What does “excess liquidity sloshing around the financial system” mean? • Hacker News Board

Re: What does “excess liquidity sloshing around the financial system” mean?

#131

Post by tomatocracy » Sun, Feb 19, 2023, 8:37 PM UTC

bjornsing wrote: post #7

I was hoping that the OP would address a related idea that I find rather weird: it’s sometimes said that “this excess liquidity has to go somewhere” and that “the excess liquidity has gone into [housing/stocks/commodities/other asset class]”. But I don’t get this: It might seem plausible that if stock prices go up they absorb liquidity from the system. But (ignoring new stock issues / newly build houses) in every tra…

Part of the confusion is, as others have pointed out, that "liquidity" isn't really the same thing as "money".

If you're talking about money, then that's exactly what happens - the creation of "high-powered" central bank money leads to a multiple of that amount of new money appearing in the economy as it's used (and reused) in the financial system to make net new loans (the multiplier effect).

Ultimately as the money gets passed around then some market participants will use the money in ways which reduce either liquidity or money supply or both (repaying loans for example) so there's a decaying effect which is why the multiple isn't infinite. As the money dissipates throughout the system it will end up in the hands of participants who are either slower to reuse it or more likely to put it in something which either is or looks like a central bank deposit - hence the "liquidity" eventually dissipates too.

Re: What does “excess liquidity sloshing around the financial system” mean?

#132

Post by CraigJPerry » Sun, Feb 19, 2023, 8:40 PM UTC

cs702 wrote: post #125

CraigJPerry wrote: post #120

Earlier quoted context omitted.

>> But money does not "go into assets." That's a misconception How would you describe the situation when you purchase a treasury bill then? You gave money, the money you gave ceased to exist in the economy - it is no longer available for anyone to spend, you gained an asset.

> How would you describe the situation when you purchase a treasury bill then? Your cash (i.e., money) goes to the seller of the treasury bill. If the seller is a private investor, your cash goes to the private investor (e.g., a mutual fund, a pension plan, an individual). If the seller is the US Treasury (i.e., you bought a newly issued treasury bill), your cash goes to the US Treasury, which will deposit it, and la…

>> If the seller is a private investor

This case is not of interest

>> If the seller is the US Treasury

This case IS of interest

>> Recall that, unlike the Fed, the Treasury cannot issue newly created money

This is where it begins to unravel and fall apart. What you say is true in theory only, it’s not true in practice:

The fed finances the primary dealer banks that participate in treasuries auctions - it accepts treasuries as collateral for repos.

The primary dealer banks are obligated to stand ready to purchase treasuries and the Federal Reserve ensures there are sufficient reserves to do so by supplying them through temporary repos (a matched purchase of Treasury debt with a requirement that the seller must repurchase later). While the Federal Reserve is not in that case directly buying the new issue directly from the Treasury, it uses the open market purchase to buy an existing bond in order to provide reserves needed for a private bank to buy the new security. The end result is exactly the same as if the central bank had bought directly from the Treasury.

The fed does also buy treasuries (the fed holds around 10% of treasuries issued - https://fred.stlouisfed.org/series/TREAST).

EDIT: moved paragraph for clarity

Re: What does “excess liquidity sloshing around the financial system” mean?

#133

Post by wfme » Sun, Feb 19, 2023, 8:53 PM UTC

Xylakant wrote: post #19

blackbear_ wrote: post #18

Earlier quoted context omitted.

Thank you for the reference, I know about the dangers of chatgpt and some skepticism is certainly warranted. However, dismissing anything produced by chatgpt simply because it was made by chatgpt is not right, which is why I was asking an opinion about that passage: if the text is accurate, it should not matter who or what wrote it.

You're missing my point: The text is produced by an agent known to be unreliable. It might be right by chance, but the onus to prove that (by citing references, for example) is on the poster. It's entirely warranted to dismiss the text, otherwise you essentially DOS the conversation.

You know, the most unreliable agents still appear to be people. If someone is right 90% of the time, we don’t require references for everything they say to save for that 10%.

Re: What does “excess liquidity sloshing around the financial system” mean?

