Fictional Reserve Lending Is The New Official Policy

Fictional Reserve Lending Is The New Official Policy

Authored by Mike Shedlock via MishTalk,

Official policy finally caught up with reality. Reserves are fictional.

Official Announcement

With little fanfare or media coverage, the Fed made this Announcement on Reserves.

As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.

Amusingly, a few days ago yet another article appeared explaining how the Money Multiplier works. The example goes like this: Someone deposits $10,000 and a bank lends out $9,000 and then the $9,000 gets redeposited and 90% of the gets lent out and so an and so forth.

The notion was potty. That is not remotely close to how loans get made. Deposits and reserves never played into lending decisions.

What’s Changed Regarding Lending?

Essentially, nothing.

The announcement just officially admitted the denominator on reserves for lending is zero.

There are no reserve lending constraints (but practically speaking, there never were).

Fictional Reserve Lending Flashback

I wrote about this in December of 2009 in Fictional Reserve Lending and the Myth of Excess Reserves.

The flashback is amusing as I reference a number of people worried about hyperinflation.

Here are the facts of the matter as I explained in 2009.

Money Multiplier Theory Is Wrong

  • Lending comes first and what little reserves there are (if any) come later.

  • There really are no excess reserves.

  • Not only are there no excess reserves, there are essentially no reserves to speak of at all.

The rationale behind the last bullet point pertains to banks hiding losses. Regulators suspended mark-to-market accounting.

When Do Banks Make Loans?

  1. They meet capital requirements

  2. They believe they have a creditworthy borrower

  3. Creditworthy borrowers want to borrow

All three requirements must be met.

  1. Banks generally do not lend if they are capital impaired.

  2. Clearly someone must want to borrow.

Point two is worthy of discussion.

Banks may not have a creditworthy borrower, they just have to believe it, or they have an alternate belief that applies. In 2007 banks knew full well they were making mortgage liar loans.

So Why Did They?

Because banks bought into the idea home prices would not go down so they did not give a rat’s ass if someone was out on the street. All they cared about was the quality of the loan. If Home prices appreciated, they were covered.

From a bank lending aspect, nothing has changed. Neither reserves nor deposits never entered into the picture.

Denominator Officially Zero

The denominator on lending is now officially zero. But nothing really changed. The Fed was always ready, willing, and able to supply unlimited reserves.

The only thing that’s new is the official announcement that reserves are fictional.

Capital Concerns in 2009

There are capital concerns, but note that in March of 2009 the Fed suspended mark-to-mark accounting.

That was the key announcement that launched the bull market.

Capital Concerns Now

There are still capital concerns, but the Fed stepped up to the plate and is willing to buy corporate bonds.

Guess who is going to unload as much questionable junk as possible and guess who will buy it.

Banks know they have losses but hey will not admit them.

All it takes to mask them is a clever swap takes the assets off the balance sheet of the banks and temporarily hides them on the balance sheet of the Fed.

What About New Lending?

Hiding junk is not new lending. It is not new production. And it is not new hiring.

To achieve real growth we need new production, not hiding of losses.

Losses and Zombies

Once again, the Fed has chosen to hide losses and shelter zombie corporations.

This will be a drag on any recovery.

All Excess Now

Hey, look on the bright side.

By definition, all reserves are now excess reserves. Banks can collect on all reserves.

The rate may not be much, but Interest on Excess Reserves = Interest on Reserves

Ain’t life grand?

But, But, But, But

  1. Unemployment Claims Spike to 3.28 Million, New Record High

  2. Coronavirus Trend: One in 10 of Those Hospitalized Die

  3. Retail Grinds to a Halt as 47,000 Stores Close

  4. US Output Drops at Fastest Rate in a Decade

But banks are saved. What more could you possibly want?

Meanwhile, Nothing is Working Now (Except for Banks)

For a 20-point discussion of where we are headed, please see What’s Next for America?


