Goldman Sachs Prez: Markets “Abnormal”, Blames Federal Reserve.

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Gary Cohn, President of the Goldman Sachs Group, recently branded the trading market as “abnormal”, citing low market volatility and artificially low interest rates as the culprits.

As Bloomberg reports:

“The environment for all the firms is quite difficult right now,” Cohn, 53, said today at an investor conference in New York. “What drives activity in our business is volatility. If markets never move or don’t move, our clients really don’t need to transact.”

Low interest rates and the Federal Reserve’s program of quantitative easing have resulted in reduced volatility, Cohn said.

“We think, at the end of the day, it’s economic in nature,” Cohn said of the cause of lower client volume. “We don’t have clear vision of economic growth or lack of growth.”

Goldman Sachs has responded to years of declining fixed-income trading revenue by cutting jobs and capital in the business, Cohn said. The number of employees is down 10 percent from 2010 and risk-weighted assets have declined by $90 billion since the second quarter of 2012, he said.

We’re not just waiting for things to get better,” Cohn said.

The current economic situation in the USA is unique. Never before in the history of the USA has the monetary base been as large as it is now: nearly $4 trillion.

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Normally, this should scream “hyperinflation”. This isn’t happening, because most of this money is not hitting the market. Most of the expanded money supply is sitting in bank coffers at the Federal Reserve as “excess reserves” (through a process I have described here). The Fed pays a 0.25% interest rate on these excess reserves. That is not a large interest rate, but most banks are too pessimistic on the current and projected state of the economy to loan this money out to the general public. They’d rather keep it at the Fed for a surefire 0.25% rate, rather than possibly lose it all on bad loans.

Because this money sits in excess reserves at the Fed, we are not seeing hyperinflation. This money stays out of circulation. If banks begin lending out this money, it will multiply through the fractional reserve banking system very quickly. This would produce significant inflation. The President of the Philadelphia Federal Reserve has referred to this situation as a “ticking time bomb.

The bankers prefer to sit on trillions of dollars of excess reserves and get a quarter of a percent interest rate from the Fed, rather than loan the money out into the economy. This gives us some insight into how much faith the bankers have in the current state of the economy: not much.

The Federal Reserve is committed to bailing out the large banks preventing the stock market from crashing. This has led to the Fed’s program of Quantitative Easing and perennially low interest rates, which has created the present paradigm: Fed-induced economic stagnation. Moving forward, expect this to be the “new normal”.

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