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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

#151

Post by imtringued »

spiralx wrote: post #120
seoaeu wrote: post #100

Earlier quoted context omitted.

> 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! That's not how fractional reserve banking works. If I deposit $100 in a bank, they're not allowed to lend out $1000. In fact given a 10% cash reserve ratio, the limit is actually $90. The other $10 has to stay at the bank "in reserve", at least in theory.…

Fractional reserve banking is an incorrect model of money creation though, banks in today's world really do create money via lending. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

"The process by which banks create money is so simple that the mind is repelled."

- John Kenneth Galbraith

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

#152

Post by imtringued »

jules-jules wrote: post #83
vmception wrote: post #48

Earlier quoted context omitted.

> There is no argument that the advent of blockchain democratised access to finance. You’d think MySQL would have been the tool to tackle this obvious use case over all these years if you read this forum

Didn't you get the memo, there really is no use case for blockchain.

It's sort of like there are two flavors of ice cream but the second flavor has much smaller portions.

It's just ice cream in the end.

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

#153

Post by thu2111 »

imtringued wrote: post #150
andrekandre wrote: post #117

Earlier quoted context omitted.

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 ev…

That seems backwards: people at the end of their life aren't saving, they're spending the money they saved via pensions earlier in their life.

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

#154

Post by imtringued »

edgyquant wrote: post #92
rsp1984 wrote: post #79

Earlier quoted context omitted.

Yea, but you gave the bank the money first. Which brings us back to the first question: How is holding cash a liability? Are they worried about deflation?

Deflation would be a good thing (as the cash would be worth more.) Cash is a depreciating asset due to inflation (it isn’t a liability.)

If nobody spends their money then your economy will end earlier than it should have.

People advocating for deflation say they will still spend their money but what they really mean is that they will spend the money on basic living expenses and that is it. They will save the rest. How else would they benefit from deflation? If they spent all their money they wouldn't benefit from deflation as their incomes stagnate or even fall.

Deflation isn't just a fall in prices of goods, it's also a fall in cost of labor because the price of goods is what pays for the labor.

It's pretty easy to illustrate how deflation ruins the profitability of companies. You have a production line that generates $5 million revenue a year. You have fixed costs of $4 million. Your profit is $1 million. As the population gets older, demand for your products goes down by 20%. Now you have $4 million in revenue and your costs went down slightly to $3.5 million. You're making half the profit even though revenue only fell by 20%. Running the production line at below capacity makes the production line increasingly less profitable until it no longer makes sense to run it.

A fixed % reduction in revenue can result in a much higher loss in profitability. Low profitability is a self reinforcing cycle as companies stop borrowing money and the money creation process is being interrupted leading to further deflation that cuts into profitability until you reach the smallest possible economy. That economy would have a GDP significantly smaller than $22 trillion USD but the level of savings didn't change meaningfully.

Despite the illusion of deflation, your money is actually losing value over time as the economy gets smaller because your dollars are just a claim to the output of the economy and if the economy shrinks so does the ability to serve your claims. When people realize that the money they are holding onto wasn't risk free after all it's too late and we get very high inflation or even hyper inflation as people get rid of dollars that have no counter part in reality.

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

#155

Post by imtringued »

Judgmentality wrote: post #45
onlyrealcuzzo wrote: post #28

Earlier quoted context omitted.

Taking a step back - "repo" is short for "Repurchase Agreement". Financial Institutions put collateral into an overnight market and receive cash, and then they "agree" to "repurchase" / give the cash back (plus some fee) for the collateral the next day - right? This is the "opposite" in that Financial Institutions put cash in and get collateral (treasuries) out - right? The transaction is essentially going in the "re…

What's really weird is they're getting interest to park their money overnight now (it's been zero interest for a while until today). This is really smoke and mirrors though. Moving the cash into the repo market doesn't change anything, other than now it's an "asset" instead of a "liability." Yes, there are obviously legal differences here, but it's still the same amount of cash owned by the same entity, except now th…

It's not just the central bank. It's literally every market participant kicking cans down the road. Everyone is saving at the expense of everyone else.

