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The article says EU banks can borrow at up to -1%. The article also says, "put that cash into the Federal Reserve’s reverse repo facility, which allows banks to
by landemva 5y ago
The article says EU banks can borrow at up to -1%. The article also says, "put that cash into the Federal Reserve’s reverse repo facility, which allows banks to park cash for a return of 0.05%."
They get paid to borrow and then paid to deposit what they just borrowed. Anyone see a problem with this risk-free infinite money mechanism?
- namdnay 5y agoIf the dollar drops by just 1.1% compared to the euro, that “risk free” trade has suddenly lost you money
- im3w1l 5y agoCould you hedge that in the futures market?
- dkjaudyeqooe 5y agoYes, but the margin on the futures contract may push you into a loss.
- sp332 5y agoNo. Both sides are getting what they wanted, at a price they set.
- landemva 5y agoI never agreed for Federal Reserve to shovel free money to euro banks. When does the working class become a side in the equation of the purpose and value of stable money?
- ummonk 5y agoIn this case it seems more like the ECB that's shoveling free money to the Euro banks.
- landemva 5y agoYes, with 0.05% sugar at Federal Reserve because the loaned funds need to be deposited somewhere.
- Rexxar 5y agoI don't think it's in this direction: negative interest rates means that banks lose money when they let their money on ECB account so they have to use it somewhere else. Here, they use it to buy dollars.
- dragonwriter 5y agoNegative interest rates mean that banks get extra money for taking short term loans to cover reserve shortfalls, which sounds a lot like having better-than-free money shoveled at them.
- Rexxar 5y agoThey don't take this loans from ECB, but from other banks that don't want to let their money on central bank account.
- neilwilson 5y agoAnd the bank who had the dollars, why would they want money on account at the ECB on which they get charged? It's an exchange, not a conversion remember.
- Rexxar 5y agoThey have probably other reasons to buy euros (because they need them, not to put them on their ecb account). It's an exchange as you say, every participant has its own reasons to trade.
- neilwilson 5y agoBut that's a fallacy of first use isn't it. Somebody has to hold the money in their ecb account at some point, because everything is merely an exchange. You can't get rid of it. All you can do is move it around.
- sp332 5y agoSo unless I misread this, the Euro banks are lending the Fed a bunch of money and only asking for 0.05% interest?
- landemva 5y agoIt's risk free. And they are being given that money, to loan to Federal Reserve, at a negative rate. EU banks get paid to take money/loan then get paid to deposit it. Regular people don't get access to this scam, which is ultimately paid by 6%+ commodity inflation felt by working class in USA.
- JohnJamesRambo 5y agoWhen the working class exits this system en masse into auditable, borderless, transparent hard money- cryptocurrency.
- dragonwriter 5y ago> I never agreed for Federal Reserve to shovel free money to euro banks. That's objectively not happening. > When does the working class become a side in the equation of the purpose and value of stable money? When employment becomes part of the Fed mandate.
- JumpCrisscross 5y ago> When employment becomes part of the Fed mandate It is [1]. [1] https://www.chicagofed.org/research/dual-mandate/dual-mandate https://www.chicagofed.org/research/dual-mandate/dual-mandat...
- lumost 5y agoThe fed and ecb are pseudo government organizations. They can set the prices at any point they want without consequence to themselves either positive or negative.
- anm89 5y ago>without consequence Lol. No. That's like saying "the US military is part of the government so it can bomb Canada without consequences" Being related to a government does not absolve you of all consequences of your actions.
- SantalBlush 5y agoThey are not getting paid, because those are nominal interest rates, not real interest rates.
- landemva 5y agoThe original loan is fixed, other than the -1% interest which is basically a loan paydown gift. They pay back the nominal they borrowed. They are getting paid for risk-free paper shuffling.
- BearsAreCool 5y agoDoesn't this require conversion between currencies, inherently adding a ton of risk?
- sumedh 5y agoWhat is the difference?
- SantalBlush 5y agoThe nominal interest rate doesn't account for inflation. Suppose countries A and B have nominal rates of -1% and 2%, respectively. Now suppose their inflation rates are 2% and 6%. That makes their real interest rates -3% and -4%, so if you borrow from country A and park the money in country B, you are losing money despite B having a higher nominal rate. Moreover, what OP is describing (infinite money mechanism) is an arbitrage situation, so any risk-free profit opportunity would quickly vanish and parity would be reached.
- ralph84 5y agoThis is just an instance the carry trade[0]. Borrow at a lower rate and lend at a higher rate. Works great until an event causes it to reverse and it all falls apart in a liquidity crisis. Then come the bailouts. [0] https://en.wikipedia.org/wiki/Carry_(investment) https://en.wikipedia.org/wiki/Carry_(investment)
- lordnacho 5y agoThat isn't risk free. Plenty of people have gotten stung getting a mortgage in a foreign currency. Source: I used to do this trade for a fund.
- neilwilson 5y ago"They get paid to borrow and then paid to deposit what they just borrowed. Anyone see a problem with this risk-free infinite money mechanism?" It's an exchange not a conversion, which means there has to be an equal and opposite flow in the other direction. Euros borrowed cannot be put on deposit at the Fed because the Fed uses dollars. So there has to be an exchange with somebody who had Fed dollar deposits, and wants Euro deposits.