Understanding Repos
A repurchase agreement or repo (RP) is an agreement between parties where a buyer agrees to temporarily purchase a basket or group of securities for a specified period.
The buyer agrees to sell those same assets back to the original owner at a slightly higher price using a reverse repo (RRP).
Understanding QE
The preceding paragraphs are confusing but think of repos and how Quantitative Easing works.
In QE, the central bank gives banks cash (cash that banks literally have no legitimate use for) and swaps that cash for securities, typically treasuries or Mortgage Backed Securities MBS.
In the process of buying securities, the Fed forced down yields on treasuries and mortgages goosing housing and the stock market.
As a result of all this asset buying, the Fed’s balance sheet rose to record highs.
Fed’s Balance Sheet
Via QE, the Fed expanded its balance sheet, not by overnight or temporary purchases but via long-term actions or “coupon passes”. But it’s really the same swap idea, cash for assets.
The cash for assets swap left banks with trillions of dollars of reserves.
Reserve Balances at Banks
Quantitative Tightening
As noted above, QE (balance sheet expansion) is similar to a repo action but of longer duration.
QT (reduction in the Fed’s balance sheet) is the opposite. But QT can also be achieved by allowing securities to mature without rolling them over.
The Fed’s QT program, especially mortgages, is a runoff operation. The Fed will reduce its balance sheet primarily by runoff as opposed to outright sales of securities.
With that understanding, let’s return to reverse repos.
Reverse Repo Operation
The above chart is courtesy of the New York Fed.
Reverse Repo Operation June 30 Details
- The Fed offered $2.39.7 trillion in reverse repos at 1.55%
- There were 108 takers (nonbanks especially money market funds, banks, etc.)
- The term was overnight.
Q: The takers took every penny they could get. Why?
A: Note the 1.55% rate. The 1-month T-Bill rate is only 1.33%
The current Fed funds rate is 1.50 to 1.75 but 1-month T-Bills yield only 1.33%.
Why not take 1.55% for as much as you can get instead of 1.33% especially when the Fed is going to hike rates, most likely to 2.25-2.50 percent on July 27.
Note: The takers are primarily money market funds. Banks collect interest on reserves greater than the reverse repo rate.
Unlimited Demand
There’s unlimited demand for free money and if the Fed offered more than $2.39.7 trillion in reverse repos there would have been unlimited takers.
It’s important to note this is a trivial amount of money compared to interest on reserves discussed below.
Q: Why is the Fed doing reverse repos?
A: The Fed is struggling to keep its target rate where it wants it.
Here’s the explanation on Repo and Reverse Repo Agreements straight out of the New York Fed’s mouth.
These open market operations support effective monetary policy implementation and smooth market functioning by helping maintain the federal funds (fed funds) rate within the FOMC’s target range.
Q: Why is the Fed struggling to maintain the Fed Funds Rate in the target range?
A: The Fed forced so much cash down banks throat that banks are struggling for yield. Competition for short term assets drove down yields.
Proof of this is a 1-month T-Bill yielding only 1.33% with the Fed Funds rate at 1.50-1.75 percent with another big rate hike coming in less than a month.
Also note the current 3-month T-Bill rate is only 1.69%. Realistically, the 3-month T-Bill ought to reflect some portion of the rate hike coming up, but it doesn’t.
It’s important to understand that cash is a liability, not an asset of banks. The banks have to maintain capital positions on deposits. Banks seek to get rid of the cash that the Fed crammed down their throats.
Q: Why don’t banks lend this excess cash?
A: Banks do not lend from deposits. Except for QE, bank deposits are actually a result of lending. Loans create deposits, not the other way around.
Banks are struggling to get rid of this excess cash (that the Fed crammed down their throats), so much so that the Fed needs to conduct reverse repos or overnight rates would drop below the Fed’s target.
Q: Is this Reverse Repo system working?
A: The Fed says the “System is working as designed.”
I don’t doubt for a second the system is working as designed, but I do question the design and the Fed’s actions.
Keeping interest rates pegged near zero while conducting QE to the bitter end (March of 2022), was a major, major policy error.
Hooray, More Free Money
The Fed pays interest on all reserves. At the end of May, the total reserves were $3.318 trillion.
The Federal Reserve currently pays 1.65% interest on reserves IOR.
