Don’t quote me on this, pretty sure I’m wrong. The Fed bought assets (with the agreement to give it back for even higher rates of return). I heard one interpretation of this being that the moneys worth less than the assets and the fed is looking for ways to incentivize financial institutions to take money.
Yes, govt bonds are looked at as not reliable and the fed is incentivizing the purchase of the bonds nightly with additional interest. Problem is this is to stave off excess inflation, but it ironically will create it.
tl;dw: too much money in the system, big banks don't want the liability, push it to money market funds which use short term treasury while treasury is trying to increase their long term debt and reduce the short term ones. essentially, not as scary as it sounds.
Well, banks do not hold cash. Cash is always held by the central bank (that's where the other banks have their accounts). Nowadays, this can easily involve negative interest rates. So if a bank now buys some security back from the central bank, they effectively remove money from the system (and get that security in return).
The Fed is adamant about preventing negative rates, which is in fact what the reverse repo facility is accomplishing--if market participants could not go to the Fed and had to conduct repo with banks, then the overnight repo rate could easily go negative when there's too much cash sloshing around.
Because it's not actively generating value, and is in fact actively losing value thanks to inflation. It's legally considered a "liability" in the context of a lot of banking regulation.
is it more fair to say one reason they don't like holding cash because they have to pay interest to their depositors on it without getting any return on it?
So putting the cash to work (in a reverse repo) even at 0.05% allows them to convert it to an asset and generate some return.
Yea, but you gave the bank the money first. Which brings us back to the first question: How is holding cash a liability? Are they worried about deflation?
If nobody spends their money then your economy will end earlier than it should have.
People advocating for deflation say they will still spend their money but what they really mean is that they will spend the money on basic living expenses and that is it. They will save the rest. How else would they benefit from deflation? If they spent all their money they wouldn't benefit from deflation as their incomes stagnate or even fall.
Deflation isn't just a fall in prices of goods, it's also a fall in cost of labor because the price of goods is what pays for the labor.
It's pretty easy to illustrate how deflation ruins the profitability of companies. You have a production line that generates $5 million revenue a year. You have fixed costs of $4 million. Your profit is $1 million. As the population gets older, demand for your products goes down by 20%. Now you have $4 million in revenue and your costs went down slightly to $3.5 million. You're making half the profit even though revenue only fell by 20%. Running the production line at below capacity makes the production line increasingly less profitable until it no longer makes sense to run it.
A fixed % reduction in revenue can result in a much higher loss in profitability. Low profitability is a self reinforcing cycle as companies stop borrowing money and the money creation process is being interrupted leading to further deflation that cuts into profitability until you reach the smallest possible economy. That economy would have a GDP significantly smaller than $22 trillion USD but the level of savings didn't change meaningfully.
Despite the illusion of deflation, your money is actually losing value over time as the economy gets smaller because your dollars are just a claim to the output of the economy and if the economy shrinks so does the ability to serve your claims. When people realize that the money they are holding onto wasn't risk free after all it's too late and we get very high inflation or even hyper inflation as people get rid of dollars that have no counter part in reality.
I don’t advocate for deflation there’s a reason why we have targeted inflation I was just clarifying that deflation doesn’t make cash lose money (except for in the meta way you’ve described) while inflation does.
SLR: recently imposed capital requirements on large banks. Banks don't hold cash, they hold reserves at the Fed. And reserves are included in the bank's leverage ratio, so by accepting too much cash the bank can end up pushing their leverage ratio beyond the SLR limit which is bad for business.
In the case of inflation, your purchasing power will decrease. For example, there was a period during the 1940s (1941-1951) where if you held cash, t-bills, cash in a bank, or t-bonds instead of equities, you would have seen your purchasing power decrease by 30-50% over that time period.[0]
It costs you to process people’s bank transactions. However the balancing cash asset (bank reserves) doesn’t pay enough to cover those costs. So you close the bank account and ask them to go elsewhere.
First, it's been at 500 or so for a few weeks this is a substantial jump. The previous high record was $589 on the 14th. This has never been this high.
But more than likely you need to understand what Reverse Repo is and why it impacts all of us. Here's a great ELI5 On Reddit.
Banks have a ton of cash, and they're worried about inflation. So, they store their cash with the fed (through a repo [repurchase] agreement) temporarily.
The immediate situation is a problem of money market funds having more inflows than they could allocate (without nominal losses) in a zero interest rate environment. It's not about inflation per se.
If inflation happens, the 30-year bond will likely rise with inflation: maybe 3% or 4%. It is better to store your cash today, than to "lock in" to 2.2% APY.
Next month, if inflation starts to kick in, maybe you'll get 3% over the next 30 years instead of 2.2% over the next 30 years.
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Obviously, a 30-year bond is 'different' than cash. However, when you start looking at 6-months, 3-months, 1-month, and overnight lending rates... things look more-and-more like cash.
No one ever holds "cash" per se, its always better to lend it out (even for only 1 day, you wanna have that cash generate more cash). By betting on shorter timescales (ex: 1-month), you're really betting that the longer-time scale bonds (ex: a 30-year) will rise up.
Banks don't like holding cash (because it doesn't belong to them, and could be withdrawn at any time). So it's actually the opposite: they pay for the privilege of not having to hold onto that cash.
Contrary to the other two replies, yes, they are paid interest (it's a reverse of the standard repo where they borrow money from the Fed and pay the interest)
the banks have too much cash and not enough collateral (typically bonds). The FED lends them the bonds for one day (reverse repo) so that their books look ok at the end of the day.
Central banks raised interest rates a tiny amount from 0 to 0.05%. Banks were like: we no longer want to borrow all this cash we weren't doing anything with anyways please take it back central bank.
To add to this, central banks don't lend out cash without banks pawning an asset in return. And they only do so on a limited time basis. The banks have to promise to repurchase the pawned asset at a certain date, hence the name "repo" (reverse repo from the central bank's perspective).
Central banks are basically pawn shops that get to create their own cash to lend out.
At a very high level, this is one among many Rube Goldberg-esque interventions in financial markets that the Fed uses to try and whip markets into behaving how it wants.
In more concrete terms, banks (i.e. members of the Federal Reserve System) keep USD reserves on deposit at the Fed. The only thing they can do with these reserves is loan them overnight to other member banks at a market-determined interest rate--the Federal Funds Rate--which is targeted to a certain range by the Fed's policymaking committee. The Fed also pays interest on these reserves, at two rates: one rate for required reserves, and another for excess reserves. These serve to put a floor under the FFR, since there is no reason to lend reserves at a rate below what you can get by just sitting on them.
Of note is the fact that only Fed member banks have access to this, so other financial institutions must go through the banks when they have excess cash to park somewhere. In essence, the bank can accept overnight cash from non-banks and split the IOER with them. This transaction is consummated through a repurchase agreement (repo) in which the bank sells a "safe" asset to the counterparty with an agreement to buy it back soon thereafter (often overnight, but potentially up to a year later) for a slightly elevated price. The price difference is effectively the counterparty's cut of the IOER accrued during the time that the bank was sitting on the cash. Repo transactions are used for all sorts of short-term funding needs among non-banks, so the overnight rate on high-quality repo is roughly equivalent to the FFR.
It is for this reason that the Fed started its reverse repo operation, whereby it offers basically the same deal that I described above to certain qualified non-bank counterparties, in order to set a floor on overnight repo rates. (You can ignore the "reverse" in the name; it just means that the Fed is the one lending securities in the transaction.) The Fed is extremely wary of negative interest rates and the effect they might have on market behavior, so reverse repo appears to be the preferred method for preventing this.
