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Strategies & Market Trends : Heinz Blasnik- Views You Can Use
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To: LLCF who wrote (395)4/22/2003 3:05:37 PM
From: GraceZ  Read Replies (4) of 4914
 
The Fed can only add money by adding reserves. It doesn't enter the system if people aren't willing to borrow it. Rising cash levels doesn't mean it's being created by the Fed. You can clearly see in that chart that reserves minus currency are lower then they were in 1994. The Fed has cut permanent creation to almost zero in the last year, a fact that seems to be lost on everyone except the most dedicated Fed watchers such as myself. Currency rises in response to people going to the bank and turning demand deposits into cash. It's the currency portion of the money supply which has risen sharply.

You have to wonder where all that currency is going considering that we are fast moving to a cashless society here in the US. You can understand the increase in bank savings accounts, demand deposits and money market accounts simply because when people get risk averse they put their money in what they deem to be a safe place (even I have a historically high cash position and I'm bullish). They start wanting return of their money and stop thinking in terms of return on their money. But currency rising the way it has indicates something else happened. You have to think a lot of it is simply leaving the country unless people are burying it in the back yard. I think the Euro currency conversion drove demand for currency because the European countries tried to use the conversion to try to flush out money held by their own citizens in illegal activities so I think there was a wholesale movement into dollars from the old currencies converting into Euros.
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