Cash Flood Drives Use of Fed Reverse Repo to Record $1T
bloomberg.com
bloomberg.com
This article kind of leaves the significance of what's happening as an exercise for the reader.
The Fed is in the fight of its life to hold back negative short term interest rates. That 0.05% in the RRP is the only thing standing in the way. Yes, this is ironic (and alarming) because QE was supposed to drive down long rates and thereby entice borrowers to borrow. However, the massive drawdown of the TGA (the Treasury's account with the Fed) has left the banks starved for good collateral yielding anything. Money market funds are obligated by law to buy short-erm US Treasuries. Throw in various government transfers clogging up the banking system, and all of this puts huge pressure on short-term notes.
QE is only inflationary if banks lend against the collateral they receive as a result of QE. So far, that hasn't been happening much. So the potential here is a deflationary shock that few are expecting, with negative rates across the yield curve leading the way.
Buying and holding long dated UST is like being leveraged long duration in the environment where interest rates are more sensitive to the credit risk of other assets in the system.
[1] https://insideparadeplatz.ch/videos/the-entire-monetary-syst...
Some cycles take longer than decades to play out. Some things take hundreds of years. First principles thinking (and common sense) tells us that no party should be able to create money out of thin air, it almost breaks physics, but it doesn't because the value comes from diluting every else's money. It breaks the social contract by taking from others without consent or transparency. And so no one complains because they don't notice it happening; my accounts stand as complete as they were yesterday. A powerful tool that over time, inevitably gets abused and mismanaged.
That’s going to be true for any kind of economic system. No reasonable person would argue that a black swan event wouldn’t be possible.
Humans are the ultimate complexity, and indeed central banking relies on the decision making of a powerful few. Will the interest rate go up or down? Will a flood of money buy bonds and mortgages? Those decisions are made for us.
The government is constantly creating more money, which is why we consistently have inflation year after year. They do it in the name of stimulating the economy. They've done it so much, that many governments now have 0 or negative interest rates on their bonds. This is when things start getting very confusing, because saving money should yield you a positive return. Your savings account should pay you interest, but instead you pay the bank to store your money (doesn't actually happen at the retail level, banks eat the cost to keep you in their business).
The "social contract" aspect is that if you want something, you ask for it. Raise taxes? Lower taxes? At least there is representation at some level with a vote. Going to war in Iraq? Needs congressional and senate approval. Creating $100b of money you don't have and buying government bonds every month? Fed does this, and nobody blinks.
Moreover, most monetary expansion is caused by private banks through lending; they don't need a central bank to do this. The central bank uses tools like reserve requirements and bond purchases/sales to raise and lower the money supply in response to macroeconomic trends. Without a central bank, the money supply can still be expanded.
Money stores the value of that economic output. We used to use gold as money because it was hard to inflate. No one can create gold without doing work, therefore it evolved over time to be valuable because of its rarity. That makes it a strong store of value over time, unlike say apples or oil, which would be poor money. Fiat currency can be created without work; it is not rare, you are at the whims of whoever has the power to create it. If you had to store value over 100 years, you would not keep it in cash or bonds. You'd buy land, gold, or possibly stocks, because those things are much harder to create.
> Moreover, most monetary expansion is caused by private banks through lending; they don't need a central bank to do this. The central bank uses tools like reserve requirements and bond purchases/sales to raise and lower the money supply in response to macroeconomic trends. Without a central bank, the money supply can still be expanded.
Private banks implement whatever the central bank tells them. Who sets the interest rate? Does a lower interest rate increase private lending or decrease it? Why can't private banks hold 0% in fractional reserve?
One must also consider whether it is a medium of exchange at any given point in time, if its used as an unit of account, the variable storage/protection/transportation costs, durability against the elements, fungibility, accessibility, liquidity, etc.
> Who sets the interest rate? Does a lower interest rate increase private lending or decrease it? Why can't private banks hold 0% in fractional reserve?
Take a look at "5% fixed-floating swap, Receive fixed"[0], who sets those float-fixed (or even the float-float) swap rates for the myriad of financial instruments, mostly in bilateral transactions with no third party involvement, that start at zero initial value and supposedly yield a non zero number, ever involving in complexity in response to demand and outside the awareness and interests of most people despite being very integral to their daily lives?
Hint: by far, not just central banks (which at least in the US are owned by private banks at different branches)…
[0] https://en.wikipedia.org/wiki/DV01#Risk_%E2%80%93_duration_a...
Yes, there are many commodities making many tradeoffs as money. Over time, through trade and travel, societies adopted gold as the premier base of money, because of its superiority in the tradeoffs they cared about. Gold was chosen by the market as the best monetary medium.
Nobody chose fiat. Dollar bills originally represented redeemable vouchers for gold stored in a bank, and so while the storage/protection/transportation costs of paper notes is/was superior to carrying gold bars, those vouchers were worthless unless you could reliably redeem them for gold. Those paper notes are worthless if people didn't trust the bank/government issuing them, which is how bank runs started. Eventually the gold peg was removed, and the continuous debasement of dollars has somehow been accepted as feature, not a bug. Every decade unto infinity, dollars will become worth less. This does not work in the long run. We are in an era of great economic productivity thanks to technology, but I fear these gains hide the weaknesses in our monetary systems.