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

#156

Post by imtringued »

nverno wrote: post #68
1-6 wrote: post #65

Earlier quoted context omitted.

If money is printed, can it ever be destroyed?

yes, taxes for example. The Fed has power to print and destroy

I've seen a proposal to replace interest rates with a credit tax. It would grant the us government the ability to borrow money at 0% regardless of the interest rates for the private market. This would completely destroy the belief that money is a risk free asset as governments can borrow money at any time and there is no need for government bonds anymore.

When inflation happens you raise the credit tax so that money creation actually causes net deflation once the loans are being paid back.

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

#157

Post by imtringued »

thu2111 wrote: post #153
imtringued wrote: post #150

Earlier quoted context omitted.

>"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 ev…

That seems backwards: people at the end of their life aren't saving, they're spending the money they saved via pensions earlier in their life.

>people at the end of their life aren't saving, >they're spending the money they saved via pensions earlier in their life.

I'm confused. You are contradicting yourself. Saving isn't just the accumulation of money. Saving is the act of keeping money in your bank account. Unless you spend the entirety of your pension, the money you haven't spent is saved until you die.

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

#158

Post by imtringued »

enraged_camel wrote: post #14

This might be an unpopular opinion, but the economy we have right now feels quite fake, for lack of a better word, in the sense that the official numbers that are reported don't seem to reflect its actual health. I find it deeply concerning that every warning sign is summarily dismissed as "transitory" and the government and the Fed continue to drive full speed ahead.

When interest rates hit 0% your money is fake and you haven't realized it yet. This isn't the fault of the Fed.

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

#159

Post by imtringued »

znt wrote: post #31
enraged_camel wrote: post #14

This might be an unpopular opinion, but the economy we have right now feels quite fake, for lack of a better word, in the sense that the official numbers that are reported don't seem to reflect its actual health. I find it deeply concerning that every warning sign is summarily dismissed as "transitory" and the government and the Fed continue to drive full speed ahead.

It is fake. The thing is is your average American would never even consider the ultimate possibility of a foundational collapse of their economy and currency. And it's not just the average American. Nearly all hedge funds etc have USD as their basis. Bitcoin, Gold, Stocks, real estate etc has a value tag that's denominated in Dollars. You open up your portfolio and be happy when the USD value goes up in a nice green…

Unfortunately none of what you said makes sense.

Other countries are dumping their deficit into the US and we are the ones pretending that the US is doing something wrong.

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

#160

Post by imtringued »

cwkoss wrote: post #139
jkhdigital wrote: post #137

Earlier quoted context omitted.

The legal tender point is the most important, as to whether or not Bitcoin will become a global reserve currency. The tipping point comes when entire chains of real economic activity can be settled in Bitcoin, and the friction of using Bitcoin for working capital fades away.

Yeah, if this move plays out in El Salvador's favor, other countries are going to try to emulate it, and we'll start seeing significant trade flows settled in Bitcoin. That's when things will start getting really exciting. That seems like a bright future to me, but my cynical tinfoil hat worries that the US will find some pretext to invade El Salvador to 'root out terrorists' or whatever so that dollar hegemony is no…

Countries that want to run a budget surplus without taking the surplus from their domestic economy must take it from another country. No government wants to take money out of their domestic economy in a way that harms it.

What happens is that these countries buy the safest bonds possible and those are issued by governments. You are relying on the ability of the government to collect taxes to pay the debt and that ability correlates with military power as having a weak military would be a risk vector. A destroyed government is unlikely to honor its debts as seen with the Weimar Republic.

The rhetoric that the US is going around the world with guns to force people to buy their bonds (and therefore USD) doesn't make sense because countries are voluntarily selling products for USD and then buy US treasuries with the USD. They actually want the military protection.

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