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

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

jnorthrop 5y ago
Great link. Thanks
MuffinFlavored 5y ago
> big banks don't want the liability How is holding lots of cash a liability?
- choeger 5y ago
  Well, banks do not hold cash. Cash is always held by the central bank (that's where the other banks have their accounts). Nowadays, this can easily involve negative interest rates. So if a bank now buys some security back from the central bank, they effectively remove money from the system (and get that security in return).
  - MuffinFlavored 5y ago
    > Nowadays, this can easily involve negative interest rates. Source? Does it? I thought negative interest rates were a thing in the EU but not in the US yet?
    - jkhdigital 5y ago
      The Fed is adamant about preventing negative rates, which is in fact what the reverse repo facility is accomplishing--if market participants could not go to the Fed and had to conduct repo with banks, then the overnight repo rate could easily go negative when there's too much cash sloshing around.
- rawtxapp 5y ago
  It increases their regulatory obligations without increasing their profits.
- ketzo 5y ago
  Because it's not actively generating value, and is in fact actively losing value thanks to inflation. It's legally considered a "liability" in the context of a lot of banking regulation.
  - stryker7001 5y ago
    is it more fair to say one reason they don't like holding cash because they have to pay interest to their depositors on it without getting any return on it? So putting the cash to work (in a reverse repo) even at 0.05% allows them to convert it to an asset and generate some return.
- joosters 5y ago
  To the banks, it's a debt and hence a liability. If you put money in your bank account, then the banks owe you money.
  - rsp1984 5y ago
    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?
    - edgyquant 5y ago
      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.)
      - imtringued 5y ago
        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.
- devin 5y ago
  In the case of inflation, your purchasing power will decrease. For example, there was a period during the 1940s (1941-1951) where if you held cash, t-bills, cash in a bank, or t-bonds instead of equities, you would have seen your purchasing power decrease by 30-50% over that time period.[0] [0]: https://www.lynalden.com/may-2021-newsletter/ https://www.lynalden.com/may-2021-newsletter/
  - devin 5y ago
    More of a fun fact than a direct answer to the question at hand.
- neilwilson 5y ago
  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.

jnorthrop 5y ago

Great link. Thanks

MuffinFlavored 5y ago

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

choeger 5y ago
Well, banks do not hold cash. Cash is always held by the central bank (that's where the other banks have their accounts). Nowadays, this can easily involve negative interest rates. So if a bank now buys some security back from the central bank, they effectively remove money from the system (and get that security in return).
- MuffinFlavored 5y ago
  > Nowadays, this can easily involve negative interest rates. Source? Does it? I thought negative interest rates were a thing in the EU but not in the US yet?
  - jkhdigital 5y ago
    The Fed is adamant about preventing negative rates, which is in fact what the reverse repo facility is accomplishing--if market participants could not go to the Fed and had to conduct repo with banks, then the overnight repo rate could easily go negative when there's too much cash sloshing around.
rawtxapp 5y ago
It increases their regulatory obligations without increasing their profits.
ketzo 5y ago
Because it's not actively generating value, and is in fact actively losing value thanks to inflation. It's legally considered a "liability" in the context of a lot of banking regulation.
- stryker7001 5y ago
  is it more fair to say one reason they don't like holding cash because they have to pay interest to their depositors on it without getting any return on it? So putting the cash to work (in a reverse repo) even at 0.05% allows them to convert it to an asset and generate some return.
joosters 5y ago
To the banks, it's a debt and hence a liability. If you put money in your bank account, then the banks owe you money.
- rsp1984 5y ago
  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?
  - edgyquant 5y ago
    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.)
    - imtringued 5y ago
      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.
devin 5y ago
In the case of inflation, your purchasing power will decrease. For example, there was a period during the 1940s (1941-1951) where if you held cash, t-bills, cash in a bank, or t-bonds instead of equities, you would have seen your purchasing power decrease by 30-50% over that time period.[0] [0]: https://www.lynalden.com/may-2021-newsletter/ https://www.lynalden.com/may-2021-newsletter/
- devin 5y ago
  More of a fun fact than a direct answer to the question at hand.
neilwilson 5y ago
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.