So what does it mean when usage of this facility skyrockets? Well, it means that banks are not willing to engage in overnight repo at the rate that the Fed is offering, which in turn means that there is suddenly a large imbalance between repo supply (high-quality lendable securities held by banks) and demand (idle cash held by non-banks). As to what that fact means for the near future, opinions may differ sharply.
Banks essentially make money by arbitraging time preferences--they borrow short term (e.g. demand deposits which can be withdrawn at any time) at very low interest rates, and lend long term for much higher rates to risky ventures. They realize a profit by earning a sufficient spread between these rates to offset losses due to counterparty risk (i.e. default) on their lending. One consequence of this model is that a bank may abruptly become insolvent due to short term market conditions, if it cannot roll over its sources of funding. Since financial assets can typically be liquidated quickly (as opposed to, say, a bunch of idle factories owned by a defunct manufacturer) this can lead to systemic instability when an insolvent bank is forced to sell everything and drags down the prices for assets held on other banks' balance sheets.
After the GFC, regulators decided to come up with a more nuanced set of rules about how "healthy" a large bank's balance sheet must be, in order to spot trouble before it exacerbates a liquidity crisis and produces a solvency crisis. A business's leverage ratio is basically capital (equity) divided by assets (or its inverse, depending on your framing). For banks, however, just looking at leverage is not that helpful since the assets being held have very different levels of risk. The new metric is the Supplemental Leverage Ratio (SLR), which includes off-balance sheet expo...
Can you check my understanding here? So all this money builds up, they have no one to lend it to (except the Fed), which they have to because of the SLR.
The Fed raises rates in two years, and banks can lend out, but people a) can't afford the monthly payments for current prices at higher interest rates or b) have extra money from QE and don't need debt. Prices fall for things that require debt (cars, houses, college), but go up for things that people can pay for in cash? Less total is lended out due to the falling prices of things and increased interest rates? The whole volume of money moving around the economy decreases.
The Fed can inject more money, but there will already be too much (at large banks and corporations) on the market that is already not allocated effectively.
I guess... I'd be interested to hear your thoughts on what happens next?
This might be an unpopular opinion, but the economy we have right now feels quite fake, for lack of a better word, in the sense that the official numbers that are reported don't seem to reflect its actual health. I find it deeply concerning that every warning sign is summarily dismissed as "transitory" and the government and the Fed continue to drive full speed ahead.
And if the inflation hawks are right, that's a great deal - the capital you owe, and the interest you need to pay, will vanish within a couple of years and you'll still own the house.
Banks clearly don't think there's much risk of long term high inflation.
The bankers are not the ultimate buyers of mortgage bonds. The Fed is. So, these low interest rates are not a predictor of lack of inflation, but a reflection of policy. The government is taking this risk.
Although you're being downvoted, this is a growing sentiment among researchers and others near the field. There are calls to improve measurements of a society's wealth, as well as individual.
Current headlines use the broad statistics, such as the most exclusive unemployment stats, that don't really capture what's happening on Main Street.
The reporting on the economy barely pokes at issues and are generally just looking for general correlations, such as "Stocks do X as Y does that," or "GDP is doing X while Y is doing Z."
> Current headlines use the broad statistics, such as the most exclusive unemployment stats, that don't really capture what's happening on Main Street.
You probably know this, but just to clarify economics has many more complicated statistics than those that make it into newspaper headlines. For example, the "unemployment number" is technically U1. U2, U3, U4, etc. capture different nuances.
> Because they can force the rest of the world to keep using USD at gunpoint?
And the alternative? The EUR which is held by an EU that will likely break in the future. The CNY which is held by China (great idea :) ) or Russia's currency which is inflating like there is no tomorrow.
Bitcoin/Gold could be a hedge but it's quite volatile to preserve value especially for short/medium term holding periods.
Bitcoin would no longer be volatile if it expanded to represent an appreciable global fraction of liquid value.
Which is a huge if! That's the maximalist bet, and I still have trouble believing in it even as I've watched intermediate predictions come true.
If the BTC chain became a Schelling point, where all market players see it as their best move to hold some, then eventually a satoshi could be worth about a 2021 US cent. It would then be unlikely to fluctuate more than a fraction of a percent in BTC/fiat pairs per day, unless one of those fiat coins happened to be hyperinflating.
If both of those things happened, then pricing things in satoshis would be more stable than pricing them in fiat, because that's what hyperinflation is: it's when inflation in a currency gets so bad that it becomes a bad unit of account.
The fact that there's no alternative to the USD at the moment is the best argument for the BTC chain forming that Schelling point. But! It hasn't happened, and contrary the maximalists, there is no law of nature which says that it will.
The total value of all gold ever mined is just 10.5x greater than Bitcoin's market cap. It was only 6.1x at the peak in April.
From my maximalist perspective, we aren't that far from Bitcoin becoming a viable global reserve currency (El Salvador just made it legal tender, other countries are investigating doing the same).
The legal tender point is the most important, as to whether or not Bitcoin will become a global reserve currency. The tipping point comes when entire chains of real economic activity can be settled in Bitcoin, and the friction of using Bitcoin for working capital fades away.
Yeah, if this move plays out in El Salvador's favor, other countries are going to try to emulate it, and we'll start seeing significant trade flows settled in Bitcoin. That's when things will start getting really exciting.
That seems like a bright future to me, but my cynical tinfoil hat worries that the US will find some pretext to invade El Salvador to 'root out terrorists' or whatever so that dollar hegemony is not threatened.
Countries that want to run a budget surplus without taking the surplus from their domestic economy must take it from another country. No government wants to take money out of their domestic economy in a way that harms it.
What happens is that these countries buy the safest bonds possible and those are issued by governments. You are relying on the ability of the government to collect taxes to pay the debt and that ability correlates with military power as having a weak military would be a risk vector. A destroyed government is unlikely to honor its debts as seen with the Weimar Republic.
The rhetoric that the US is going around the world with guns to force people to buy their bonds (and therefore USD) doesn't make sense because countries are voluntarily selling products for USD and then buy US treasuries with the USD. They actually want the military protection.
>Because they can force the rest of the world to keep using USD at gunpoint?
People and countries outside the US don't use the dollar because of the US military, any more than they use the Swiss franc because of the Swiss military. They use both currencies (and the UK pound, and the Euro, and the Japanese yen) because decades of experience show that the countries that issue said currencies are the least likely to default on their financial obligations, and are most transparent about their own financials.
Russians and Chinese themselves avoid using their own countries' currencies when abroad as much as possible because they are most aware of this. To put another way, the primacy of the dollar isn't a supply issue (something that the US directly forces), but a demand issue (it's the currency everyone else prefers to use).
(This is where you'll bring up the "petrodollar". No, the petrodollar isn't real. Well, it's real in the sense that oil is, like almost every other product, usually denominated in US dollars when sold internationally. What's not real is the theory that the US has a particular need for (say) Iraq back in the day to denominate its oil sales in dollars, as opposed to Euro. Or that Venezuela attempting to denominate its oil in yuan today surely augurs the collapse of the US economy tomorrow.)
Countries started using the dollar because the US was the most powerful economy left standing after WW2 and thus the only trustworthy issuer of currency. The petrodollar system helped things along even after economies were rebuilt, as it meant that anyone who needed oil (i.e. everyone except OPEC) would also need to keep dollars on hand to pay for it.
After decades of this, we've reached the point where the US Dollar is so deeply embedded in nearly every global supply chain that everyone needs it all the time. I don't think it has anything to do with being transparent about financials or unlikely to default; it's just accepted everywhere and has a better stock-to-flow ratio (i.e. stability) than the alternatives.
I think for as long as the rest of the world wants to export its goods and services to America in exchange for dollars. Maybe a better question is who in the world wants to be the importer of last resort ? Who wants to run trade deficits ?
