Posted on 02/22/2015 8:13:01 PM PST by Jack Hydrazine
How can “their cash flow, which has always been positive” ever “go negative”? If they can change a number in a computer (QE) and instantly have more cash?
Yeah, you were wrong.
Bottom line the are not ownership in a company or ownership of a government backed financial instrument.
Excellent. You got one right.
They are nothing but a bet on a mathematical formula.
Well, a Nymex oil future, for example, is based on 1000 barrels of physical crude oil. So simple, even you could do the math.
Derivatives are not real. they are just a vehicle to create an income stream
Income stream? LOL!
It's been fun pointing out your confusion. We should do it again, soon.
Well, if they pay out more in interest on reserves and in operating expenses than they earn on their bond holdings........
You assume so because you have trouble with basic reading comprehension.
From post 54 My words:"Oh you mean they do it all for free? Hahahaha Tell me how they make no money on trading derivatives they just do so from the kindness of their hearts.
That's silly, of course banks usually make money when trading derivatives.
You assume so because you have trouble with basic reading comprehension.
Your confusion comes thru loud and clear, no assumption involved.
Yes and it was I who pointed such out and you claimed I didn't know such. And as we see you were wrong, I was right. Thanks for playing.
Derivatives are basically a way for the institutions in the financial sector to create wealth for themselves
...You adjusted your claim. You're learning!
No sorry. An institution creates a contract and then sells it. No creation, no contract. Thus you create the contract to create wealth. QED.
Most people don’t understand the accounting for the Fed’s operations. For one thing, they can’t just change a number in a computer and get more cash.
>>Well, if they pay out more in interest on reserves and in operating expenses than they earn on their bond holdings........<<
Ah, someone who understands....
How do they “increase the monetary base” then? They don’t actually print more money.
Your opponent is getting the best of you in this argument Dawgg.
The created contract is essentially a bet between two parties. When it’s drawn up, no one has made money yet. That comes when the object of the bet moves in price, whether that’s oil prices, bond prices, interest rates, etc.
The reason such contracts exist is to enable various parties to either reduce risk or increase risk on their current positions, depending on their preferences. As for their being “real,” when the judge tells you you do indeed owe the money it will have a real impact on your wealth.
Although the Monetary Base does, indeed, include currency (printed money in the form of dollar bills), printing more dollars doesn’t increase the Monetary Base. That’s because the Fed doesn’t just give that new money to the banks; they trade it for excess reserve balances. So printing doesn’t increase the base because the new currency is offset by the reduced reserve balances (which are also part of the Monetary Base.) The Base stays unchanged.
The Fed increases the Monetary Base by purchasing securities from the banking system and/or its customers. When they purchase a billion dollars of securities, they issue a billion dollar credit to the bank’s asset position in the form of a new reserve balance on the books of the bank. That directly increases the size of the Monetary Base (which is composed of currency in circulation plus bank reserves) by the billion dollars involved in the transaction.
If a customer sold the bonds instead, the bank still ends up with the billion in new reserves, but instead of those reserves replacing another bank asset, the bonds they held in the above example, they are offset by a liability of a billion dollars in the form of a customer deposit. (The customer delivers the bonds to the bank in return for a billion dollar credit to his account. The bank then delivers the bonds to the Fed in return for a billion dollar credit to its reserves.)
That process used to get money flowing in the economy because banks wouldn’t just sit on unused (excess) reserves. However, now the Fed in all its wisdom first puts trillions of excess reserves into the system and then pays the banks to sit on them. If that sounds silly, it’s because it is. Essentially, the QE’s resulted in the Fed forfeiting the control it once had over the money supply. Now they just control bank reserves and the money supply goes in whatever direction it chooses, depending upon economic activity, interest rates, etc.
Whether the banks sit on them, or not, they cannot reduce the reserves in the system.
I’m not sure what your point is. I agree, the banking system has no control over the level of reserves. However, if the fed funds rate is, say, 4%, and they are not being paid to sit on the excess, banks will sell any excess in the fed funds market. In normal times, when the level of excess reserves was minimal the banks selling into the market wouldn’t drive the rate significantly lower, but their circulating them tended to boost lending and the money supply. (Granted, you might not believe that, depending upon how you look at money growth causation.)
Today, however, the rate can’t go up because bank selling would immediately drive it back down, so the only way to raise the rate is to raise the Interest Rate on Excess Reserves, currently only 1/4 of a percent (but still over 6 billion dollars per year at that rate.) Payment of that interest by the Fed, to the banks, tends to neutralize the excess to an extent, but it’s not really controllable anymore. If a bank sees a lending opportunity it can sell some reserves and replace that asset with a loan asset.
