last year. I hope one of our readers can point us to some links to this story. I am concerned that there has not been any congressional or federal investigations into these mysterious events. I am concerned because, having grown up in the political circles of DC, I know how tight the political and financial powers are, and how they can easily control the media if they so desire.
Lack of reporting and investigation is never a good sign, it simply means there is no dissension among the elites.
A vast chunk of it went to the Fed buying up Tbills that they were issuing themselves because for that week China had a net outflow of foreign investments.
You have to look at the auctions where the Fed was buying nearly all the tbills offered.
Basically the created the cash and then immediately swallowed it right back.
Finance and steet investment blogs have been on this one for a while in real time.
What you have to look at is M-3 (which the Fed does not calculate any more) and that tells the story.
The 64 million dollar question many are trying to figure out is just what the heck Goldman Sachs is doing with their program trading running at the levels it is right now pushing the market into a false bear rally.
“Key to note here is that Goldman’s program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x.”
In fact their program trading is as large as the next 14 trading floors combined.
The only reasonable conclusion is that GS has stepped in as the instrument of the Plunge Protection Team.
Well it is lock that the TARP funds are not getting shoved into a mattress.
So
They are not lending for housing
They are not lending for cars
They have much smaller payrolls to do short term loans for due to the growth in unemployment reducing the total payrolls
So where can the money go??
About all that is left is treasuries or stocks / commodities
The Fed has been chewing up the treasuries like candy so only stocks / commodities are left.
Calculate the inflow of total market capitalization to get from the bottom we saw to where we are now. You are talking trillions of market cap.
Most investors and funds still are holding their much less valuable assets (stuck in untradeable 401k vehicles) and have massive mark to market losses but they are unrealized losses since they are only book losses and the asset is still held.
So just where could all the cash to accrue the equivalent of the market cap increase come from…a combo of TARP funds plus whatever maturing debt owed to the banks got paid and has no other outlet to go to.
Reserve requirements would never soak up all the funds we are talking about here so it has to be going somewhere.
All the auto bailouts came out of the government pocket and was a net reduction to loan demand on commercial banks to fund the same operations.
With all the losses incurred it would be hard to explain any alternative funding source to have caused the market cap increase…there was not that much sitting in piggy banks to buy all that much stock.
Plus the Maddow capital vaporization had to be overcome.
Ok this really bugs the living daylights out of me. From the Financial times:
Meaning: We might let you have control of your bank back if we think it is in our interests to do so. And the part that I marked in bold is just astounding. Translation:
“We had no clue what we were doing initially when we were throwing money at all these banks, but as soon as we figure out what the heck is going on, we will probably treat banks in worse shape differently than banks in good shape”
It sounds to me like the Treasury still has no clue how good or bad of shape these banks are in yet. I suppose Doogie has met his match at Treasury.
Oh, here we go! Federal government as largest shareholders in the banks. How do you spell NATIONALIZATION. Source NYT
The last four paragraphs (on page 2) of this article say the same thing that bothers me only better than I can say it.