Trade deficits are a real benefit to the importer and real cost the exporter, but it seems the rest of the world doesn't get this. They want to manufacture using sweatshops, polluted air, local natural resources, so that we can have our Iphones and Teslas and they can have electronic digital dollars in the bank. We should keep doing this till they stop.
In a floating fx currency regime that we practice, China, et al, have to hold/buy dollars in order keep their exports cheap and foreign fx exchange rates stable.
It is fake in the sense that billions of dollars are being minted by crypto without any real use case other than theoretically fixing the financial system "someday". But fake stuff has always been a big part of the economy. Realtors extract 6% of most real estate transactions, but provide minimal "real" value, for example. The important thing is that inflation isn't running away and also businesses are not shutting down rapidly, causing a cascading effect of more businesses to shutdown and fire even more employees.
This makes no sense, if only because the US government is the only entity that can “mint” US dollars.
More directly, just because the brokerage website says you have $x worth of an asset based on multiplying quantity of the asset times most recent sale price of a unit of that asset, unless you can trade it and deposit the cash into your account, you do not have $x.
Good point. I think the financial community has created a false sense of legitimacy for bitcoin by quoting its prices on front pages, displaying performance graphs, etc, as if BTC were as legit as stocks, bonds, and other financial instruments.
No running away inflation? According to what? CPI?
Many people who live in the real world know that CPI is a garbage measure of inflation and life is increasing in price faster than they say.
CPI doesn’t even measure the right thing: inflation is a monetary, not a price phenomenon. It’s not things getting more expensive, it’s the value of money growing less. But they don’t publish the m2 money stock charts any more. Wonder why?
Not sure why you are down voted, everyone (when it benefits them) takes credit for the “greatest economy the world has ever seen” and “record stock market”, simultaneously they ignore record wage stagnation, record income gaps, record homelessness, record student loan defaults, record debt defaults of nearly every kind, record young people living at home to record high ages…I’d say record high unemployment, to which someone would inevitably point to the unemployment numbers and claim it’s actually record low unemployment, which, to your point highlights the farce and disconnect from reality.
The FED is sitting on trillions of taxpayer bailout money from the CARES Act, yet if you took about 1/8th of that money, government could wipe the entire student loan debt, but then you’d hear the media talking point screaming how we can’t afford it.
Canceling debt creates a taxable event for the person with the debt under the tax code. Transferring money to a person and then voiding the liability is indistinguishable from unearned income, and is taxed as such. People aren't going to be very happy when they get hit with an unexpected $10k tax bill due immediately.
Similarly, the people with the largest student loan debt tend to be affluent. Gifting the affluent more money than a poor person who could not afford school may be able to save in their lifetime is a bad look politically, and would be deeply unfair.
> Similarly, the people with the largest student loan debt tend to be affluent.
I question this. I'd assume the largest student loan debts are held by the middle class, because the affluent didn't take out loans because they paid for their education with cash.
> the affluent didn't take out loans because they paid for their education with cash
Not if they didn't become affluent until after going to college and getting a high powered career... case in point, I took out almost $70k in student loans to get an MBA and paid it back within three years of graduation. I actually screwed up by paying it off so quickly, because the interest rate after refinancing was less than 3% and I would have been better off using that money to load up my IRA (which presumably would earn better than 3% on average, as well as provide a tax break).
> Canceling debt creates a taxable event for the person with the debt under the tax code.
Under the current tax code, a forgiven debt isn’t always taxable. I have represented student loan holders and had their student loans forgiven (6 figure debts), and they had no tax liability.
And if student loans were forgiven it would be through the passing of a law, and it would be pretty trivial to include a provision that would remove any tax liability from student loan forgiveness.
And if people had a $10k tax bill due immediately (which you completely made up), they would not be mad if they had $100k or $200k in loan forgiven. It’s funny how the $10k tax bill is your concern on one hand then you shift to saying it would be deeply unfair because the people with the biggest loans tend to be affluent.
Affluent people don’t have student loans because their parents pay for their school. Otherwise the people with the most amount of debt are the biggest victims of the poorly designed system intended to indebt them for their entire lives.
Student loans increase the supply of money. If those students don't take on loans then the government would have to do it. It's very deliberate. And no, someone has to take on those loans. It's just the way things are.
No, it’s not “just the way things are”. Student loans are official government policy codified into law. There is certainly a much better way for the system to have been designed, instead it was designed to allow tuition to be completely unrelated to market conditions. The government could have easily placed a cap on tuition prices/increases to protect students, instead the government allowed universities to set any tuition they want while supplying the loans to the detriment of students.
> This might be an unpopular opinion, but the economy we have right now feels quite fake, for lack of a better word, in the sense that the official numbers that are reported don't seem to reflect its actual health.
opinion - feels - seems ?
Do you have any sources for your unpopular opinion?
This is what happens when a central authority is controlling the economy. Everyone should know that free markets can allocate resources better than any central planner, but still somehow those economists think that we need central bank policies to control the whole thing. Central planning might be appeling idea especially for those who benefit from it, and provides unlimited avenues for complex economic theories, but it just doesn't work in the long run.
> economists think that we need central bank policies to control the whole thing (...) but it just doesn't work in the long run.
Roughly speaking, a central authority might work in certain scenarios, for a short time, to prevent situations where market participants might otherwise panic.
In the long run, the problem is the same authority does not have to all "local", decision-making information available to the individual market participants, and that might prevent the economy from reaching an optimal configuration.
Not a central planned economy. The fed sets interest rates to attempt stabilize the economy in terms of unemployment rates and price stability. The congress spends money in a Keynesian fashion to smooth the business cycle. Other than that, the economy goes where the actors in the economy, the corporations and consumers, want it to go within the rules.
Everyone should know that free markets can allocate resources better than any central planner
for the most part yes, but market failure is a thing... 1929 being the best example...
and what the fed is doing is reacting to trends to prevent the system from tilting out of control, not centrally planning things (when the fed starts making 5-year plans then we can talk)
No, this is what happens when demographic realities make rational behavior impossible.
Old people want to keep their pensions and savings with 0% inflation or even deflation. The one thing they don't want to do is spend money, for obvious reasons. They'd burn through their pension very quickly.
An economy that is not spending money will die. Someone has to spend to keep it going. Interest rates must go to 0% or lower so that someone finally spends their money.
Taking a step back - "repo" is short for "Repurchase Agreement".
Financial Institutions put collateral into an overnight market and receive cash, and then they "agree" to "repurchase" / give the cash back (plus some fee) for the collateral the next day - right?
This is the "opposite" in that Financial Institutions put cash in and get collateral (treasuries) out - right? The transaction is essentially going in the "reverse" direction it traditionally went - which is why it's the "reverse repo market".
It's interesting because "having too much cash" is not usually a problem. Now it is.
What's really weird is they're getting interest to park their money overnight now (it's been zero interest for a while until today).
This is really smoke and mirrors though. Moving the cash into the repo market doesn't change anything, other than now it's an "asset" instead of a "liability." Yes, there are obviously legal differences here, but it's still the same amount of cash owned by the same entity, except now they're getting paid just to park it overnight.
I'm not saying the reverse repo market is nonsense. I'm saying the way the government has structured assets and liabilities in this instance is bizarre and seems like musical chairs. I've actually read up on this and am happy for someone to explain it to me further, but it really seems like they're just inventing new ways to kick the can down the road. I don't think they're actually solving anything; they're just making the problem worse and hiding the symptoms.
> they're just inventing new ways to kick the can down the road
Yes, even mainstream voices are starting to say things like this. Hard to imagine that this doesn't end very, very badly.
The fundamental contradiction is that the Fed wants to goose economic activity with money printing, but simultaneously imposes capital adequacy requirements on banks to prevent systemic risks. You can't have your cake and eat it too; or, in the parlance of classical economics, there's no free lunch.
