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.
> 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…
> 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.
Apparently "ever" covers neither 2008 (where the Lehman Brothers bankruptcy caused the money market to implode) nor 1994, nor 1978.
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.
>"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.
> 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.
> 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.
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.
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.
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 :)
> 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.
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.
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.
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.
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.
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.
> 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.
>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.)
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.
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.
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.
> 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.
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.
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.
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?
> 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?
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
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.
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.
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 exposure. Notably, the bank's reserves at the Fed as well as holdings of US Treasuries are normally included in the denominator (risk assets), but at the start of the pandemic an exemption was put in place so these could be excluded, thereby boosting the leverage ratio and allowing banks to engage in more lending than would otherwise be allowed by the normal SLR calculation.
However, the SLR exemption has now been allowed to expire, and thus banks must tighten up their balance sheets to avoid the severe restrictions of a low SLR. We are now squeezed between the Scylla and Charybdis of financial regulation and monetary stimulus, as the Fed engages in QE to encourage lending towards riskier economic activity while simultaneously imposing leverage constraints to prevent large banks from posing systemic risks. The Fed's reverse repo has become the pressure release valve, as banks are completely hamstrung by their inability to offer negative rates so everyone is now going straight to the Fed for their overnight deposits.
Ironically, this is essentially a (short-term) negation of the Fed's QE activity, as the Fed is simultaneously purchasing assets as well as lending them out on an ongoing basis. In other words, the market is sending a pretty clear signal that QE is really unnecessary at this point in time.
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?
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.
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.
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.
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.
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.
Readit News
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.
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…
Not the first time ever. At least two money market funds "broke the buck" (that is, lost value) in 2008, IIRC.
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.
https://www.rollcall.com/2021/06/14/democrats-have-no-easy-o...
factual answers please, partisans
i wonder what us the root cause? or in economics, i guess its never so straightforwards...?
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 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.
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.
When interest rates are 0% there's nothing stopping them from doing this.
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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.
https://share.transistor.fm/s/b33f1c10
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.
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-...
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-...
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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.
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 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.
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?
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.
The fall of the Roman Empire had so many causes that to attribute it to one thing is misleading at best.
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.
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.)
Other countries are dumping their deficit into the US and we are the ones pretending that the US is doing something wrong.
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.
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?
opinion - feels - seems ?
Do you have any sources for your unpopular opinion?
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
[0] What is a repo? - https://www.richmondfed.org/publications/research/econ_focus...
[1] Repos in charts - https://fred.stlouisfed.org/series/RRPONTSYD
What does this gain them? Are they paid interest?
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?
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 exposure. Notably, the bank's reserves at the Fed as well as holdings of US Treasuries are normally included in the denominator (risk assets), but at the start of the pandemic an exemption was put in place so these could be excluded, thereby boosting the leverage ratio and allowing banks to engage in more lending than would otherwise be allowed by the normal SLR calculation.
However, the SLR exemption has now been allowed to expire, and thus banks must tighten up their balance sheets to avoid the severe restrictions of a low SLR. We are now squeezed between the Scylla and Charybdis of financial regulation and monetary stimulus, as the Fed engages in QE to encourage lending towards riskier economic activity while simultaneously imposing leverage constraints to prevent large banks from posing systemic risks. The Fed's reverse repo has become the pressure release valve, as banks are completely hamstrung by their inability to offer negative rates so everyone is now going straight to the Fed for their overnight deposits.
Ironically, this is essentially a (short-term) negation of the Fed's QE activity, as the Fed is simultaneously purchasing assets as well as lending them out on an ongoing basis. In other words, the market is sending a pretty clear signal that QE is really unnecessary at this point in time.
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 relates to scarcity of short-duration treasuries, it's mostly a scary sounding non-event
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.
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Right, 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...
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.
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.