That means that the main governor on money supply growth is now bank regulations that limit loan growth via capital requirements. That’s a totally different mechanism than when they could just ease or tighten the fed funds rate to influence money growth.
Just that the fact that the Fed is paying 0.25% on reserves has no impact on the level of reserves. Those reserves would sit there, no matter what.
Today, however, the rate can’t go up because bank selling would immediately drive it back down, so the only way to raise the rate is to raise the Interest Rate on Excess Reserves
I agree. FYI, they're paying on all reserves, not just excess reserves.
That means that the main governor on money supply growth is now bank regulations that limit loan growth via capital requirements.
Correct. They haven't been reserve constrained for a while.
The created contract is essentially a bet between two parties. When it’s drawn up, no one has made money yet."
Ahhh and right there it is the same exact mistake TP made.
The post you are referring to was in post 68: "Thus you create the contract to create wealth."
Noticed I said "wealth" and not currency or money. And that is because I meant exactly that, Wealth.
And the economic definition of Wealth:
From dictionary.com: Weatlh:
3. Economics:
all things that have a monetary or exchange value. anything that has utility and is capable of being appropriated or exchanged.
So that would be QED
>>Just that the fact that the Fed is paying 0.25% on reserves has no impact on the level of reserves. Those reserves would sit there, no matter what.<<
Let’s assume that you’re correct, although I don’t believe you are. Why then is the Fed discussing raising the interest rate that they pay on reserves in the event of a tightening? All they’d be doing, if you’re correct, is giving the banks money unnecessarily.
In fact, if the Fed tries to raise short term rates by raising the fed funds rate to, say, 2%, no bank will willingly hold an excess position if they can sell it at 2%. But with 2.5 trillion in excess, they clearly hold sufficient reserves to drive the rate back to zero. The only thing stopping them from doing so is the Interest on Reserves.
I don’t see how you can argue with that, from the perspective of an individual bank. So, it’s not “no matter what.” If the Fed tries to raise the fed funds rate, they will be absolutely unable to do so without somehow dealing with the excess reserve situation, and draining 2.5 trillion will not be practical due to the effect on their portfolio value.
I, however, go further than that. I’m reasonably certain that were the banks to try to sell reserves into the market their actions would begin to generate a significant expansion in the money supply, and that the result would be much higher inflation thereafter.
And thanks for correcting me on their paying interest on required reserves as well. I wasn’t aware that they did, or had at least forgotten it. By the way, while confirming that, I found a NY Fed paper that asserts essentially what I’ve claimed above. Raising the rate paid on reserves is necessary if they are to raise the fed funds rate.
You already explained why. If they raise Fed Funds and leave the rate on reserves at 0.25%, banks will lend excess reserves and drop the Fed Funds rate back to 0.25%.
But with excess reserves so high, which banks even need to access Fed Funds?
I don’t see how you can argue with that, from the perspective of an individual bank. So, it’s not “no matter what.”
A bank lending reserves to another bank does not reduce the level of reserves in the system. That's all I'm arguing. The Fed could stop paying 0.25% and reserves would not change. The Fed could raise their payment to 4% and reserves would not change.
I, however, go further than that. I’m reasonably certain that were the banks to try to sell reserves into the market their actions would begin to generate a significant expansion in the money supply,
Who would they be "selling" reserves to?
>>A bank lending reserves to another bank does not reduce the level of reserves in the system. That’s all I’m arguing. <<
If that’s all you’re really arguing then I don’t see why we’re arguing at all because I completely agree, and never said otherwise. As we both know, only the Fed can control the total reserves in the banking system.
If we do disagree, it would appear to be on what would happen if the Fed didn’t neutralize the excess reserves by paying interest on them while at the same time trying to effect a tightening. It appears that we’ve agreed that they can’t leave the IOR rate at .25 and still increase the fed funds rate appreciably, so that leaves open the question as to how they would manifest a tightening, however.
I don’t think this line of discussion will lead us to what I suspect is where our real difference of opinion resides, that being the effect of changing the level of excess reserves on the overall money supply. The side taken by most is that a tightening indicated by raising the fed funds rate (and now, by necessity, the IOR rate) first impacts lending and economic activity, and that then feeds back into the money supply, causing it to drop.
I take the side that an increase in total reserves (via an addition to the excess reserves in the system) directly leads to money being created which then feeds first into financial markets and later into economic activity. The reverse of the cause and effect described in the first case. Of course, that is not the case when banks are paid to hold onto their excess, as they have no incentive to then circulate them. For it’s the circulation that generates the increase in money supply.
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