Tyler Durden

Sat, 03/28/2020 – 21:15

Rosneft Abruptly Exits Venezuela, SellsĀ Assets To Russian State, Amid US Squeeze On Maduro

Rosneft Abruptly Exits Venezuela, Sells Assets To Russian State, Amid US Squeeze On Maduro

In the past weeks the Kremlin has shown it’s willing to punch back as well as take drastic necessary defensive action in the face of Washington sanctions at a moment America is preoccupied and made more vulnerable by the coronavirus threat — first by dumping OPEC+ and MbS, effectively declaring war on US shale — and now by taking aggressive measures to insulate Russia’s state-controlled Rosneft.

On Saturday Rosneft announced it has sold off all its Venezuelan oil assets to an unnamed Russian state entity. “The government of the Russian Federation has acquired assets in Venezuela from Rosneft. A company 100% owned by the Russian Federation has become the owner,” Russia’s TASS said.

A company statement framed the move as key to protecting shareholders’ interests at a moment the Trump administration ramps up pressure on Maduro and external entities still doing business with Caracas. It’s been widely reported that Rosneft has explored exit options since early 2019 when Venezuelan assets continued rapidly losing money, leading to worsened current operating conditions.

Venezuelan President Nicolas Maduro holds a sword given as gift by Russian oil company Rosneft’s CEO, Igor Sechin. File image: AFP via Getty

“As a result of the concluded agreement all assets and trading operations of Rosneft in Venezuela and/or connected with Venezuela will be disposed of, terminated or liquidated,” Rosneft said. “We took this decision in the interests of our shareholders, as a publicly traded international company,” Rosneft spokesman Mikhail Leontyev further told TASS. “And we have a right to expect, indeed, that the US regulators fulfill their public promises.”

On Thursday the White House went so far as to issue a $15 million bounty on Maduro and his inner circle over drug trafficking charges, amid sweeping indictments against what Washington dubbed a vast narco-state criminal enterprise orchestrated by the regime. It appears Rosneft took note of Trump’s willingness to press his economic war on Venezuela further even as the United States now leads the world in numbers of confirmed coronavirus cases, which threatens to decimate an economy still on “pause” and extreme uncertainty still on the horizon. 

All of this follows in mid-February the US slapping new sanctions on Rosneft Trading SA, a unit of Rosneft, and the company’s executive Didier Casimiro, accusing it of being the “primary culprit” of a campaign to evade Washington’s pressure campaign on the Maduro government. But the sanctions stopped just short of naming parent company Rosneft, though the Trump administration long accused it of “actively evading sanctions — engaging in ruses, engaging in deception.”

Via AFP/Getty

Bloomberg observed that “The fight over Venezuela fits into a much larger geopolitical battle between Trump and Vladimir Putin, with both turning to oil as the weapon of choice.” And the report further cited Russia’s ambassador to Venezuela, Sergey Melik-Magdasarov, as saying:

“Don’t worry! This is about Rosneft’s assets being transferred to Russia’s government directly. We keep moving forward together!,” he [Amb. Melik-Magdasarov] said, in a message that also posted on the embassy website.

The assets include Rosneft’s stakes in local upstream companies Petromonagas, Petroperija, Boqueron, Petromiranda and Petrovictoria, as well as oil-service, commercial and trading units.

The Russian Federation controls Rosneft with just over 50% of its shares, while BP Plc is the second-largest shareholder with 19.75%, and Qatar’s QH Oil Investments owns 18.93%.

Rosneft’s position has long been that US sanctions are illegal and that its own operations in Venezuela are commercial in nature, not political, after in prior months the company’s cooperation with state-run PDVSA became an “open secret”. 

The ultimate strategy behind Saturday’s dramatic announcement is as yet uncertain, it should be noted:

But Russ Dallen, head of Caracas Capital Markets brokerage, cautioned that it’s too early to know for sure whether the move is intended to bolster Maduro.

“We don’t know whether the new state entity is a cemetery corporation, where companies go to die, or whether the Russians are simply doing it to take Rosneft — which is their crown jewel and provides a large portion of Russia’s income — out of the way of sanctions and Putin will use the new company to continue to help Maduro,” he said.

Rosneft has emerged as one of PDVSA’s closest joint venture partners, being crucial as a heavy lifter keeping Venezuelan oil afloat at a moment Washington tries to strangle and blockade the socialist state’s industry.