If the Fed hikes to the range of 2.25-2.50 percent as expected, then expect IOR to jump to 2.40%.
Q: On an annual basis, how much free money are we talking about?
A: 2.40 percent of $3.318 trillion is $79.63 billion!
Q: We are giving banks $79.63 billion in free money?
A: It’s a moving target.
The IOR keeps rising but the reserve balances keep declining.
That $79.63 billion reflects a hike that has not taken place yet. If the Fed keeps hiking at a pace that exceeds QT, then the amount will rise further. If not, the actual amount of free money will drop.
Q: Why does the Fed pay interest on reserves?
A: It has to, given the amount of money it shoved down banks’ throats. If it doesn’t, then note the NY Fed explanation: Repos and reverse repos help maintain the federal funds (fed funds) rate within the FOMC’s target range.
Q: Why doesn’t the Fed just drain all this QE instead of all these Mickey Mouse operations?
A: I do not have a good handle on that question, but I suspect the Fed fears consequences of a massive shock action they have never tried before. Meanwhile, please feel free to take comfort that the “system is functioning as designed”.
I have time for one final telepathic question. This question just came in.
Q: Why isn’t Elizabeth Warren screaming about nearly $80 billion in free money to banks?! What the hell?
A: The only rational explanation is that she does not know what’s going on.
I am surprised Warren has not picked up on this. But she will and so will AOC and all the Progressives.
And for a change, the Progressives will actually be moaning about a legitimate issue.
Expect a big stink over this because it’s coming.
The Fed will respond by bragging about refunding billions of dollars to the Treasury. But that’s an acute perversion of returning taxpayer money (interest on debt) without accounting for the free money siphoned off to banks.
Recession Outlook
In case you missed it, a recession is already underway.
For discussion, please see GDPNow Forecast Dives to -1.0 Percent Following Income and Spending Data
Oh well, feel free to also take comfort in this: Powell: “We understand better how little we understand about inflation”.
This post originated at MishTalk.Com.
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If you look at page 15 in Chicago’s “Modern Money Mechanics” you will see that “sells of securities” decrease both the assets and liabilities of “Factors Changing Reserve Balances”
Thus, the O/N RRP facility is primarily used by the nonbanks (draining the money stock). So, the FED’s operations are not transparent.
growth or inflation was very strong for a long, long time, which ended about 40
years ago”.
the precise “Minskey Moment” of the GFC:
POSTED: Dec 13 2007 06:55 PM |
The Commerce Department said retail sales in Oct 2007
increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
RoC trajectory as predicted. Nothing has changed in > 100
+ years
In QE, the central bank gives banks cash (cash that banks literally
have no legitimate use for) and swaps that cash for securities,
typically treasuries or Mortgage Backed Securities MBS.
In QE, the central bank gives banks cash (cash that banks literally
have no legitimate use for) and swaps that cash for securities,
typically treasuries or Mortgage Backed Securities MBS.
Economics Yale, original argument was:
“that monetary policy has as an objective a certain level of
spending for N-gDp and that a growth in interest-bearing deposits in the
payment’s system involves a decrease in the demand for money balances, and that
this shift will be reflected in an offsetting increase in the velocity of the
remaining transaction’s deposits”.
Professor Chandler’s conjecture was correct up until 1981 –
most of this “S-Curve” dynamic damage (sigmoid function), was complete by the
first half of 1981, up until the saturation of financial innovation for
commercial bank deposit accounts (the near end of the “monetization” of time
deposits, the virtual end of gate-keeping restrictions, Reg. Q ceilings, and
reservable liabilities on time deposits).
The saturation of DD Vt according to Professor Dr. Marshall
D. Ketchum, Ph.D. Chicago, Economics:
“It seems to be quite obvious that over time the
“demand for money” cannot continue to shift to the left as people buildup their
savings deposits; if it did, the time would come when there would be no demand
for money at all”.
It’s all “Fools Gold”
all bank-held savings are lost to both consumption and investment.
