Fed Flood

I've been watching this handy thumbnail graph of Federal open market actions for some time now and thought it might be of interest to pass along. It basically reflects the daily liquidity that's being created--measuring the power of the proverbial printing presses. And frankly, they've been kicked into high gear for the past couple weeks. I assumed this was just to give a quick boost to the stock market going into year's end, but I gotta tell ya.....yesterday's action was massive...I mean the kind of liquidity you wouldn't see unless there was real Fear at the Fed.

To give you some perspective you might eyeball the bottom black lines on this longer-term chart....and note that the last time we saw 60 billion was in the second week of Sept. 2001....

Comments

[slomo]

Yikes!! I've been following open market ops for about a year now, and I've rarely seen it above 30!

[crz53]

Perhaps this is me being uneducated, but exactly what is this a graph of?
- Mike Lorenz

[Dale Asberry]

Same question as Mike, but with an observation - it looks like the ups and downs in the past were fairly solid but recent activity seems to have an element of oscillation to it. In other words, the recent activity seems to be entering a driven, chaotic 'state'.

[Dale Asberry]

... much like a spring that's being driven by an external force.

[Steven Lagavulin]

The graph basically represents a daily view of the amount of money that the (Not-Really)Federal Reserve is loaning into existence. (It's only the NY Fed window, but it's a good approximation).

The basic idea is: the Fed doesn't just create money and push it into the system, what they do is create LOANS which carry a specific interest rate. They pass these loans through to their Fed member banks, who turn around and sell those loans--at a slightly higher interest rate--to certain preferred banks (the big names). Then these banks sell the loans--at an even higher interest rate--to mid-tier banks, who sell the loans--at a slightly higher rate--to customers and smaller banks, who then pass them on to smaller customers and lenders, etc., etc. And with every exchange of hands the interest rate gets ratcheted up a bit more. Thuse the whole banking system makes it's money throughout.

Now there are all sorts of very good discussions that could be had about the critical flaws and disparities in this system, but what it boils down to is that the "loans" effectively create new "money" in our global economic system (since it's all U.S. Dollar based at the moment).

So in a nutshell: the graph shows how much new money the (Not-Really)Federal Reserve is creating each day.

Now money is the gasoline in the economic engine, so the rule of thumb is that the Fed will create more (step on the gas) when the system needs a little extra "umpff", and less when the system is humming along a little too quickly. Hence the reference to 9/11....in times of real crisis they will create a massive boost of "liquidity" (money) to try to balance out the perceived "fear" in the economic system (fear which leads people to stop spending and lending for a while while they adjust to whatever shock they perceive).

And finally, many people have observed that the Fed sometimes seems to pump the system just PRIOR to a big crisis. Which is why this action is so notable, because it begs the question "What crisis--seemingly on the level of a 9/11-style shock--is the Fed sensing?"

I avoided trying to address this in the post, but if you've heard recently about the "inverted yield curve" that developed in the bond market a week ago, and how that is seen by many as an important indicator of the onset of recession, then it's likely that the Fed's actions are a confirmation of that.... But I'll leave off for now.

[Chris]

Steven --

Thanks for spelling things out in plain English. It helps. A lot.

[SurvivalAcres]

As much as I loathe those fundementalist fruitcakes over at WorldNetDaily, they have an article regarding Gates and Buffet moving money out of US dollars. http://wnd.com/news/article.asp?ARTICLE_ID=42687

As they say, follow the money.