Excess Banking Reserves during the Great Depression versus Now

Excess banking reserves in USA were just above 70 million dollars in 1929. In 1935 they had exploded to 1282 million dollars. The banks had simply very few good projects to lend out money too. There are not many businesses that are growing in a depression.

In August 2008 the excess banking reserves in USA were 4 billion dollars. In January 2009 the excess banking reserves had exploded to more than 900 billion dollars. The excess banking reserves have recently gone down a bit, but high volatility even in excess banking reserves can be expected in times like this. Personally I think we likely will see new highs in excess banking reserves in the months to come. More and more people and banks will simply sit on their money. Few companies are in need for expanding when demand is falling, most companies need to cut back on their businesses and their loans.

There are simply not that many good projects to lend out money to these days. It is about surviving. The main cause of the mega bubble bursting in front of us was too much debt. There is a limit in how many times central banks can fix a debt bubble by trying to create an even bigger debt bubble.

The velocity of money is down, industry production is falling rapidly world wide, more people are getting fired… we are in a bad cycle feeding on itself, just like the credit bubble was feeding on itself. A lot of money is simply accumulating as excess banking reserves; it could take a long time before the confidence is re-established and the velocity of money picks up again.

Down the road there is also the danger that economic chaos will spill over in political chaos. From order there will likely be more chaos before some type of “order” again return.

I also made a few comments on excess banking reserves in DN today (for the few of you reading Norwegian)