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Chart Of The Day: How Much US GDP Growth Is Thanks To The Fed?

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By now even the most confused establishment Keynesian economists agree that when it comes to economic "growth", what is really being measured are liabilities (i.e., credit) in the financial system. This is seen most vividly when comparing the near dollar-for-dollar match between US GDP, which stood at $16 trillion as of Q1 and total liabilities in the US financial system which were just over $15.5 trillion in the same period. What, however, few if any economists will analyze or admit, and neither will financial pundits, is the asset matching of these bank liabilities: after all since there is no loan demand (and creation) those trillions in deposits have to go somewhere - they "go" into Fed reserves (technically it is the reserves creating deposits but that is the topic of a different article). It is here that we can discern directly just what the contribution of the Fed to US GDP, or economic growth.

The chart below shows the time series of US GDP since 1960 compared to total US financial liabilities over the same time period (compiled as the total of U.S.-Chartered Depository Institutions, Excluding Credit Unions (L.110), Foreign Banking Offices in U.S. (L.111) and Banks in U.S.-Affiliated Areas (L.112) all from the quarterly Flow of Funds, Z.1., report).  This is a chart we have shown previously. What we have broken out this time in the red shaded area, however, is how much of bank liability funding is matched by reserves originating by none other than the Federal Reserve. This amounted to a record $1.75 at March 31. It also means that excluding the Fed, US banks would have some $1.75 trillion fewer in assets and thus liabilities. Finally, it also means that the broadest aggregate of "credit creation", the US economy, would be some $1.75 trillion lower at the end of the first quarter.

And a quick update: we await the next full Z.1 update to reflect Q2 balances due out in a month, we do know that total Fed reserves grew by $250 billion in Q2 to $2 trillion, and as of last week stood at a new record high of $2.1 trillion. This is "money" that is inextricably linked to the US GDP, and also means that absent a pick up in credit creation in the private sector, that would be US commercial banks whose total loans and leases once again declined and continue to still be below Pre-Lehman levels (!), have to step up. Sadly, in a world in which all the banks are habituated to relying on the Fed for all money creation, and instead invest excess reserves manifested at the bank level in the form of excess deposits over loans, this is not going to happen.

So perhaps the question that economists should ask is: what will be the impact of the Taper on US GDP going forward (hint: very negative). And what happens when the establishment admits that as of last quarter, some $2 trillion in US GDP was exclusively thanks to the Federal Reserve, a number which will rise to $2.3 trillion at September 30 (and continue rising).


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