Slow Leak Bank excess reserves represent the money available to loan to customers without violating reserve requirements. Their excess reserves are also quite high, totaling approximately $1.4 trillion. Although high, it clearly doesn’t equate to the $1.98 trillion growth shown above. This reflects a $580 billion leak. (In other words, $580 billion of Fed expansion has gone into the economy with little inflationary impact.)
Additional Lava Flow What I find interesting is the recent sharp drop in excess reserves – approximately $200 billion has flowed into the economy through bank lending just this past year. Despite a leaking volcanic mountain, the CPI’s growth has been tame at 2.2% for the 12-month period ending October 2012, and the $200 billion drawdown in bank excess reserves hasn’t exactly spurred massive inflation so far. The big question going forward is . . . will this build-up of funds turn the U.S. and the globe into Pompei or Hawaii? So far, the flow of funds has been much more Hawaiian-like rather than a major disaster. I’m willing to estimate the middle ground for now. We can’t escape inflation forever. However, the extent of its increase remains to be seen. 2098-CLS-12/20/2012