It's not just the central bank. It's literally every market participant kicking cans down the road. Everyone is saving at the expense of everyone else.
So the banks are lending their cash to the Fed or (repo market), and holding the treasuries (making interest) to let other banks or the Fed borrow the cash for some reason overnight.
The only thing I get from it is that banks are flush with cash and overnight rates should go lower because there is an abundance of cash being lent.
The whole point of this charade is to prevent negative rates. The Fed can put a floor on interbank lending of reserves by paying interest on them, but it also wants to keep a floor under the non-Fed overnight money markets. Reverse repo is the answer, as it can always offer a positive rate even when market participants refuse to.
It means a healthy economy and tons of deals, if it wasn’t so exclusive the banks wouldn’t have any business but it’s hard to say if it would be bad. I think more and smaller deals would be finished
Like, employees could do cashless stock option exercise by just going to the Fed’s overnight lending market instead of dealing with boutique lenders
I kind of like the moving goal posts for being against blockchain based digital assets and settlement, I think it accelerates a lot of the improvements and everyone inside the space gets to participate in this global boom town either way
Its interesting how outdated the detractors ideas get, and fascinating what new detractions they come up with
I've seen a proposal to replace interest rates with a credit tax. It would grant the us government the ability to borrow money at 0% regardless of the interest rates for the private market. This would completely destroy the belief that money is a risk free asset as governments can borrow money at any time and there is no need for government bonds anymore.
When inflation happens you raise the credit tax so that money creation actually causes net deflation once the loans are being paid back.
Just as bank lending creates money, paying back bank loans destroys money. Money is also created or destroyed by banks purchasing or selling debt assets such as government bonds.
2. Banks have been inundated with cash resulting from federal government transfers (stimmy checks, paycheck protection program giveaways, etc.).
3. Banks can't simply accept cash from depositors and be done with it. They need to convert that cash into an asset of some kind. And right now, the asset of choice is short term treasuries (exactly the thing in short supply).
Reverse repo is when the Fed loans treasuries to banks, typically at very low rate and no more than one day. This avoids the need for the Fed to sell its short term treasuries on the open market.
By running reverse repo, the Fed can prevent short term interest rates from falling below zero (they have briefly broken this level in recent months). Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever.
Of course, you might ask why on earth the Fed doesn't just sell the treasuries it picked up by performing all that quantitative easing over the last 18 months or so. This is what's known as "quantitative tightening." If you want to see markets really freak out, watch what happens if the Fed were to suddenly announce a massive quantitative tightening program.
Whether or not any of this matters is not clear. The Fed still has some tricks up its sleeve to keep the train rolling. And once the TGA is spent down, that could open the path to much more short term debt issuance. Of course, if demand grows faster than supply at that point, things could get crazy.
Different answer than you’re asking for, but the debt limit is probably not even legal. Congress authorizes the Executive branch to spend funds, not to manage the debt. The Constitutional question will probably never be answered, but my gut tells me if it is violated, that there is no real remedy.
> Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever.
Not the first time ever. At least two money market funds "broke the buck" (that is, lost value) in 2008, IIRC.
> Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever.
Panic how? what will they do, withdraw the cash that banks don't want anyway?
I dont undertand the weird mythologizing of 0% interest rate, pretending transaction costa dont exist.
I do agree with you that most commentators freak out about the zero bound more than is justified. Especially given the fact that negative rates have existed in Europe and Japan for a while without any major effects.
But generally, banks are extremely discourages, both by regulation and convention, from charing negative interest rates on consumer accounts. The first bank that "burns" funds in your checking or savings account is going to get assailed by a pitchfork wielding mob. So you're forced to borrow deposits at zero, and lend negative, which is obviously unprofitable. Negative interest rates do create a game of hot potato, where banks continuously try to offload their consumer depositors on one another.
The current approach seems to be negative rates on deposits over a certain amount. E.g. ING Belgium will have a -0.5% interest on deposits over 250K EUR starting next month[1].
Rabobank.be simply decided to close all accounts[2], which is another way to get rid of customer deposits while avoiding mobs. It will increase the pressure on the other banks who will receive those deposits though.
> Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever.
Apparently "ever" covers neither 2008 (where the Lehman Brothers bankruptcy caused the money market to implode) nor 1994, nor 1978.
A significant number of US money market funds have been operating under fee waivers to keep yields positive since last year.
One of my retirement accounts sent me an email stating that their fee waiver expires June 30 of this year and can’t be extended. This is very different from “breaking the buck”, but I am curious to see what things would look like if money market yields went negative, which apparently is likely to happen next month.
I’m not really sure. It would definitely mean that holding cash in an investment account costs money - you have to invest it in something to avoid losing money. But then again, investing in something involves the risk of losing a lot more money than holding it in “cash”!
Reverse repo is when the Fed loans treasuries to banks, typically at very low rate and no more than one day. This avoids the need for the Fed to sell its short term treasuries on the open market.
coming from a programmers mindset, my immediate reaction was "this seems like a hack, whats the root cause of the issue, we should fix that instead"...
i wonder what us the root cause? or in economics, i guess its never so straightforwards...?
Whenever I delve into this stuff in depth it feels like people are explaining the world's most complicated PID controller for dealing with the human economy, which is itself a product of human psychology. Since no one understands the latter, it seems like economics is just the constant over-fitting of mathematics to the incomprehensible.
It is definitely a process with an incredibly long lag. What's amazing is that some of these control loops have only been operational since 2008 and/or 2013.
>"this seems like a hack, whats the root cause of the issue, we should fix that instead"...
There is nothing to fix. You have an aging population that pays back loans and never takes any new ones on. This contracts the money supply. Business profitability shrinks as less people spend their money and more save it instead. Given a limited number of dollars saving cannot continue forever. At some point you have saved every dollar there is. The only way you can save even more money is by creating new dollars. It's an entirely human made problem. If you stop saving beyond the point where it makes sense the problem goes away.
Telling people to stop saving doesn't work because their decision to save is just the result of being at the end of their life. The other solution is to make the dollars real. E.g. by investing the money and letting the dollars in your bank account represent a physical resource somewhere on the planet. This approach suffers from a problem: Companies are saving as well. The interest rates on credit are too high to justify investments. You can just sit on cash for a risk free loss vs the uncertainty of investing into a market that is shrinking in profitability as people stop spending money. So the only answer left is to let the government take on the debt so the retiring people and companies don't have to.
If the government decides to be "financially (ir)responsible" it can just kick the problem back to the private sector by running a balanced budget or even a surplus. Without negative interest rates the problem will not resolve itself and zero sum games start dominating until the only acceptable solution is a war. At that point we get to decide whether we want to kill people in our country or go to another country and kill people there.
>people at the end of their life aren't saving,
>they're spending the money they saved via pensions earlier in their life.
I'm confused. You are contradicting yourself. Saving isn't just the accumulation of money. Saving is the act of keeping money in your bank account. Unless you spend the entirety of your pension, the money you haven't spent is saved until you die.
By that definition anyone with a bank balance above zero is saving money, but that's not the normal definition of the term. Saving money does normally mean the accumulation of money.
> Banks have been inundated with cash resulting from federal government transfers (stimmy checks, paycheck protection program giveaways, etc.).
Oh man, you left out one of the weirdest ones going on right now! Because of the insanity of the housing market, there are tons of people who close on the house they’re selling a week or more before they close on the house they’re buying and are parking half a million or more in a bank account for a very short duration!
I’ve been in two hotels long-term this spring and both have been filled with people in this situation. They can’t be the only two hotels in the country with people doing this…
> 3. Banks can't simply accept cash from depositors and be done with it. They need to convert that cash into an asset of some kind. And right now, the asset of choice is short term treasuries (exactly the thing in short supply).