The saturation of DD Vt according to Professor Dr. Marshall
D. Ketchum, Ph.D. Chicago, Economics
Having kicked myself a few times for asking for acronym definitions rather than just looking them up myself, I looked up DD Vt, both separately and together. DD might mean “due diligence,” but it doesn’t appear to fit this context. Vt is nowhere to be found as a financial acronym.
the drop in the unemployment rate from 8.0% to 5.0% by Dec. 2015.
forecast a “market zinger” in Dec. 2012, – a surprise, shock, or
piece of electrifying news.
Savings flowing
through the nonbanks increases the supply of loanable funds, but not the supply
of new money, a velocity relationship.
role of money in the economy. This is also a ruse. To coverup his ruse Powell
has destroyed deposit classifications. Powell eliminated the 6 withdrawal
restrictions on savings accounts, which isolated money intended for spending,
from the money held as savings
derived and therefore contrived (N-gDp divided by M). It is a
“residual calculation – not a real physical observable and measurable
statistic.” The product of M*Vi is obviously N-gDp. whereas Vt, the
transactions’ velocity of circulation, is an “independent” exogenous force
acting on prices. Vt will at times, move in the opposite direction of Vi. 1978 is a good example.
When I think of velocity, I look at the extremes. My maternal grandfather was a refugee of the Great German Inflation, and was paid twice a day. He and the other workers would run to the grocery store at lunch because the prices would rise by evening. That’s velocity, or so I think. At the other end, during the Great Depression, prices were cratering and people held onto their money. I also think of the “helicopter money” (stimulus checks and other spending) of 2020-22 contributing to velocity and making inflation worse.
But that’s where any knowledge of mine ends. Anything more you have to say about velocity is going to get my close attention.
Economists flunked
accounting. It’s stock vs. flow. In the “circular flow of income”,
unless the upper income quintiles savings (highest shares of income), are put
back to work, a dampening economic outcome, secular stagnation, is generated (a
fall in velocity).
“Commercial Banks and Financial Intermediaries: Fallacies and Policy
Implications–A Comment Leland J. Pritchard Journal of Political Economy Vol. 68, No. 5 (Oct., 1960), pp. 518-522
against commercial bank saving accounts”
“The
economics of the commercial bank : savings-investment process in the United
States” Leland James Pritchard 1969
“Should Commercial
Banks Accept Savings Deposits?” Conference on Savings and Residential Financing
1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.
“Profit or Loss
from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the
Currency, United States Treasury Department, Irwin, 1963, pp. 369-386
Link: The riddle
of money, finally solved BY PHILIP GEORGE
maintained and deflationary effects avoided”…
aggregate demand and therefore produces adverse effects on gDp”…
time-deposit banking, would tend to have a longer-term debilitating effect on
demands, particularly the demands for capital goods.” Circa 1959
My strong belief (but which can be changed, only with more difficulty than weak beliefs) is that velocity is an afterthought in times of price stability, but kicks into high gear during times of deep and persistent deflation or high and persistent inflation, and especially hyperinflation. The equation I learned a long time ago sets up velocity as an error term, so when I discuss it I compare to (I think my Swiss cheese brain has it right) Heisenberg who said that the act of close observation of matter or a process will change it. Yet the matter and process still exist, making observation and measurement tricky.
My question is whether velocity is measureable directly, or can only be inferred. Past that, maybe I’m so shallowly grounded in the entire concept that I need to study it more closely. If so, can you weigh in, perhaps with a recommendation or two for some reading on the topic? My belief (again, vulnerable to change) is that the “helicopter money” (stimulus checks and other outlandish largess) lit a fire under velocity, and greatly magnified the effect of the second round of QE of 2020-22. I’d love to know what I got right and what I got wrong.
In “The General Theory of Employment, Interest and
Money”, pg. 81 (New York: Harcourt, Brace and Co.): John Maynard Keynes
gives the impression that a commercial bank is an intermediary type of
financial institution (non-bank), serving to join the saver with the borrower
when he states that it is an: “optical illusion” to assume that “a depositor
and his bank can somehow contrive between them to perform an operation by which
savings can disappear into the banking system so that they are lost to
investment, or, contrariwise, that the banking system can make it possible for
investment to occur, to which no savings corresponds.”
In almost every instance in which Keynes wrote the term
“bank” in his General Theory, it is necessary to substitute the term
non-bank in order to make Keynes’ statement correct.
