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Comment by ww520 | Hacker News Reader

One thing to note is that $100B is created everyday but the $100B is destroyed the next day. It's not like $100B created everyday for the next month.

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That's true. But another way to look at it (not necessarily good), it's like the water in desert. You are in the middle of the desert and you need water - you ask a guy - lend me some water please, I will buy you back the same amount once we are home. Technical speaking, the amount you get and the amount you give back is the same.

What happened during the last crisis is also a great illustration - many banks took taxpayers money during the 'dark hours' then paid it back easily some time later, when the air cleared. Some went as far as to suggest it wasn't necessary at all. Well, the truth is, the banking system as we know it survived only thanks to governments stepping in - otherwise none of the banks we know would exist today. There was 0 trust during the crisis - and all the banking system is build on trust.

That's why the FED is "taking a sledgehammer to squash a bug". That's also why it's a very disturbing signal. My gut tells me shit is about to hit the fan.

PS. But don't try to time the market and short it - as the saying goes, the market can stay irrational longer than you can remain solvent.

You don't have to short it, however, would it make sense to start selling things? Where should money be right now or where should it start going if it is about to hit the fan?

If there truly is a cash shortage to the point that it is threatening bank liquidity, the Fed's likely response would be dropping rates and increasing the money supply with another round of QE.

If that happens, you should be buying, not selling, since QE basically acts as a subsidy for equities as institutions seek yield with cheap money.

"otherwise none of the banks we know would exist today"

isn't that a good thing? otherwise they will never learn.

Hijacking my own comment. There're rumors that the current shortage of cash is because people in Europe are borrowing massive amount of ultra low rate loans (negative yield) in Europe and turn around to buy U.S. treasuries (higher yield) to do currency carry trade to profit on the yield difference. To buy the treasury bonds, they have to use U.S. dollars so they are soaking up all the excessive dollars out there with their borrowed euros.

I don't think this is true. I trade cross currency basis and if there was excess demand for offshore USD the "basis" (premium over normal rates to borrow USD in return for lending e.g. EUR ) would be moving dramatically. It changed a bit today in response to USD shortage but this seems predominantly a domestic story.

government can borrow at negative rates. i doubt that yooropean joe blow can do that.

I guess that's a fair point. Sorry for oversimplified explanation. So, to attempt to improve on your further clarification: technically it is $75b per night created and destroyed each morning. And 3 separate cycles of $30b will be created for 2 weeks and then destroyed. Therefore $90b injected for 2-weeks then destroyed. Point is this is being injected to help banks cover their overnight exposures with the hope that they won't need the help anymore after Oct 10.

Is there some resource I can look up to better understand what you mean by "destroyed"? Will they be absorbing the value back through financial instruments or how does this "destruction" happen?

They are loans. Money is given to the banks, and then repaid (with interest, but a low rate and short time makes this marginal).

The fact that the money is "created" and "destroyed" is the nature of the Fed. They don't need to have money in order to lend it. That's what the Fed is.

These loans are literally the same as printing money, loaning it, collecting the loans, and destroying the printed money. Except everything is just numbers on a balance sheet, so no physical money needs to be physically printed or shredded. The effect is still the same: The Fed decides that money should enter the money system, and also describes how that money will leave the money system.

when the fed writes a check to a bank, the money isn't deducted from an account, it's new money created out of thin air.

when the fed receives a check from a bank, the money doesn't get deposited and stored in some account, the money just stops existing.

Any source to back this statement? I’m curious if fed actually destroyed the money after repayment

literally any macroeconomics textbook. it's the whole point of the fed.

terms to google: "monetary policy", "open market operations"

This is indeed very important to understand. While overall of course it’s not a bad sign, the Fed is behaving like a _lender of last resort_ for very short term loans. And the situation can also be explained.

Of course it’s not a good sign overall, but there’s no reason to panic.

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