When interest rates are 0% there's nothing stopping them from doing this.
Reverse repo is where money goes to die 24 hours at a time. It isn't the opposite of QE because it is a 24 hour operation that reverses at the end. But string a lot of 24 hours together and you get something that behaves like Quantitative Tightening during the duration.
"However, a facility that could allow a very rapid and unexpected expansion of ON RRP might
exacerbate disruptive flight-to-quality flows during a period of financial stress and thus could
undermine financial stability. Market observers and policymakers both have described such
risks. For example, the Minutes of the June 2014 FOMC meeting state that “[m]ost participants
expressed concerns that in times of financial stress, the facility’s counterparties could shift
investments toward the facility and away from financial and nonfinancial corporations, possibly
causing disruptions in funding that could magnify the stress” (FOMC 2014a). "
This event doesn't make sense if you have assumed that banks take deposits and then loan that deposit money out.
In reality deposits only cover around 10% of the loan. This is called fractional reserve banking and it means that a bank loan is actually a money creation event!
Cash might seem like an asset. But in reality the loan is the asset that pays the bank money and cash is the liability because the cash can be withdrawn at any time (it is owed to someone else). Increased deposits are bad for banks if they cannot use it to generate a loan asset (which is the case today).
However, I am still trying to understand why increased deposit liabilities are such a problem that the bank regulations force this issue to be resolved overnight in a reverse repo operation.
Fairly new at this and don't work in the sector, just someone who enjoys this stuff.
I think it's because if the banks have too much cash, that's expensive because it depreciates. They don't want just "mattress money", so when too many people deposit and not enough people withdraw, banks have too much cash, and need a place to park it. If they can't park it anywhere, that means that they don't want more cash, which pushes the interest rates down. Fed has decided that interest rates going down is bad, so they basically say "hey, we'll take the cash off your books, give you a small interest payment for buying the treasuries" and now the banks don't mind taking more cash in.
Basically this is a way of keeping the interest rates higher on deposits, because the banks get subsidized to use that cash to borrow Treasuries, this gets unwound every night. So the banks can operate like they don't have too many deposit liabilities, even though they would without reverse repo.
I think this is a defense against inflation: If banks can't earn anything from cash, that means they have to push out more loans. Loans add risk/leverage (because it's that money creating event) and they also serve to increase monetary supply, causing inflation. Fed has decided that they'd rather control this process instead of leaving it to the free market in hopes that the situation returns to normal instead of causing additional inflation. This could be just kicking the can down the road, but what do I know.
> In reality deposits only cover around 10% of the loan. This is called fractional reserve banking and it means that a bank loan is actually a money creation event!
That's not how fractional reserve banking works. If I deposit $100 in a bank, they're not allowed to lend out $1000. In fact given a 10% cash reserve ratio, the limit is actually $90. The other $10 has to stay at the bank "in reserve", at least in theory. (In practice there's additional complexity because banks can borrow money to fulfill their reserve requirements.)
When people talk about money creation from fractional reserve banking, what they mean is that someone has $90 from the loan and someone else has $100. Which sums to $190: more than the initial deposit.
Fractional reserve banking as a model actually requires deposits in order to make loans, but you're correct in saying that banks do not lend out deposits at all, they in fact create money by lending.
This is the clearest overview of the process I've ever come across, and it's from the Bank of England who should know how :)
It isn’t resolved. It’s an asset swap that gives the bank free income.
Fractional reserve banking is a myth. All deposits come from banks making loans. They are the balancing item on the balance sheet. Banks make loans until they run out of creditworthy customers prepared to pay the current price of money.
However government payments effectively force banks to make loans to the Fed on terms dictated by the Fed.
All a reverse repo is, is the Fed offering alternative terms for that loan for a day.
Stupid idea: Let people mail invoices to the Fed and the Fed will pay for them.
If people start spending money again things will go back to normal. The hope is that the pandemic makes people realize that money is not a perfect risk free asset that you can hold onto forever.
The podcast Making Sense by Jeff Snider and Emil Kalinowski dig into how the Fed functions and how dollars/collateral affect the (world) economy. Very interesting if you're looking to learn more about this. Jeff also has some very informative blog posts.
Yes! This. Consideration of the repo markets without understanding Eurodollars means the entire conversation is meaningless. There is not enough GOOD collateral. Treasuries are the only thing banks trust because they know how fragile everything is (rehypothecations, nake shorts). This is the continuation of the '08 crash, not a new one.
I feel like if you are up to these antics, really bad shit is happening to keep economic growth up in the face of very bad underlying productivity growth
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[ 4.1 ms ] story [ 224 ms ] threadRight, the current situation is a money market "plumbing" issue; there are more deposits than banks can handle due to GSIB balance sheet regulations.
Here's some background info: https://fsforum.com/news/fixing-whats-broken-the-gsib-surcha...
tl;dw: too much money in the system, big banks don't want the liability, push it to money market funds which use short term treasury while treasury is trying to increase their long term debt and reduce the short term ones. essentially, not as scary as it sounds.
How is holding lots of cash a liability?
Source? Does it? I thought negative interest rates were a thing in the EU but not in the US yet?
So putting the cash to work (in a reverse repo) even at 0.05% allows them to convert it to an asset and generate some return.
People advocating for deflation say they will still spend their money but what they really mean is that they will spend the money on basic living expenses and that is it. They will save the rest. How else would they benefit from deflation? If they spent all their money they wouldn't benefit from deflation as their incomes stagnate or even fall.
Deflation isn't just a fall in prices of goods, it's also a fall in cost of labor because the price of goods is what pays for the labor.
It's pretty easy to illustrate how deflation ruins the profitability of companies. You have a production line that generates $5 million revenue a year. You have fixed costs of $4 million. Your profit is $1 million. As the population gets older, demand for your products goes down by 20%. Now you have $4 million in revenue and your costs went down slightly to $3.5 million. You're making half the profit even though revenue only fell by 20%. Running the production line at below capacity makes the production line increasingly less profitable until it no longer makes sense to run it.
A fixed % reduction in revenue can result in a much higher loss in profitability. Low profitability is a self reinforcing cycle as companies stop borrowing money and the money creation process is being interrupted leading to further deflation that cuts into profitability until you reach the smallest possible economy. That economy would have a GDP significantly smaller than $22 trillion USD but the level of savings didn't change meaningfully.
Despite the illusion of deflation, your money is actually losing value over time as the economy gets smaller because your dollars are just a claim to the output of the economy and if the economy shrinks so does the ability to serve your claims. When people realize that the money they are holding onto wasn't risk free after all it's too late and we get very high inflation or even hyper inflation as people get rid of dollars that have no counter part in reality.
[0]: https://www.lynalden.com/may-2021-newsletter/
But more than likely you need to understand what Reverse Repo is and why it impacts all of us. Here's a great ELI5 On Reddit.
https://www.reddit.com/r/investing/comments/1ixbwf/eli5_repo...
TLDR: More inflation and shakey times ahead.
"as it raised the rate on its overnight Reverse Repo facility from 0% to 0.05%"
[0] What is a repo? - https://www.richmondfed.org/publications/research/econ_focus...
[1] Repos in charts - https://fred.stlouisfed.org/series/RRPONTSYD
If inflation happens, the 30-year bond will likely rise with inflation: maybe 3% or 4%. It is better to store your cash today, than to "lock in" to 2.2% APY.
Next month, if inflation starts to kick in, maybe you'll get 3% over the next 30 years instead of 2.2% over the next 30 years.
-----------
Obviously, a 30-year bond is 'different' than cash. However, when you start looking at 6-months, 3-months, 1-month, and overnight lending rates... things look more-and-more like cash.