Tyler Durden

Sat, 03/28/2020 – 20:50

Midnight On Planet Lockdown: Bob Dylan Strikes Again

Midnight On Planet Lockdown: Bob Dylan Strikes Again

Authored by Pepe Escobar via The Asia Times,

What spectacular timing. Like a shot ricocheting at Heaven’s Door as a virus pandemic rages and Planet Lockdown is the new normal, Bob Dylan has produced a stunning 17-minute masterpiece dissecting the November 22, 1963, assassination of JFK – releasing it at midnight US Eastern Standard Time on Thursday.

For baby boomers, not to mention obsessive Dylanologists, this is the ultimate sucker punch. Countless eyes will be plunged into swimming pools revisiting all the memories swirling around “the day they blew out the brains of the king / Thousands were watching, no one saw a thing.”  But that’s not all: the Dylanmobile takes us on a magical mystery tour of the 60s and 70s, complete with the Beatles, the Age of Aquarius and the Who’s “Tommy.”

If there’s any cultural artifact capable of sending a powerful jolt across a discombobulated America trying to come to grips with a dystopic Desolation Row, this is it, the work of America’s undisputed, true Exceptionalist. The times, they are-a-changin’. Oh, yes, they are.

There are so many nuggets in Dylan’s lyrics they would be worthy of a treatise, tracking the vortex of music, literature, film references and interlocking Americana.

This is essentially an incantatory mantra set to piano, sparse percussion and violin. We have two narrators: a dying Kennedy (“Ridin’ in the backseat next to my wife / Headin’ straight on in to the afterlife / I’m leanin’ to the left, got my head in her lap / Oh Lord, I’ve been led into some kind of a trap”) and Dylan himself.

Or this can be read as Dylan playing Kennedy’s doppelganger, plus occasional interventions, such as Kennedy’s would-be killers

(“Then they blew off his head while he was still in the car / Shot down like a dog in broad daylight / Was a matter of timin’ and the timin’ was right / You got unpaid debts we’ve come to collect / We gonna kill you with hatred, without any respect / We’ll mock you and shock you and we’ll grin in your face / We’ve already got someone here to take your place”).  

The pearl at the heart of the mantra is nothing sort of apocalyptic:

“They killed him once and they killed him twice / Killed him like a human sacrifice / The day that they killed him someone said to me, / ‘Son, The Age of the Antichrist has just only begun.’”

Extra words to define it would be idle. Wherever you are in Planet Lockdown, sit back in stay at home social distancing mode, turn on, tune in and time travel. There will be blood on the tracks.


Tyler Durden

Sat, 03/28/2020 – 20:25

Joe Biden: “Believe All Women” (Except The One Accusing Me Of Sexual Assault)

Joe Biden: “Believe All Women” (Except The One Accusing Me Of Sexual Assault)

In September, 2018 – former Vice President Joe Biden weighed in on allegations of sexual assault against Justice Brett Kavanaugh by insisting that any woman’s public claims of sexual assault should be presumed to be true.

Except for Biden’s former Senate staffer, Tara Reade, who says Biden penetrated her with his fingers in 1993 when she was in her mid-20s, making her life “hell.”

Biden’s deputy campaign manager magically transformed “believe all women” into “all women have a right to tell their story” on Friday, saying in a statement to Fox News: “Women have a right to tell their story, and reporters have an obligation to rigorously vet those claims. We encourage them to do so, because these accusations are false.

If you believed Kavanaugh’s accuser, why in the world would you not believe Biden’s? Believing women doesn’t end when it starts to impact your politics.

— The Gravel Institute (@GravelInstitute) March 27, 2020

Remember when Benjamin Wittes said, “Kavanaugh himself bears the burden of proof.” Does the same apply for Biden? https://t.co/Qb53NAJI3g

— David Harsanyi (@davidharsanyi) March 27, 2020

As we noted last week, Reade said in an interview with Rolling Stone‘s Katie Halper that Biden sexually assaulted her after she was asked to run a gym bag over to him.

