Sunday, October 18, 2020

The One-Chart Summary Of All That Is Wrong With The US Financial System: Deposits Over Loans — Tyler Durden

However, while it is hardly surprising that loan growth has refused to pick up during the worst economic depression since the "Great" one, what is certainly remarkable is when one looks at the corresponding bank liability: deposits. Here, there is no such problem, and in fact, in recent quarter (and years), deposits have exploded higher and continued to do so last quarter too.

Why is this notable? Well, for one, it crushes the socialism-enabling "theory" known as MMT, or Modern Money Theory, also known as Helicopter Money. Recall that according to the hodgepodge of confused concerts that were thrown at the wall in hopes of coming up with some comprehensive monetary theory, from the perspective of Modern Monetary Theory private bank lending is unconstrained by the quantity of reserves the bank holds at any point in time. In other words, according to MMT loans create deposits (see here, here, and here). Only... clearly in reality that's not the case.

More financial illiteracy. 

What is actually happening is increased liquidity preference (reducing velocity), tighter credit owing to rising risk and uncertainty in an economic contraction based on an exogenous factor (pandemic) that is poorly understood so far, along with historically high (like humongous) government spending (fiscal injection) in relation to taxation (fiscal withdrawal). So the stock of deposits is increasing over the stock of loans.

Zero Hedge
The One-Chart Summary Of All That Is Wrong With The US Financial System: Deposits Over Loans
Tyler Durden


Matt Franko said...

“ More financial illiteracy.

It’s not more ... it’s THE SAME THING as they posted earlier this week... they are dogmatically advocating for their thesis... like all good art degree morons are trained to do...

They will not come off if it... they are not trained to make adjustments or corrections..

Mike Norman said...

Government spending adds to deposits. Zerohedge completely ignores this. They are clueless over there. Spending hit a record, $6.9T in FY 2020, an increase of $1.9T over FY 2019, and all of that increase came in the pandemic period. That's what added to bank deposits. Loans were not necessary to create deposits in that period.

Butch Busselle said...

What Mike said, plus, not many people or businesses are in a position to take out a loan when income is uncertain.

Matt Franko said...

Also the 525b of PPP loans govt made fiscal agents issue depleted most/all authority they had to increase loan issuance... those ppp loans are still on the books... should start being reduced to zero as borrowers apply and receive forgiveness over next few months...