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U.S. Fed accepts $756B in daily reverse repo operation

reuters.com

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Re: U.S. Fed accepts $756B in daily reverse repo operation

#141

Post by jkhdigital »

cwkoss wrote: post #130
jandrewrogers wrote: post #122

Earlier quoted context omitted.

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 m…

> Similarly, the people with the largest student loan debt tend to be affluent. I question this. I'd assume the largest student loan debts are held by the middle class, because the affluent didn't take out loans because they paid for their education with cash.

> the affluent didn't take out loans because they paid for their education with cash

Not if they didn't become affluent until after going to college and getting a high powered career... case in point, I took out almost $70k in student loans to get an MBA and paid it back within three years of graduation. I actually screwed up by paying it off so quickly, because the interest rate after refinancing was less than 3% and I would have been better off using that money to load up my IRA (which presumably would earn better than 3% on average, as well as provide a tax break).

Re: U.S. Fed accepts $756B in daily reverse repo operation

#142

Post by OldHand2018 »

aazaa wrote: post #41

It really helps to have a look at the graph: 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. Ban…

> 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…

Re: U.S. Fed accepts $756B in daily reverse repo operation

#143

Post by bubbleRefuge »

jkhdigital wrote: post #138
bubbleRefuge wrote: post #106

Earlier quoted context omitted.

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, pollut…

https://en.wikipedia.org/wiki/Triffin_dilemma

In a floating fx currency regime that we practice, China, et al, have to hold/buy dollars in order keep their exports cheap and foreign fx exchange rates stable.

Re: U.S. Fed accepts $756B in daily reverse repo operation

#144

Post by OldHand2018 »

aazaa wrote: post #121
jcranmer wrote: post #73

Earlier quoted context omitted.

> 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.

I stand corrected. 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.

A significant number of US money market funds have been operating under fee waivers to keep yields positive since last year.

One of my retirement accounts sent me an email stating that their fee waiver expires June 30 of this year and can’t be extended. This is very different from “breaking the buck”, but I am curious to see what things would look like if money market yields went negative, which apparently is likely to happen next month.

Re: U.S. Fed accepts $756B in daily reverse repo operation

#145

Post by new_realist »

conanbatt wrote: post #115
iso1631 wrote: post #42

Earlier quoted context omitted.

And if the inflation hawks are right, that's a great deal - the capital you owe, and the interest you need to pay, will vanish within a couple of years and you'll still own the house. Banks clearly don't think there's much risk of long term high inflation.

If inflation goes up and ratings go up, mortgages get expensive, and then housing more unaffordable. Your debt is liquified but your house value also goes into the crapper.

Over 30 years, though, your salary will go up with inflation, but your fixed rate mortgage payments will not.

Re: U.S. Fed accepts $756B in daily reverse repo operation

#146

Post by sschueller »

new_realist wrote: post #58
iso1631 wrote: post #42

Earlier quoted context omitted.

And if the inflation hawks are right, that's a great deal - the capital you owe, and the interest you need to pay, will vanish within a couple of years and you'll still own the house. Banks clearly don't think there's much risk of long term high inflation.

The bankers are not the ultimate buyers of mortgage bonds. The Fed is. So, these low interest rates are not a predictor of lack of inflation, but a reflection of policy. The government is taking this risk.

"The government is taking this risk" meaning the Tax payer. Which is you and me but not people like Bezos or Musk.

Re: U.S. Fed accepts $756B in daily reverse repo operation

#147

Post by neilwilson »

gregwebs wrote: post #71

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 w…

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.

Re: U.S. Fed accepts $756B in daily reverse repo operation

#148

Post by neilwilson »

MuffinFlavored wrote: post #35
rawtxapp wrote: post #4

Earlier quoted context omitted.

This was a good and simple explanation on why this might be happening: https://www.youtube.com/watch?v=O0fSPO7AW7k . 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.

> big banks don't want the liability How is holding lots of cash a liability?

It costs you to process people’s bank transactions. However the balancing cash asset (bank reserves) doesn’t pay enough to cover those costs. So you close the bank account and ask them to go elsewhere.

Re: U.S. Fed accepts $756B in daily reverse repo operation

#149

Post by neilwilson »

jkhdigital wrote: post #72
Zelphyr wrote: post #2

Can someone provide a ELI5 for this?

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…

Finally a proper answer. Not the top voted one I note.

Re: U.S. Fed accepts $756B in daily reverse repo operation

#150

Post by imtringued »

andrekandre wrote: post #117
aazaa wrote: post #41

It really helps to have a look at the graph: 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. Ban…

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 s…

>"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.

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