Jeff Frankel needs to understand banking better

 Jeffrey Frankel, 

The first reason for the high dollar price of gold is that the Fed has eased US monetary policy very strongly since the onset of the coronavirus recession in March of this year. True, gold had already begun to climb in 2019. But the Fed had already begun to cut interest rates in 2019.

Gold’s role as a hedge against inflation has for centuries been one of the major motives for holding it. One might observe that there is little sign of inflation today. But inflation in goods markets is not the only sign of easy money. Other signals include low real interest rates, a depreciated dollar, and high stock prices – not to mention the size of the Fed’s balance sheet. Each of these signals currently confirms the aggressive loosening of US monetary policy. A low real interest rate is often associated with a high real price of gold, in theory and empirically. After all, the long-time argument against holding the yellow metal, that it doesn’t pay interest, is less persuasive at a time when other assets are not paying much interest either.

How did Jeff figure that banking was loose?  Here is Sumner:

The best way to judge the stance of monetary policy is by looking at the growth rate in “M*V” aka nominal GDP. By that criterion, money has been tighter than average in America, and even more so in Europe and Japan. That helps to explain low nominal interest rates, but it’s not the whole story.

This headline explains it:

Interest Rates Are Low, but Loans Are Harder to Get. Here’s Why.

Banks have tightened standards, becoming more choosy about their borrowers and asking a lot of questions

Private credit is tight in general now.  Fees have gone up for refinances, credit scores need be higher.  In fact, retail banking is suffering and shrinking, likely making money tighter.

Jeff Frankel is a bit confused about this, not connecting the dots.  It is that future $150 billion a year in seigniorage taxes coming, and that will last at least six years.  Private regulated credit is losing the battle to shadow banking.  Regulated banking will be tight for years to come.

Retail banking was getting squeezed before covid, from The Ecoomist:

CORPORATE AMERICA’S earnings season began this week, with big banks reporting mixed fortunes in two of their main activities. In investment banking, trading revenues—basically, fees for buying and selling bonds, shares and derivatives on behalf of pension funds, hedge funds and other clients—leapt as markets rallied in the closing weeks of 2019. But in commercial banking—broadly, the business of taking in deposits and making loans—revenues were squeezed. That is because banks’ interest margins (the difference between the interest they earn on loans and what the pay to fund themselves) tend to fall when interest rates decline. The Federal Reserve cut interest rates three times in the second half of last year.

What was happening before covid? The Fed was doing QE and raising Fed taxes on the banking sector. Remember repo madness?  When the Fed intervenes, tax and fees are collect by the regulated banking network, and they get tight with loans.   Taxes are taxes, Jeff, and the dots have been connected.