The same market has also accepted:
> and the continuous debasement of dollars has somehow been accepted as feature, not a bug. Every decade unto infinity, dollars will become worth less.
As well as accepting a host of other things beyond paper notes redeemable for x.
> Nobody chose fiat.
The shareholders of the federal reserve branches did…
> but I fear these gains hide the weaknesses in our monetary systems.
I don't have that fear, the market will adapt with the times based on demand and risks individual actors perceive relative to the power they have to make their desires a reality, rather than some hypothetical idealized scenario we can carve out in our minds about how it "should" be.
Some to this day only do commodity (i.e. certain multi party tested quality of gold and oil) settlement with other actors, others are okay with rehypothicated UST's and AAPL paper, and others are ok with BTC/ETH/USDT/beenie baby tokens/etc.
Efficient market hypothesis is based on humans acting rationally with available information. But humans tend to be short sighted and only optimize for their lifespans. Ex: clearly we have done poorly with carbon emissions and global warming, and now we can only hope that throwing money at the problem can solve it. As things get worse, we'll throw more money at it. But all we can do is hope that a solution will be found, and that is scary.
> The shareholders of the federal reserve branches did…
Can you explain what you mean by this? "The Federal Reserve System is not "owned" by anyone. The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation's central bank. The Board of Governors in Washington, D.C., is an agency of the federal government and reports to and is directly accountable to the Congress" https://www.federalreserve.gov/faqs/about_14986.htm
> I don't have that fear, the market will adapt with the times based on demand and risks individual actors perceive relative to the power they have to make their desires a reality, rather than some hypothetical idealized scenario we can carve out in our minds about how it "should" be.
I'm confident society will make it out alive, but at what cost. What does the mother of all hyperinflation events look like? What are the effects of the collapse of the world's reserve currency? The closer we get to those events, the more seriously people will start to take this problem.
I'm not claiming markets are efficient, or that all humans have access to the same amount of resources or information, just that there are many different incentives out there for people and there isn't a one size fits all.
> Ex: clearly we have done poorly with carbon emissions and global warming, and now we can only hope that throwing money at the problem can solve it.
Even with this, not everyone has the same perspective or the same exposure to the downsides. Not everyone will throw more resources at their problems, some will more than others, some will collect it and squander it more than others, no matter their ends.
> Can you explain what you mean by this?
https://en.wikipedia.org/wiki/List_of_Federal_Reserve_branch...
> I'm confident society will make it out alive, but at what cost.
The cost is irrelevant, because whatever it may be, it's not going to be born by everyone equally, some will come out ahead and others wont (i.e. if ones family member bought a bunch of land [and didn't lose it through war/confiscation/default/etc] in 18XX with x paper notes, they'd be better off than someone who just spent equivalent x paper notes on a consumable in 18XX). Not everyone will be exposed to inflation because some people are hedged, or live in countries where the value of the dollar is constantly growing wrt what goods they can purchase locally with dollars.
Events are always going to happen, and everyone will respond differently to them everytime. Sure pockets of consensus will form but to expect it to be prevalent among everyone is highly unlikely, and hoping for such to happen is a sisyphean task.
Well, if the greenhouse effect is real and our planet cooks itself, then pretty sure humanity as a whole is exposed to the downsides.
>Events are always going to happen, and everyone will respond differently to them everytime. Sure pockets of consensus will form but to expect it to be prevalent among everyone is highly unlikely, and hoping for such to happen is a sisyphean task.
If you know there are cracks in the dam, you do something about it. If a hurricane is coming, you sound an alert. Tragic outcomes can be bounded and limited by human function.
People who have more resources under their control to secure food and shelter in the event of major catastrophe will fair better than those who don't not… some with quick thinking in the event of major catastrophe will fair better than those who just run around screaming and panicking… etc.
> If you know there are cracks in the dam, you do something about it. If a hurricane is coming, you sound an alert. Tragic outcomes can be bounded and limited by human function.
Some people knowing that a specific spot is more prone to hurricanes than others can choose not to live there… they will fair better than others who did not know, or did not chose to move away with the knowledge they had and staying put in the face of tail risk of losing their life was deemed worth it…
If you think it is the individuals role to place the burdens off society on it's sholders above all else, I'm afraid we're never going to share the same perspective esp when comes to intricate matters of the eurodollar system…
I'm not sure if you understand the impact of environmental change. Entire ecosystems will collapse, species of animals and plants will die. It's not an earthquake. It's the gradual warming of the planet. Humanity as we know it may be eliminated. Nobody does well in this scenario. Earth is relegated to a dead and dying planet for the bacteria. I'm not convinced with the idea that pockets of humanity will proliferate living in small tribes, deep in caves and that somehow this is an optimized collective outcome of our individual choices.
