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> As commercial banks engage in fractional-reserve banking with stablecoin deposits, their balance sheet expands with expansions in credit and security holdings

> As commercial banks engage in fractional-reserve banking with stablecoin deposits, their balance sheet expands with expansions in credit and security holdings accounting for most of the expansion. The central bank shrinks its balance sheet on the net, as reserves increase slightly while cash liabilities decrease significantly. Households accumulate more assets, funded by the expansion in bank loans. This is basically saying everyone can get more money because the Fed is less bound by its cash liabilities. This could allow them more direct control over the money supply which is less tied to physical cash deposits. Cautiously optimistic here but this seems like a good thing overall. One problem scenario: banks invest more with larger balance sheets. What if those investments fail? Now they have liabilities for their deposits which are backed by stable coins which, in turn, are backed by the Fed, which has slightly more cash than before (due to households replacing cash with stable coins) but likely not enough to cover the difference. Could this be a problem or would the Fed simply print more stable coins?

aftbit 5y ago
I was with you to the end... how can the Fed print more stable coins? Unless you're suggesting that they'd issue their own stable USD, which honestly would be a great idea. IMO it seems more likely that they'd print more traditional dollars via congressional authorization or treasury nonsense instead.
- uncomputation 5y ago
  “Print” stable coins referring to issuing their own CBCD, yes. I mean, the Fed determines monetary policy, correct? They control the interest rates of the economy basically which gives them all sorts of levers to manipulate. My concern is basically: banks have more assets, backed with CBDC, in turn backed by the Fed. If banks make poor investments (say in a housing market which collapses and they are unable to sell their underlying assets), their “money” is even less tied to cash than before, since the Fed can now just issue more CDBC without needing cash reserves. It seems to be getting all a bit abstract.

aftbit 5y ago

I was with you to the end... how can the Fed print more stable coins? Unless you're suggesting that they'd issue their own stable USD, which honestly would be a great idea. IMO it seems more likely that they'd print more traditional dollars via congressional authorization or treasury nonsense instead.

uncomputation 5y ago
“Print” stable coins referring to issuing their own CBCD, yes. I mean, the Fed determines monetary policy, correct? They control the interest rates of the economy basically which gives them all sorts of levers to manipulate. My concern is basically: banks have more assets, backed with CBDC, in turn backed by the Fed. If banks make poor investments (say in a housing market which collapses and they are unable to sell their underlying assets), their “money” is even less tied to cash than before, since the Fed can now just issue more CDBC without needing cash reserves. It seems to be getting all a bit abstract.