This is the source of the pervasive error that characterizes
the Keynesian economics, the Gurley-Shaw thesis, the elimination of Reg Q
ceilings, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository
Institutions Act of 1982, the Financial Services Regulatory Relief Act of 2006,
the Emergency Economic Stabilization Act of 2008, sec. 128. “acceleration of
the effective date for payment of interest on reserves”, etc.
marrying and giving in marriage, up to the day Noah entered the ark.
Voyagers,
Today we made the difficult decision to temporarily suspend trading, deposits, withdrawals, and loyalty rewards. The app will be down for a short transition period. After that, you will still be able to view market data and track your portfolio, and you will receive rewards payments for the month of June.
We understand the significant impact of this decision, which is why we tried hard to avoid it—including by securing a credit facility from Alameda Ventures and lowering daily withdrawal limits. But the failure of a borrower, Three Arrows Capital (3AC), to repay a substantial loan from us means this was the right path forward. Voyager is actively pursuing all available remedies for recovery from 3AC, including through the court-ordered liquidation process in the British Virgin Islands.
As a result—while far from optimal—this decision gives us time to strengthen our balance sheet, a necessary condition to protect assets and preserve the future of the Voyager platform we have built together. We are exploring a number of options and hope to have more to share soon.
The loan creates the deposit, which is a liability. It’s the bank’s job to have enough cash on hand to honor the checks I write from my $750,000 deposit account. It’s counter-intuitive. Next task is repos and reverse repos. Un(?)fortunately, I’m cooking dinner and that will have to wait. LOL
A bank run can take place regardless if too many people withdraw their deposits in cash or electronically. Banks only hold a fraction of their customers deposits in liquid assets. This is a feature, not a bug of fractional reserve banking. See
That was then. Right? And it isn’t like that now.
Low interest rates and QE been tried in Japan for 40 years and they still have almost no inflation.
I looked up the acronyms, but remain confused. NBFI = non-bank financial institutions. DFI = development financial institutions. Wrong acronyms, or my mental block? How are those two connected, and what DFIs are you referring to?
The authors present quantitative data to demonstrate how American middle-class families have been left in a precarious financial position by increases in fixed living expenses, increased medical expenses, escalating real estate prices, lower employment security, and the relaxation of credit regulation.[2][6] The result has been a reshaping of the American labor force, such that many families now rely on having two incomes in order to meet their expenses.[2] This situation represents a greater level of financial risk than that faced by single-income households: the inability of either adult to work, even temporarily, may result in loss of employment, and concomitant loss of medical coverage and the ability to pay bills.[6][4] This may lead to bankruptcy or being forced to move somewhere less expensive, with associated decreases in educational quality and economic opportunity.[2]
Among the expenses driving the two-income trap are child care, housing in areas with good schools, and college tuition. Warren and Tyagi conclude that having children is the “single best predictor” that a woman will go bankrupt.[7]
Warren and Tyagi call stay-at-home mothers of past generations “the most important part of the safety net”, as the non-working mother could step in to earn extra income or care for sick family members when needed.[3] However, Warren and Tyagi dismiss the idea of return to stay-at-home parents, and instead propose policies to offset the loss of this form of insurance.[6]
Warren and Tyagi attempt to overturn the “overconsumption myth” that Americans’ financial instabilities are the result of frivolous spending[4] – they note, for instance, that families are spending less on clothing, food (including meals out), and large appliances, when adjusted for inflation, than a generation prior.[8] They also note that dual-income households have less discretionary money than single-income households a generation prior.[6]
The authors propose several solutions to the “two-income trap”. In order to decouple educational opportunity from real estate location, they propose allowing families to choose among public schools in their district, with a voucher system.[6] They recommend tuition freezes for public universities, which have seen tuitions rise three times faster than inflation.[6] They endorse universal preschool as a means of reducing fixed costs for families with children.[6] Warren and Tyagi take care to consider possible perverse consequences of various social programs aimed at middle-class economic relief.[4]
Warren and Tyagi also call for the restoration of “usury laws” limiting credit interest rates, and increased disclosure requirements for creditors.[6] They suggest revisiting policies that have encouraged home ownership by making mortgages available with little or no down payment.[6] Then-Senator Joe Biden comes under heavy criticism for promoting legislation friendly to the banking industry.[4]
Bottom line: I don’t care what her ideas are. She’s a worthless human being.