Biden’s “hands were on me and underneath my clothes,” she said, after he “had me up against the wall.”

“I remember him saying first, like as he was doing it, ‘Do you want to go somewhere else,'” she said, adding “And then him saying to me when I pulled away, he got finished doing what he was doing, and I kind of just pulled back and he said, ‘Come on man, I heard you liked me.’ And that phrase stayed with me because I kept thinking what I might’ve said and I can’t remember exactly if he said ‘i thought’ or ‘I heard’ but he implied that I had done this.”

Reade then went on to say that “everything shattered in that moment” because she knew that there were no witnesses and she looked up to him. “He was like my father’s age,” she said. “He was like this champion of women’s rights in my eyes and I couldn’t believe it was happening. It seemed surreal.”

Reade then said Biden grabbed her by the shoulders and said, “You’re okay. You’re fine” and proceeded to walk away.

Reade said that Biden also told her something after the alleged assault that she initially didn’t want to share because “it’s the thing that stays in my head over and over.” But after some pressing from Halper, Reade decided to share:

He took his finger. He just like pointed at me and said you’re nothing to me.”

Halper said she spoke with Reade’s brother and close friend, and both of them recall Reade telling them about the alleged assault at the time. –NewsOne

Reade says that after she revealed some of Biden’s inappropriate behavior, she was accused of doing the bidding of Vladimir Putin, according to The Intercept 

Listen to Reade’s interview here:


Tyler Durden

Sat, 03/28/2020 – 20:00

“There’s No Gold” – COMEX Report Exposes Conditions Behind Physical Crunch

“There’s No Gold” – COMEX Report Exposes Conditions Behind Physical Crunch

Early this week, we were among the first to report on the “break down” in precious metals markets.

While the demand for gold has been soaring as a safe haven asset amid the multiple global crises we are currently facing, forced paper gold liquidation (as leveraged funds scramble to cover margin calls) and unprecedented logistical disruptions created a frantic hunt for actual bars of gold.

Specifically, as Bloomberg details, at the center of it all are a small band of traders who for years had cashed in on what had always been a sure-fire bet: shorting gold futures in New York against being long physical gold in London. Usually, they’d ride the trade out till the end of the contract when they’d have a couple of options to get out without marking much, if any, loss.

But the virus, and the global economic collapse that it’s sparking, have created such extreme price distortions that those easy-exit options disappeared on them. Which means that they suddenly faced the threat of having to deliver actual gold bars to the buyers of the contract upon maturity.

It’s at this point that things get really bad for the short-sellers.

To make good on maturing contracts, they’d have to move actual gold from various locations. But with the virus shutting down air travel across the globe, procuring a flight to transport the metal became nearly impossible.

If they somehow managed to get a flight, there was another major problem. Futures contracts in New York are based on 100-ounce bullion bars. The gold that’s rushed in from abroad is almost always a different size.

The short-seller needs to pay a refiner to re-melt the gold and re-pour it into the required bar shape in order for it to be delivered to the contract buyer. But once again, the virus intervenes: Several refiners, including three of the world’s biggest in Switzerland, have shut down operations.

“I realized it was going to be an extremely volatile day,” Tai Wong, the head of metals derivatives trading at BMO Capital Markets in New York, said of Tuesday. “We watched this panic develop literally over the course of 12 hours. Having seen enough market dislocations, you recognize that the frenzy wasn’t likely to last, but at the same time you also don’t know how long it would extend.”

By the end of the week, the shorts had sourced the metal and chartered flights, reverting the spot-futures spread…

But Morgan Stanley’s Exchange-For-Physical Index shows a large physical premium remains

The real price.. for real gold? Nearer $1,800. If you can get it.

“There’s no gold,” says Josh Strauss, partner at money manager Pekin Hardy Strauss in Chicago (and a bullion fan).

“There’s no gold. There’s roughly a 10% premium to purchase physical gold for delivery. Usually it’s like 2%. I can buy a one ounce American Eagle for $1,800,” said Josh Strauss. “$1,800!”

“The case for gold is simple,” says Strauss.