No one ever holds "cash" per se, its always better to lend it out (even for only 1 day, you wanna have that cash generate more cash). By betting on shorter timescales (ex: 1-month), you're really betting that the longer-time scale bonds (ex: a 30-year) will rise up.
What does this gain them? Are they paid interest?
This relates to scarcity of short-duration treasuries, it's mostly a scary sounding non-event
Central banks are basically pawn shops that get to create their own cash to lend out.
In more concrete terms, banks (i.e. members of the Federal Reserve System) keep USD reserves on deposit at the Fed. The only thing they can do with these reserves is loan them overnight to other member banks at a market-determined interest rate--the Federal Funds Rate--which is targeted to a certain range by the Fed's policymaking committee. The Fed also pays interest on these reserves, at two rates: one rate for required reserves, and another for excess reserves. These serve to put a floor under the FFR, since there is no reason to lend reserves at a rate below what you can get by just sitting on them.
Of note is the fact that only Fed member banks have access to this, so other financial institutions must go through the banks when they have excess cash to park somewhere. In essence, the bank can accept overnight cash from non-banks and split the IOER with them. This transaction is consummated through a repurchase agreement (repo) in which the bank sells a "safe" asset to the counterparty with an agreement to buy it back soon thereafter (often overnight, but potentially up to a year later) for a slightly elevated price. The price difference is effectively the counterparty's cut of the IOER accrued during the time that the bank was sitting on the cash. Repo transactions are used for all sorts of short-term funding needs among non-banks, so the overnight rate on high-quality repo is roughly equivalent to the FFR.
It is for this reason that the Fed started its reverse repo operation, whereby it offers basically the same deal that I described above to certain qualified non-bank counterparties, in order to set a floor on overnight repo rates. (You can ignore the "reverse" in the name; it just means that the Fed is the one lending securities in the transaction.) The Fed is extremely wary of negative interest rates and the effect they might have on market behavior, so reverse repo appears to be the preferred method for preventing this.
So what does it mean when usage of this facility skyrockets? Well, it means that banks are not willing to engage in overnight repo at the rate that the Fed is offering, which in turn means that there is suddenly a large imbalance between repo supply (high-quality lendable securities held by banks) and demand (idle cash held by non-banks). As to what that fact means for the near future, opinions may differ sharply.
Banks essentially make money by arbitraging time preferences--they borrow short term (e.g. demand deposits which can be withdrawn at any time) at very low interest rates, and lend long term for much higher rates to risky ventures. They realize a profit by earning a sufficient spread between these rates to offset losses due to counterparty risk (i.e. default) on their lending. One consequence of this model is that a bank may abruptly become insolvent due to short term market conditions, if it cannot roll over its sources of funding. Since financial assets can typically be liquidated quickly (as opposed to, say, a bunch of idle factories owned by a defunct manufacturer) this can lead to systemic instability when an insolvent bank is forced to sell everything and drags down the prices for assets held on other banks' balance sheets.
After the GFC, regulators decided to come up with a more nuanced set of rules about how "healthy" a large bank's balance sheet must be, in order to spot trouble before it exacerbates a liquidity crisis and produces a solvency crisis. A business's leverage ratio is basically capital (equity) divided by assets (or its inverse, depending on your framing). For banks, however, just looking at leverage is not that helpful since the assets being held have very different levels of risk. The new metric is the Supplemental Leverage Ratio (SLR), which includes off-balance sheet expo...
The Fed raises rates in two years, and banks can lend out, but people a) can't afford the monthly payments for current prices at higher interest rates or b) have extra money from QE and don't need debt. Prices fall for things that require debt (cars, houses, college), but go up for things that people can pay for in cash? Less total is lended out due to the falling prices of things and increased interest rates? The whole volume of money moving around the economy decreases.
The Fed can inject more money, but there will already be too much (at large banks and corporations) on the market that is already not allocated effectively.
I guess... I'd be interested to hear your thoughts on what happens next?
Banks clearly don't think there's much risk of long term high inflation.
Your debt is liquified but your house value also goes into the crapper.
Also “the system” isn’t setup to be nice to you.
Current headlines use the broad statistics, such as the most exclusive unemployment stats, that don't really capture what's happening on Main Street.
The reporting on the economy barely pokes at issues and are generally just looking for general correlations, such as "Stocks do X as Y does that," or "GDP is doing X while Y is doing Z."
You probably know this, but just to clarify economics has many more complicated statistics than those that make it into newspaper headlines. For example, the "unemployment number" is technically U1. U2, U3, U4, etc. capture different nuances.
The thing is is your average American would never even consider the ultimate possibility of a foundational collapse of their economy and currency.
And it's not just the average American. Nearly all hedge funds etc have USD as their basis.
Bitcoin, Gold, Stocks, real estate etc has a value tag that's denominated in Dollars.
You open up your portfolio and be happy when the USD value goes up in a nice green color.
But what happens when USD gets diluted and debased so much that it's not possible to stop anymore. Are we not past point of no return already?
Debasement of currency marked the end of the Roman empire, why would American empire be any different?
Because US has nukes?
Because they can force the rest of the world to keep using USD at gunpoint?
For how long?
The fall of the Roman Empire had so many causes that to attribute it to one thing is misleading at best.
This is false, many have CAD, EUR, and other currencies as their basis.
> Bitcoin, Gold, Stocks, real estate etc has a value tag that's denominated in Dollars.
This is false as well. You can measure BTC,Gold, stocks or realestate in any currency you want.
Do you really think Canadians denominate their real estate in USD? Why would BTC, Gold or stocks be any different.
The US denominates BTC, Gold, Stocks and real estate in USD. The reset of hte world uses their own currency.
And the alternative? The EUR which is held by an EU that will likely break in the future. The CNY which is held by China (great idea :) ) or Russia's currency which is inflating like there is no tomorrow.
Bitcoin/Gold could be a hedge but it's quite volatile to preserve value especially for short/medium term holding periods.
There is no alternative to the USD at the moment.
Which is a huge if! That's the maximalist bet, and I still have trouble believing in it even as I've watched intermediate predictions come true.
If the BTC chain became a Schelling point, where all market players see it as their best move to hold some, then eventually a satoshi could be worth about a 2021 US cent. It would then be unlikely to fluctuate more than a fraction of a percent in BTC/fiat pairs per day, unless one of those fiat coins happened to be hyperinflating.
If both of those things happened, then pricing things in satoshis would be more stable than pricing them in fiat, because that's what hyperinflation is: it's when inflation in a currency gets so bad that it becomes a bad unit of account.
The fact that there's no alternative to the USD at the moment is the best argument for the BTC chain forming that Schelling point. But! It hasn't happened, and contrary the maximalists, there is no law of nature which says that it will.
From my maximalist perspective, we aren't that far from Bitcoin becoming a viable global reserve currency (El Salvador just made it legal tender, other countries are investigating doing the same).
The moon may not be that far away.
That seems like a bright future to me, but my cynical tinfoil hat worries that the US will find some pretext to invade El Salvador to 'root out terrorists' or whatever so that dollar hegemony is not threatened.
What happens is that these countries buy the safest bonds possible and those are issued by governments. You are relying on the ability of the government to collect taxes to pay the debt and that ability correlates with military power as having a weak military would be a risk vector. A destroyed government is unlikely to honor its debts as seen with the Weimar Republic.
The rhetoric that the US is going around the world with guns to force people to buy their bonds (and therefore USD) doesn't make sense because countries are voluntarily selling products for USD and then buy US treasuries with the USD. They actually want the military protection.
People and countries outside the US don't use the dollar because of the US military, any more than they use the Swiss franc because of the Swiss military. They use both currencies (and the UK pound, and the Euro, and the Japanese yen) because decades of experience show that the countries that issue said currencies are the least likely to default on their financial obligations, and are most transparent about their own financials.
