Is the Markets ready for a 15 Trillion Dollar Liquidity Pump.

Mr Bernanke has just started "Operation Twist" and the world is in financial crisis. Well here is a different "Twisted" view about what's really happening. Just look at the table below.

1. The first table is FED data H.3 "Aggregate Reserves of Depository Institutions and the Monetary Base"
All the Data is in Millions of USD (US Dollars) Seasonaly Adjusted, Break Adjusted.

2. The FED is looking at the Monetary Base and reporting it.
- In Jan 2007 (2007-01) the monetary base was $813 Billion
- In the peak of financial crisis Oct 2008 (2008-10) the monetary base was $1,129Billion (1.12Trillion)
- 26 months later in Jan 2010 (2010-01) the monetary base was expanded to $1,987Billion  (1.987 Trillion)
- In August 2011 the monetary base has expanded to $2,658 Billion (2.658 Trillion)

On the first look we can clearly see the FED has increased the monetary base by 235.42% (Oct 2008 to August 2011) in the past 35 months but the ground reality is that there has not been any comparable increase in economic activity.. We conclude .. US is in depression.

3. Lets look at "Reserves of Depository Institutions Required" column. A more common term used to describe "Reserves of Depository Institutions Required" is "Cash Reserve Ratio" or CRR.

As per Investopedia:
The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the U.S. is the Federal Reserve. The reserve ratio affects the money supply in a country. This is also referred to as the "cash reserve ratio" (CRR).


For example, if the reserve ratio in the U.S. is determined by the Fed to be 11%, this means all banks must have 11% of their depositers' money on reserve in the bank. So, if a bank has deposits of $1 billion, it is required to have $110 million on reserve. 

US CRR rate is 10% and lets look at the column titled "Reserves of Depository Institutions Required"
2008-10 (Oct 2008) Reserve Required: $48.366 Billion.
2011-08 (August 2011) Reserve Required: $83.843 Billion.

- The banks in US had deposits of $483.66 Billion in Oct 2008 (10% is $48.36 Billion)
- August 2011 the Deposits in US banking system has increased to $838.43 Billion (10% is $83.843Billion)

Reserve Required has increased by 173.35% but compared to 235.42% increase in Monetary base deposit growth is 62.06% lower. This would mean there is an increase in savings but definitely its lower than the increase in monetary base so if its a Vanilla Savings account your money would have lost value as the monetary base has increased at a higher rate.

4. This is the column titled: "Reserves of Depository Institutions non borrowed"  This column indicates the reserves held by Banks with the FED and its their "own money" "NON Borrowed (from FED)".
Before 2008 The FED paid Zero interest on the "Reserves of depository Institutions"  and from 2008 FED has started paying interest of 0.25% (25 basis points) on the "Reserves of Depository Institutions"

  a. in Jan 2007 (2007-01)
Reserves of Depository Institutions Non borrowed: $41.672 Billion
Reserves of Depository Institutions Required: $41.338 Billion
The numbers were matching .. so the banks maintained a reserve level with the FED just equal to the minimum required levels. (as there was no interest payments of 0.25% )

  b. In Oct 2008 (2008-10) just as the financial crisis imploded.
Reserves of Depository Institutions Total: $315.522 Billion
Reserves of Depository Institutions Non borrowed: -ve $332.798 Billion
Reserves of Depository Institutions Required: $48.366Billion
Monetary Base: $1,129.938 Billion ($1.129 Trillion)

The banks were really facing a liquidity crisis.. and also a crisis of confidence. 
-Reserves were higher ($315.522 Billion) than Minimum Required levels of $48.366 Billion (which indicates a crisis of confidence)
-All of the reserves was borrowed money (from the FED) which indicates a liquidity crisis.

  c. In Aug 2011 (2011-08) what is really happening.
- Reserves of Depository Institutions Non Borrowed: $1,655.535 Billion ($1.65 Trillion)
- Reserves of Depository Institutions Required: $83.843 Billion
- Monetary Base: $2,658.972 Billion ($2.658Trillion)

The banks are flush with Cash and the banks are storing it with FED as Reserves. The Scenario has completely changed from Oct 2008 where the banks had no money and were borrowing from the FED. 
Now the banks have large amount of money and are not willing to lend and are holding it with the "FED as Reserves" 

I have done some calculations and it looks like this:

1. Money in the system:
Money in the system = Monetary Base - Reserves of Depository Institutions Non borrowed.
Jan 2007  (2007-01) Money in the system: $771.434 Billion
Oct 2008 (2008-10) Money in the system: $1,462.736 Billion (1.462 Trillion)
Aug 2011 (2011-08) Money in the system: $1,003.437 Billion ( 1.003 Trillion)

On Oct 2008 the banking system had cash deficit and had borrowed from the FED $332.798 Billion so Money in the system was more than the Monetary base of $1,129.938 Billion. Money in the system was $1,462.736 Billion

2. As we can see in Aug 2011  the Monetary base is 1,003.437 Billion which is less than what was in Oct 2008 ( $1462.736 Billion start of Financial turmoil)
So even after an expansion of 235.4% in monetary base  the actual "Money in the System" is less than what it was in Oct 2008. All the money has been deposited with the FED as "Reserves" by the big banks. So a recession scenario has been created by "Tight Liquidity" by reducing the actual "Money in the system"

Conclusion: The FED has done a lot of liquidity infusion into the system. unfortunately it has never reached the  financial system. The gatekeepers "The big banks" have deposited all of it about $1.57 Trillion dollars back with the FED as "Excess Reserve holdings" This money could have been deployed in the Bond market but that has also not been done at the expense of profits and also with the intention of curbing liquidity (I think) 


Since Cash Reserve Ratio is 10% so $1.57 Trillion in reserves would translate at M3 levels $15.7 Trillion.
What has happened is .. in the past 3 yrs the liquidity infusion by the FED and the banks keeping the liquidity out of the system by depositing it with the FED as reserves .. the control (flow of liquidity) has moved from the FED into the hands of banks. 


If and when this money enters the financial system..
- Dollar should get devalued.
- Inflation in US will rise.
- Exports should become cheaper for US Exporters.
- Gold in Dollar terms could rise further while in Indian Rupee terms.. Gold could be worth  much less.
- A lot of this excess cash will look for attractive destinations and Indian Stock market should "Break away from the developed markets" Also other BRIIC markets which are driven by internal consumption could see increased valuations.


The current strengthening of the US dollar is temporary in nature. It is advisable for American Investors to move out of dollar into other stock markets and buy into good stable companies. Indian Bond market with 10% interest rates is also very attractive..Export based companies in US should also do well. US also has large natural resources and these resource based companies would also do well.
Indian Investors should remain invested in Indian companies. Exporters need to worry about Dollar devaluation and its advisable to shift to non US Dollar denominated currencies for export or Indian Rupee. 


Keeping "Peak oil" in view it is advisable to invest in basic consumption oriented ideas and Hydro power companies (NHPC). Energy "Peak oil" will make everything expensive so large value one time expenses can be front loaded. It is advisable to buy NIFTY Call Options 1 year down the line if available at attractive valuations. Best Value buy stocks are: GAEL, Jayant Agro, NHPC and Tata Communications.

PN: these are my personal views/understanding about publicly available information. Please do your own deep dive before investing.

FED H3. Data (link)
FED H4.1 Factors affecting Reserve Balances (Link)