You want to own gold in times of financial dislocation and or inflation. And that’s been the case since time immemorial. And gold behaves well in those cases. In those cases stocks behave poorly. It’s a great portfolio hedge. Gold does poorly when you’ve got strong economic growth and low inflation. Tell me when that’s going to happen. Gold held its value during 2008 and after all that money printing it tripled over the next three years.”

And in case you doubted this, the cost of an American Eagle one ounce coin at the US Mint is now $2,175

But now we can see more details of what is behind this ‘shortage’ as SKWealthAcamdemy’s J.Kim details, the latest COMEX Issues and Stops reports expose conditions behind the COMEX physical gold supply problems. Though I have written about the various reasons why physical gold supply problems manifest many times in the past, this topic still remains one rarely discussed by financial journalists, and never discussed by the mass financial media.

For client accounts, when bullion banks stop more notices than issued, they, will lose physical inventory.

For house accounts, the opposite is true.

When bullion banks issue more notices than stops, then they will lose physical inventory as well. Normally, when bullion banks manufacture waterfall declines in paper gold and silver prices, as they did earlier this month, with the complicity of the CME’s largely unreported rampage in raising initial and maintenance margins on futures contracts many times within a 2-month period in the midst of a stock market crash, they load up on physical gold and silver for their house accounts while ensuring that their clients take almost zero delivery of physical gold and silver ounces. However, if they are unable to execute this clever strategy, this is when physical gold supply problems can manifest.

In fact, I have not seen a single news site in the entire world, except for my own, mention the relentless increase in initial and maintenance margins in gold and silver futures contracts (the 100-oz gold futures contract and the 5000-oz silver futures contract) for the past two months, in a desperate attempt to knock long positions out of the game and thereby prevent an increasing amount of physical delivery requests.

Just recently, the CME raised margins yet again for 100-oz gold futures contracts to $9,185/$8,350 for initial/maintenance margins, representing a massive 86% increase in margins, and for 5000-oz silver futures contracts to $9.900/$9,000 for initial/maintenance margins, representing a gigantic 73% increase in margins, in just a couple months’ time. Normally, such relentless increases in initial/maintenance margins in gold futures markets is sufficient to prevent physical gold supply problems from afflicting futures markets, but the fact that even this reliable manipulation mechanism failed recently is a sign of additional tectonic earthquakes to come in the global financial system.

However, as you can see for the data I have compiled for the behavior of issues and stops for client and house accounts for bullion banks in gold and silver from December 2019 to March 2020, this pattern of normal behavior, in which bullion banks take advantage of their own artificially manufactured paper gold and silver price plunges to load up on physical metals at the expense of their clients, has strongly reversed during this four-month time span. I have only included data for the major gold (100-oz) and silver (5000-oz) futures contracts below and not for the mini gold (10-oz) and mini silver (1000-oz) silver futures contracts. 

Furthermore, I only separated out the bullion banks by name that had several hundred to a few thousand contracts stopped or issued, and compiled all other data under the category of “all others”. For those of you that don’t understand the terminology “stopped” and “issued”, the categories refer to the number of delivery notices that were “issued” (short positions issuing notification that underlying gold/silver would be delivered) and “stopped” (long positions receiving a delivery notice).

Therefore, when delivery notices are “issued” in house accounts, the issuing bank is on the hook for delivering the physical ounces associated with the underlying contracts. On the contrary, when notices are “stopped”, then the stopping bank would receive notification of the future delivery of the physical ounces associated with the underlying contracts. The same holds true for client accounts. Thus, all bullion banks desire more stopped than issued notices for their house accounts, and desire more issued versus stopped notices for their client accounts. This way they accumulate more physical inventory during artificially engineered paper price crashes.