Russians and Chinese themselves avoid using their own countries' currencies when abroad as much as possible because they are most aware of this. To put another way, the primacy of the dollar isn't a supply issue (something that the US directly forces), but a demand issue (it's the currency everyone else prefers to use).
(This is where you'll bring up the "petrodollar". No, the petrodollar isn't real. Well, it's real in the sense that oil is, like almost every other product, usually denominated in US dollars when sold internationally. What's not real is the theory that the US has a particular need for (say) Iraq back in the day to denominate its oil sales in dollars, as opposed to Euro. Or that Venezuela attempting to denominate its oil in yuan today surely augurs the collapse of the US economy tomorrow.)
After decades of this, we've reached the point where the US Dollar is so deeply embedded in nearly every global supply chain that everyone needs it all the time. I don't think it has anything to do with being transparent about financials or unlikely to default; it's just accepted everywhere and has a better stock-to-flow ratio (i.e. stability) than the alternatives.
Other countries are dumping their deficit into the US and we are the ones pretending that the US is doing something wrong.
This makes no sense, if only because the US government is the only entity that can “mint” US dollars.
More directly, just because the brokerage website says you have $x worth of an asset based on multiplying quantity of the asset times most recent sale price of a unit of that asset, unless you can trade it and deposit the cash into your account, you do not have $x.
Many people who live in the real world know that CPI is a garbage measure of inflation and life is increasing in price faster than they say.
CPI doesn’t even measure the right thing: inflation is a monetary, not a price phenomenon. It’s not things getting more expensive, it’s the value of money growing less. But they don’t publish the m2 money stock charts any more. Wonder why?
Because they moved savings deposits into M1. So the old M1 and M2 charts are retired and replaced with M1SL and M2SL.
The FED is sitting on trillions of taxpayer bailout money from the CARES Act, yet if you took about 1/8th of that money, government could wipe the entire student loan debt, but then you’d hear the media talking point screaming how we can’t afford it.
Similarly, the people with the largest student loan debt tend to be affluent. Gifting the affluent more money than a poor person who could not afford school may be able to save in their lifetime is a bad look politically, and would be deeply unfair.
I question this. I'd assume the largest student loan debts are held by the middle class, because the affluent didn't take out loans because they paid for their education with cash.
Not if they didn't become affluent until after going to college and getting a high powered career... case in point, I took out almost $70k in student loans to get an MBA and paid it back within three years of graduation. I actually screwed up by paying it off so quickly, because the interest rate after refinancing was less than 3% and I would have been better off using that money to load up my IRA (which presumably would earn better than 3% on average, as well as provide a tax break).
Under the current tax code, a forgiven debt isn’t always taxable. I have represented student loan holders and had their student loans forgiven (6 figure debts), and they had no tax liability.
And if student loans were forgiven it would be through the passing of a law, and it would be pretty trivial to include a provision that would remove any tax liability from student loan forgiveness.
And if people had a $10k tax bill due immediately (which you completely made up), they would not be mad if they had $100k or $200k in loan forgiven. It’s funny how the $10k tax bill is your concern on one hand then you shift to saying it would be deeply unfair because the people with the biggest loans tend to be affluent.
Affluent people don’t have student loans because their parents pay for their school. Otherwise the people with the most amount of debt are the biggest victims of the poorly designed system intended to indebt them for their entire lives.
No, it’s not “just the way things are”. Student loans are official government policy codified into law. There is certainly a much better way for the system to have been designed, instead it was designed to allow tuition to be completely unrelated to market conditions. The government could have easily placed a cap on tuition prices/increases to protect students, instead the government allowed universities to set any tuition they want while supplying the loans to the detriment of students.
opinion - feels - seems ?
Do you have any sources for your unpopular opinion?
Roughly speaking, a central authority might work in certain scenarios, for a short time, to prevent situations where market participants might otherwise panic.
In the long run, the problem is the same authority does not have to all "local", decision-making information available to the individual market participants, and that might prevent the economy from reaching an optimal configuration.
and what the fed is doing is reacting to trends to prevent the system from tilting out of control, not centrally planning things (when the fed starts making 5-year plans then we can talk)
Old people want to keep their pensions and savings with 0% inflation or even deflation. The one thing they don't want to do is spend money, for obvious reasons. They'd burn through their pension very quickly.
An economy that is not spending money will die. Someone has to spend to keep it going. Interest rates must go to 0% or lower so that someone finally spends their money.
Long but worth the education (if you're interested)
Financial Institutions put collateral into an overnight market and receive cash, and then they "agree" to "repurchase" / give the cash back (plus some fee) for the collateral the next day - right?
This is the "opposite" in that Financial Institutions put cash in and get collateral (treasuries) out - right? The transaction is essentially going in the "reverse" direction it traditionally went - which is why it's the "reverse repo market".
It's interesting because "having too much cash" is not usually a problem. Now it is.
This is really smoke and mirrors though. Moving the cash into the repo market doesn't change anything, other than now it's an "asset" instead of a "liability." Yes, there are obviously legal differences here, but it's still the same amount of cash owned by the same entity, except now they're getting paid just to park it overnight.
I'm not saying the reverse repo market is nonsense. I'm saying the way the government has structured assets and liabilities in this instance is bizarre and seems like musical chairs. I've actually read up on this and am happy for someone to explain it to me further, but it really seems like they're just inventing new ways to kick the can down the road. I don't think they're actually solving anything; they're just making the problem worse and hiding the symptoms.
Yes, even mainstream voices are starting to say things like this. Hard to imagine that this doesn't end very, very badly.
The fundamental contradiction is that the Fed wants to goose economic activity with money printing, but simultaneously imposes capital adequacy requirements on banks to prevent systemic risks. You can't have your cake and eat it too; or, in the parlance of classical economics, there's no free lunch.
The only thing I get from it is that banks are flush with cash and overnight rates should go lower because there is an abundance of cash being lent.
Seems like a game. Must be nice to be a banker.
It means a healthy economy and tons of deals, if it wasn’t so exclusive the banks wouldn’t have any business but it’s hard to say if it would be bad. I think more and smaller deals would be finished
Like, employees could do cashless stock option exercise by just going to the Fed’s overnight lending market instead of dealing with boutique lenders
You’d think MySQL would have been the tool to tackle this obvious use case over all these years if you read this forum
Its interesting how outdated the detractors ideas get, and fascinating what new detractions they come up with
It's just ice cream in the end.
The fed can affect money supply by raising interest rates.
When inflation happens you raise the credit tax so that money creation actually causes net deflation once the loans are being paid back.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
https://fred.stlouisfed.org/series/RRPONTSYD
This is clearly the highest level of reverse repo since the program was introduced, by a wide margin.
There are three factors behind this:
1. The Treasury has temporarily backed off issuance of short term debt as it drains down an overflowing General Account.
https://www.reuters.com/article/us-usa-treasury-liquidity-ex...
2. Banks have been inundated with cash resulting from federal government transfers (stimmy checks, paycheck protection program giveaways, etc.).
3. Banks can't simply accept cash from depositors and be done with it. They need to convert that cash into an asset of some kind. And right now, the asset of choice is short term treasuries (exactly the thing in short supply).
Reverse repo is when the Fed loans treasuries to banks, typically at very low rate and no more than one day. This avoids the need for the Fed to sell its short term treasuries on the open market.
By running reverse repo, the Fed can prevent short term interest rates from falling below zero (they have briefly broken this level in recent months). Such an occurrence would send a very unexpected signal to markets and could result in panic as investors see the value of money market funds shrink for the first time ever.