#134

Post by CraigJPerry » Sun, Feb 19, 2023, 9:06 PM UTC

zozbot234 wrote: post #122

CraigJPerry wrote: post #119

Earlier quoted context omitted.

>> you have some newly created money, whilst the demand for holding money balances … stays the same This is a contradiction. You can’t create money without a demand for it first. In this specific case through the demand for money in exchange for treasuries/MBS/etc. >> So what happens is that money is exchanged away like a hot potato until the demand for money balances rises to match the extra created money This view…

> You can’t create money without a demand for it first. Why not? At the individual level it literally works the same as any purchase of existing assets. In practice, the counterparty of that transaction will probably spend that money in turn on something else that she actually planned to hold. > This view derives from monetarist theory, it’d be fair to say this view enjoys less support today than it did in the past.…

> You can’t create money without a demand for it first

>> Why not?

To be clear i’m discounting stimulus checks which would be exactly that but it wouldn’t be right to claim this is a common source of money creation.

The most common source would be A commercial bank issues a loan creating new money, but without a customer demanding a loan, there is no ability to create money.

The second most common source would be the government spends into the economy by consuming on its own behalf - there needs to be something for sale in the economy (inc. labour / public sector employment).

Re: What does “excess liquidity sloshing around the financial system” mean?

#135

Post by xhrpost » Sun, Feb 19, 2023, 9:10 PM UTC

Rury wrote: post #99

xhrpost wrote: post #95

This is tangential but I asked it in another thread a little too late. But with the Fed's interest payments exceeding their asset income interest for the first time in history, does this effectively cause an increase in M1 like QE? The official charts seem to imply that the answer is "no" but I don't understand why.

The interest income the Fed earns now, is from assets which were created in the past at lower interest rates, where what it's paying out to banks is in current higher interest rates. While this may seem like it could essentially result in QE, the Fed covers the difference via what's considered a deferred asset, which is something that goes away when the income balance changes in the future. It's kind of like paying a…

Thanks. I've heard of the deferred asset, kind of an IOU to itself. But that only changes, like you said, when the income balance changes. Similarly, we could say that QE is just deferred until the purchased assets are sold again in the future?

Re: What does “excess liquidity sloshing around the financial system” mean?

#136

Post by CraigJPerry » Sun, Feb 19, 2023, 9:26 PM UTC

cs702 wrote: post #130

CraigJPerry wrote: post #116

Earlier quoted context omitted.

>> Quantitative easing" means issuing new money Issuing new reserves not new money. New money can then be issued by the counterparties of the Fed’s open market operations The counterparties are the “primary dealer” banks (theres around 30 of them), these are the banks whose reserve accounts at the fed get topped up in exchange for the assets the fed wishes to buy. This is the US model, the UK model is a bit simpler (…

Reserves are money -- they are the key component of the monetary base, included in all money aggregates. Yes, the Fed trades with the rest of the world only via its primary dealers. But note that these dealers are non-US-government entities (specifically, they're for-profit businesses, part of the private sector), or trade with the Fed acting as intermediaries for other non-US-government entities (businesses, individ…

> “Quantitative easing" means issuing new money

>> Issuing new reserves not new money

>>> Reserves are money

Reserves can be cash, but the reserves issued through quantitive easing are not cash. They are not a form of money that can be spent in the economy.

>> Thus, newly issued money with which the Fed pays to purchase instruments in open-market transactions

Newly issued reserves, not money. The reserves go to the primary dealer banks. The mechanism by which this results in the banks being prepared to issue new money (for spending in the economy) is not direct. Empirically shown through the muted money creation in response to the enormous reserves injections of QE.

The reasons for this lethargy are many but it’s fair to say capital requirments are the main one. Lending operations (the mechanism by which QE is supposed to ultimately inject real money to the economy) are not reserve constrained. Since Basel, they’re capital constrained.

Re: What does “excess liquidity sloshing around the financial system” mean?

#137

Post by nostrademons » Sun, Feb 19, 2023, 9:27 PM UTC

pontifier wrote: post #92

ThrustVectoring wrote: post #30

Earlier quoted context omitted.