> If you think it is the individuals role to place the burdens off society on it's sholders above all else, I'm afraid we're never going to share the same perspective esp when comes to intricate matters of the eurodollar system…
It's always been individuals and marginalized groups initiating pushes to better society. Disabled Americans had to fight for rights in the American Disabilities Act. Same with African Americans and civil rights. Same with women and the right to vote. They did it because nobody else cared. Do you not have shared humanity with these people? "Not my job to be concerned with them, they'll make decisions and I'll make decisions and some will do better than others, and whatever way that turns out to be will be the result of each person's optimized individuality."
When the dollar collapses, it will be the working poor and marginalized people affected most.
> …will be the result of each person's optimized individuality."…
Where did this optimize come from? Just because I think that individuals don't have to place the burdens of society on its shoulders, doesn't mean that people cannot willingly chose to if they want to or feel compelled to for lack of other options. But just because people decide to make whatever choices they make, doesn't mean that it will result in an optimized outcome… whatever happens from t0 to t1 will just be an outcome…
I'm not going to fool myself to think that whatever collective action can be taken, for any goals, will automatically make it optimized for any particular outcome that can be determined ahead of time with 100% certainty (or anything even close to 100%, or even understood by everyone ahead of time).
> When the dollar collapses, it will be the working poor and marginalized people affected most.
These people have always felt the brunt of the worst any society has to offer throughout history, just because you want to do something about it for whatever reason, lofty idealized pie in the sky or not, the likelihood of that changing from one system to another seems pretty low.
And I say that as someone who feels marginalized by the current centralized through global TBTF banking/corporate order and is actively building decentralized systems (have nearly all of my "money"/"store of value"/whatever in these decentralized systems and not the TBTF bailoutistan ones). I'm not going to pretend that the ills that have plagued society throughout history are just magically going to go away just because there are uncollateralized and decentralized stablecoins for people to transact value in. Nor will I pretend that people who think "central" banks are central or think they have a monopoly on what value can be denominated and transacted in will have the same calling as I to work on such things.
Interest rates have been on a downward trend for the past few decades. This is a new thing, that has not happened before. The Fed seem hell bent on making sure that there are no deflationary recessions anymore, and i think that is the true cause of the long term decline in interest rates.
One of the results of this trend is the hyper growth in asset prices. Reduced interest rates dictate a reduced time value of money, and higher valuations. This rewards the owner class with increased wealth, and doesn't do anything (and well actually harms) the rentee class, which pays the same rent for a home.
The problem is that this is not sustainable. I'm not sure if you agree, but we cannot keep decreasing interest rates forever. It would have to slow down and stop one day. What that means is that some future (or present) generation would not be rewarded with increased wealth that past generations have enjoyed. Essentially in order to fight deflation, the Fed has borrowed immensely from the future to openly gift wealth to the present, making the future less rosy.
Like you acknowledged in another comment, most money created now is through private banks lending and exchanging future cash flows with one another (some subset of which are also the private share holders of the different FRB's in the US), and arguably this is the system being threatened now with new crypto entrants (uncollateralized lending in defi is just getting started, stable coin fixed income is just getting started, uncollateralized and decentralized stablecoins are also on the horizon, etc) and increasingly looking to attract fixed income cashflows from tradfi (i.e TBTF banks who have been publicly outspoken against crypto for years, being forced by some of their HNW/institutional clients to get exposure), who are solving the lack of trust and market structure issues between counterparties without the regulatory overhead (which in practice is used to serve the primary dealer banks interests, so self-serving just like any other random defi protocol at its worse).
Not that it prevents them from producing metric tons of it.
And why shouldn't they?
People gobble them up and never hold them accountable for getting it wrong.
To whom? The past?
Future generations inherit whatever is produced in the present. If you want to run with with the present-vs-future generations metaphor, maybe include that the present generation will gift everything they have to the future generation. Spending money to improve things today is an investment in the future as well.
I would be happier if my future income isn't taxed to gift to the wealth of the currently rich. And this extra wealth of currently rich is definitely never getting taxed enough to get it back into the working class hands.
We have gone so far into capitalism that not only we take from labor to give to capital owners, we have started taking from future labor to give to current capital owners.
I upvoted because I sympathise with your view, although I think you portray it using a metaphor that's more of an appeal to emotions than setting out solid principles.
My take on it is we are setting up future labour to be increasingly indentured to future capital, due to obligation structures being cultivated in the present that have long-lasting structural consequences. Of which the widespread housing crisis may be the most obvious to ordinary people, for now.
That's not new. It is in fact what capitalism is all about. It wouldn't be called capital if there wasn't some kind of long-lasting obligation structure. To an extent it works rather well to collectively enrich. However, it can get out of hand.
I agree that we should complain about the scale of it and be concerned about hegemony and corporatism taking over the world. I favour keeping with "We hold these truths to be self-evident" and human rights near the top of the values scale.