Of course, you might ask why on earth the Fed doesn't just sell the treasuries it picked up by performing all that quantitative easing over the last 18 months or so. This is what's known as "quantitative tightening." If you want to see markets really freak out, watch what happens if the Fed were to suddenly announce a massive quantitative tightening program.
Whether or not any of this matters is not clear. The Fed still has some tricks up its sleeve to keep the train rolling. And once the TGA is spent down, that could open the path to much more short term debt issuance. Of course, if demand grows faster than supply at that point, things could get crazy.
https://www.rollcall.com/2021/06/14/democrats-have-no-easy-o...
factual answers please, partisans
https://en.wikipedia.org/wiki/History_of_United_States_debt_...
Not the first time ever. At least two money market funds "broke the buck" (that is, lost value) in 2008, IIRC.
Panic how? what will they do, withdraw the cash that banks don't want anyway?
I dont undertand the weird mythologizing of 0% interest rate, pretending transaction costa dont exist.
But generally, banks are extremely discourages, both by regulation and convention, from charing negative interest rates on consumer accounts. The first bank that "burns" funds in your checking or savings account is going to get assailed by a pitchfork wielding mob. So you're forced to borrow deposits at zero, and lend negative, which is obviously unprofitable. Negative interest rates do create a game of hot potato, where banks continuously try to offload their consumer depositors on one another.
I think some banks have already done this as a result of Europe's persistent negative rates. See this Bloomberg article for a citation: https://www.bloomberg.com/news/articles/2019-09-22/banks-jus...
Rabobank.be simply decided to close all accounts[2], which is another way to get rid of customer deposits while avoiding mobs. It will increase the pressure on the other banks who will receive those deposits though.
[1] https://www.ing.be/en/retail/daily-banking/savings-accounts/...
[2] https://www.brusselstimes.com/news/business/174304/200000-be...
Apparently "ever" covers neither 2008 (where the Lehman Brothers bankruptcy caused the money market to implode) nor 1994, nor 1978.
https://en.wikipedia.org/wiki/Money_market_fund#Breaking_the...
That said, I think it's safe to say nobody is prepared for what will happen if this became the norm.
One of my retirement accounts sent me an email stating that their fee waiver expires June 30 of this year and can’t be extended. This is very different from “breaking the buck”, but I am curious to see what things would look like if money market yields went negative, which apparently is likely to happen next month.
The Fed(eral Reserve) and the federal government are not the same thing. The forming owning debt of the latter isn’t owning its own debt.
i wonder what us the root cause? or in economics, i guess its never so straightforwards...?
I expect this will end badly as they keep kicking the can down the road.
A recession - a real one - would help us rest this problem, but the Fed is afraid of hosing all the 401k retirement money in the process.
There is nothing to fix. You have an aging population that pays back loans and never takes any new ones on. This contracts the money supply. Business profitability shrinks as less people spend their money and more save it instead. Given a limited number of dollars saving cannot continue forever. At some point you have saved every dollar there is. The only way you can save even more money is by creating new dollars. It's an entirely human made problem. If you stop saving beyond the point where it makes sense the problem goes away.
Telling people to stop saving doesn't work because their decision to save is just the result of being at the end of their life. The other solution is to make the dollars real. E.g. by investing the money and letting the dollars in your bank account represent a physical resource somewhere on the planet. This approach suffers from a problem: Companies are saving as well. The interest rates on credit are too high to justify investments. You can just sit on cash for a risk free loss vs the uncertainty of investing into a market that is shrinking in profitability as people stop spending money. So the only answer left is to let the government take on the debt so the retiring people and companies don't have to.
If the government decides to be "financially (ir)responsible" it can just kick the problem back to the private sector by running a balanced budget or even a surplus. Without negative interest rates the problem will not resolve itself and zero sum games start dominating until the only acceptable solution is a war. At that point we get to decide whether we want to kill people in our country or go to another country and kill people there.
I'm confused. You are contradicting yourself. Saving isn't just the accumulation of money. Saving is the act of keeping money in your bank account. Unless you spend the entirety of your pension, the money you haven't spent is saved until you die.
Oh man, you left out one of the weirdest ones going on right now! Because of the insanity of the housing market, there are tons of people who close on the house they’re selling a week or more before they close on the house they’re buying and are parking half a million or more in a bank account for a very short duration!
I’ve been in two hotels long-term this spring and both have been filled with people in this situation. They can’t be the only two hotels in the country with people doing this…
When interest rates are 0% there's nothing stopping them from doing this.
Here is a quote from a paper at the Federal Reserve itself from 2015:
https://www.federalreserve.gov/econresdata/feds/2015/files/2...
"However, a facility that could allow a very rapid and unexpected expansion of ON RRP might exacerbate disruptive flight-to-quality flows during a period of financial stress and thus could undermine financial stability. Market observers and policymakers both have described such risks. For example, the Minutes of the June 2014 FOMC meeting state that “[m]ost participants expressed concerns that in times of financial stress, the facility’s counterparties could shift investments toward the facility and away from financial and nonfinancial corporations, possibly causing disruptions in funding that could magnify the stress” (FOMC 2014a). "
In reality deposits only cover around 10% of the loan. This is called fractional reserve banking and it means that a bank loan is actually a money creation event!
Cash might seem like an asset. But in reality the loan is the asset that pays the bank money and cash is the liability because the cash can be withdrawn at any time (it is owed to someone else). Increased deposits are bad for banks if they cannot use it to generate a loan asset (which is the case today).
However, I am still trying to understand why increased deposit liabilities are such a problem that the bank regulations force this issue to be resolved overnight in a reverse repo operation.
I think it's because if the banks have too much cash, that's expensive because it depreciates. They don't want just "mattress money", so when too many people deposit and not enough people withdraw, banks have too much cash, and need a place to park it. If they can't park it anywhere, that means that they don't want more cash, which pushes the interest rates down. Fed has decided that interest rates going down is bad, so they basically say "hey, we'll take the cash off your books, give you a small interest payment for buying the treasuries" and now the banks don't mind taking more cash in.
Basically this is a way of keeping the interest rates higher on deposits, because the banks get subsidized to use that cash to borrow Treasuries, this gets unwound every night. So the banks can operate like they don't have too many deposit liabilities, even though they would without reverse repo.
I think this is a defense against inflation: If banks can't earn anything from cash, that means they have to push out more loans. Loans add risk/leverage (because it's that money creating event) and they also serve to increase monetary supply, causing inflation. Fed has decided that they'd rather control this process instead of leaving it to the free market in hopes that the situation returns to normal instead of causing additional inflation. This could be just kicking the can down the road, but what do I know.
That's not how fractional reserve banking works. If I deposit $100 in a bank, they're not allowed to lend out $1000. In fact given a 10% cash reserve ratio, the limit is actually $90. The other $10 has to stay at the bank "in reserve", at least in theory. (In practice there's additional complexity because banks can borrow money to fulfill their reserve requirements.)
When people talk about money creation from fractional reserve banking, what they mean is that someone has $90 from the loan and someone else has $100. Which sums to $190: more than the initial deposit.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- John Kenneth Galbraith
This is the clearest overview of the process I've ever come across, and it's from the Bank of England who should know how :)
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
There's another one covering money more generally as well.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Fractional reserve banking is a myth. All deposits come from banks making loans. They are the balancing item on the balance sheet. Banks make loans until they run out of creditworthy customers prepared to pay the current price of money.
However government payments effectively force banks to make loans to the Fed on terms dictated by the Fed.
All a reverse repo is, is the Fed offering alternative terms for that loan for a day.
If people start spending money again things will go back to normal. The hope is that the pandemic makes people realize that money is not a perfect risk free asset that you can hold onto forever.
https://share.transistor.fm/s/b33f1c10