As you can see, the massive engineered drop in paper silver prices versus the massively higher physical silver prices for the past month backfired on the bullion banks, as it led to a frenzy of clients asking for physical delivery, whereas in the past, bankers had been able to chase client long positions out of the market without ever being on the hook for physical delivery. Thus the amount of contracts stopped versus issued for clients was nearly break even for silver futures contracts, a pattern I have not witnessed in a long time during a banker raid on paper silver prices.  And in regard to house accounts, under past similar circumstances, I had always observed JP Morgan bankers taking a tremendous amount of physical silver delivery during engineered collapses in paper silver prices. However, during the last four months, this situation did not materialize, perhaps due to the stress on physical stores of silver created by so many clients asking for physical delivery. As you can see in the data I complied above, this time around, JP Morgan bankers were nearly absent in taking physical silver delivery for their house account.  In fact, for the bullion bank house accounts, the amount of stopped versus issued contracts, net, was only 74 contracts, or a mere 395,000 AgOzs for their House accounts. As a basis of comparison, during similarly engineered collapses in paper silver prices in the past, JP Morgan alone was able to accumulate and take delivery of many millions of physical silver ounces.

In regard to real physical gold delivery, the situation was even worse for bullion bankers than their situation with real physical silver delivery, which likely has given rise to physical gold supply problems at the current time. In their client accounts, physical delivery requests exploded, with the net (stopped minus issued) totaling 8,095 contracts representing 800,950 AgOzs of real physical gold requested for delivery. In their house accounts, the bullion banks were unable to yield a positive net situation either, with issued contracts exceeding stopped contracts by 6,107 contracts, representing 610,700 AgOzs.  Thus, when adding these two figures together, the bullion banks are on the hook for delivering more than 1.4M AgOzs.

This unexpected demand on bullion bank physical gold reserves has undoubtedly led to a disruption of physical gold delivery associated with the gold futures markets, though various COMEX spokespeople have claimed there is no shortage of physical gold whatsoever, and that the disruption of delivery is simply due to a disruption in the supply chain caused by the coronavirus pandemic, i.e., when in doubt, blame the coronavirus pandemic for all manifested stresses revealed in the global financial system. Earlier, here, on 24 February, I speculated, well before US stock markets started to crash, that the coronavirus pandemic would be scapegoated for the market crash, and I was 100% right.  Is it possible that the coronavirus pandemic is now being scapegoated for shortages of physical gold as well?

Oddly, a gold analyst, Ole Hanson stated in response to the shortages of gold physical supply in the futures markets: “There is plenty of gold in the market, but it’s not in the right places. Nobody can deliver the gold because we are forced to stay home.” The explicit function of COMEX warehouses is to store the physical gold that backs gold delivery associated with gold futures contracts. Consequently, why is the physical gold “not in the right places” and in these warehouses, as if it is stored where it is supposed to be stored, and the data is accurate (1.76M registered AuOzs and an additional 6.98M eligible AuOzs in COMEX warehouses as of 26 March 2020), there should be no physical gold shortages to meet physical demand right now? Did Mr. Hanson, in his statement that gold is “not in the right places” unwittingly reveal that the reported COMEX warehouse data is fraudulent?

Secondly, some would suggest that ever since the COMEX mandate that paper gold could be used to close out physical delivery requests through EFP (Exchange For Physical) transactions by Exchange Rule 104.36 enacted on February 18, 2005, which allowed for the substitution of gold ETFs for physical gold, that no physical shortage of gold could ever result.

Since paper was allowed to replace physical, could not bullion banks just literally “paper over” any physical supply deficit? And if the answer to this question is yes, then why is the COMEX experiencing physical shortages of gold right now? Well, as I explained in an article that I published on my news site in June 2011, in which I explained how EFP transactions operate (which you can read here), “the Related Position [Physical] must have a high degree of price correlation to the underlying of the Futures transaction so that the Futures transaction would serve as an appropriate hedge for the Related Position [Physical].”  Consequently, since there has been a massive price decoupling between physical and paper gold prices, perhaps this price decoupling has enabled the underlying holder of longs in gold that asked for physical delivery to reject any EFP transaction, since there is no longer a “high degree of price correlation” between paper and physical gold, and to insist on physical gold delivery with no substitution for this request. And this rejection of EFPs and EFS (exchange for swaps) as acceptable behavior is perhaps what is causing the physical gold supply problems in the futures markets right now.


Tyler Durden

Sat, 03/28/2020 – 19:35