>What am I getting wrong? You are correct when taking the view of the financial sector as a whole - every asset purchase merely swaps who has the cash and who has the asset. You're not getting much of anything wrong, merely missing a behavioral trait of many market participants: they desire a fixed ratio between their various financial assets. An extreme example of this is an index fund, which has a formulaic relatio…

I totally had this happen. When I was growing up we didn't have much money, and I've always tried to be really frugal. I tend to agonize over minor necessary expenses like gloves or shoes. When I went from a couple hundred bucks in the bank to almost a million I felt strange. I tried to ignore those feelings, so I could live like a normal person. It only took me about a year to... I mean... Well... It goes pretty fas…

It's possible to avoid this by having separate buckets for consumption and savings. Hold your consumption bucket constant (some people call this "budgeting", but it could be done more informally), and all the excess cash you're making, by definition, will go into investments. Then you just have to learn how to invest prudently. :-)

GP is talking about the investment side of this, where "investing prudently" usually means looking at the relative prices of different investments and putting your money only into the ones that are undervalued. If enough people do this, a.) relative prices approach a pretty good approximation of their true value, and b.) those prices are going to be much higher when a lot of cash went into savings than if there's not much cash going into savings.

Re: What does “excess liquidity sloshing around the financial system” mean?

#138

Post by zozbot234 » Sun, Feb 19, 2023, 9:29 PM UTC

CraigJPerry wrote: post #134

zozbot234 wrote: post #122

Earlier quoted context omitted.

> You can’t create money without a demand for it first. Why not? At the individual level it literally works the same as any purchase of existing assets. In practice, the counterparty of that transaction will probably spend that money in turn on something else that she actually planned to hold. > This view derives from monetarist theory, it’d be fair to say this view enjoys less support today than it did in the past.…

> You can’t create money without a demand for it first >> Why not? To be clear i’m discounting stimulus checks which would be exactly that but it wouldn’t be right to claim this is a common source of money creation. The most common source would be A commercial bank issues a loan creating new money, but without a customer demanding a loan, there is no ability to create money. The second most common source would be the…

Usually new money is created when the central bank issues it in exchange for government bonds. It's practically always possible to do this. You could posit a theoretical situation where government bonds are literally indistinguishable from money, but that just means that government bonds are money, so the government treasury has merged into the central bank. Then the central bank has to buy something else, which means it incurs some risk. Or the government can issue more government bonds. "Spending money in the economy" is like this, assuming that the government bonds are permanently rolled over, and never bought back in full.

Re: What does “excess liquidity sloshing around the financial system” mean?

#139

Post by s1artibartfast » Sun, Feb 19, 2023, 9:29 PM UTC

fleischhauf wrote: post #111

readthenotes1 wrote: post #97

Earlier quoted context omitted.

kids eat tide. Call me crazy, but I don't think assuming people make rational decisions is a good starting point for economics

are there any alternatives being explored actually?

To eating tide pods?

Re: What does “excess liquidity sloshing around the financial system” mean?

#140

Post by cs702 » Sun, Feb 19, 2023, 9:35 PM UTC

CraigJPerry wrote: post #136

cs702 wrote: post #130

Earlier quoted context omitted.

Reserves are money -- they are the key component of the monetary base, included in all money aggregates. Yes, the Fed trades with the rest of the world only via its primary dealers. But note that these dealers are non-US-government entities (specifically, they're for-profit businesses, part of the private sector), or trade with the Fed acting as intermediaries for other non-US-government entities (businesses, individ…

> “Quantitative easing" means issuing new money >> Issuing new reserves not new money >>> Reserves are money Reserves can be cash, but the reserves issued through quantitive easing are not cash. They are not a form of money that can be spent in the economy. >> Thus, newly issued money with which the Fed pays to purchase instruments in open-market transactions Newly issued reserves, not money. The reserves go to the p…

As I mentioned in my comment, the Fed's primary dealers can and do act as intermediaries for the rest of the private sector. If you sell a treasury bond you own in your brokerage account, it could well be the Fed buying it on the other side, through one of its dealers -- and vice versa.

Otherwise, I agree with you that banks are capital constrained in their ability to make loans. But as I mentioned elsewhere on this thread, I left bank lending (and its impact on higher-level monetary aggregates) out of this mental model for simplicity.