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anyone know of bullet-proof analyses into central banking policy out there? after dealing with crypto projects that offer high interest rates, and do so by jus

anyone know of bullet-proof analyses into central banking policy out there? after dealing with crypto projects that offer high interest rates, and do so by just inflating their token supply, fed policy seems magical to me. the fed’s offering you yield on your dollars, and that yield comes from printing new dollars (right? there’s no tax increase as part of this announcement). your share of dollars stays constant. so why is it that paying nominal interest on dollars makes people want to buy and hold onto them? how is it that inflating the supply via this one particular method strengthens the dollar? how do you model these things?

seibelj 4y ago
All fiat currencies are backed by the USD. All commodities that matter are priced in USD. Countries must acquire USD to buy oil. Therefore we increase interest rates, makes USD-denominated debt harder to manage, increases demand for dollars, weakens other fiat currencies, dollar is strengthened. What USA business can do now is swoop in and buy all foreign capital assets at pennies on the dollar. Go to Sri Lanka and buy whatever factories and industrial capacity they have. Emerging market crashes are great for the USD money printing country.
- boppo1 4y ago
  >Countries must acquire USD to buy oil Not anymore!
bjt 4y ago
The Federal Reserve doesn't print money. The Treasury does that. The Fed does two things: 1. They lend money to banks through what's called their "discount window". https://en.wikipedia.org/wiki/Discount_window https://en.wikipedia.org/wiki/Discount_window 2. They buy and sell US Treasury Bonds on the open market until interest rates hit the target that they've set. https://en.wikipedia.org/wiki/Federal_Open_Market_Committee https://en.wikipedia.org/wiki/Federal_Open_Market_Committee Today's announcement is about using that second mechanism.
- boppo1 4y ago
  "print money" is a colloquialism for increasing the money supply, which the Fed does do. Before you argue that all banks increase the money supply: there is a limit to the maximum possible amount of money as long as the reserve ratio isn't 0. That maximum limit was raised by the Fed with bond buying. When people complain about printing money, this is what they are complaining about. It absolutely causes asset inflation (very easy to observe with some DCF modeling or checking P/E ratios). I would also argue it is a strong contributor to increasingly binary wealth stratification. It's a legitimate complaint and pedantically pointing out that the Treasury literally prints money is either ill-informed or arguing in bad faith.
  - piperswe 4y ago
    Reserve requirement ratios are currently 0: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
thesausageking 4y ago
This article by Lyn Alden is the best on the dollar as the US Currency Reserve I've read: https://www.lynalden.com/fraying-petrodollar-system/ https://www.lynalden.com/fraying-petrodollar-system/
- paulpauper 4y ago
  the articles promoting gold and btc in late 2020 and 2021 as a hedge aged well too, I see.
  - thesausageking 4y ago
    Her Bitcoin take (which was at $19k at the time) is that "Scarce assets, particularly industrial commodities, are historically cheap... Alternatives like Bitcoin also offer asymmetric outcomes even with small allocations." She's also talking about the "longish" timeframe, so it's early to judge.
nonameiguess 4y ago
This is the exact opposite of what the Fed does. They have many instruments by which to influence interest rates, but mostly what they do is target the federal funds rate. This is the rate at which banks lend to each other overnight. The Fed mostly hits the target rate in two ways. One, by directly lending at the top of band rate and borrowing at the bottom of band rate, so banks will never lend to each other outside of the band. Second, by engaging in open market operations, which is primarily the buying and selling of US Treasury notes. Buying them increases the demand, which in turn increases the price, which decreases the interest rate. Selling them increases the supply, which in turn increases the interest rate. To buy treasuries, they simply create money from nothing, thus inflating the money supply is what lowers interest rates. When they sell treasuries, they simply destroy the proceeds, thus deflating the money supply to increase interest rates. The Fed doesn't offer anyone yield on holding dollars. You get yield from holding treasuries and interbank commercial paper. The Fed influences the yield on these instruments by buying and selling them using a theoretically infinite supply of its own dollars.
- nonameiguess 4y ago
  Reading my answer after posting, I think your confusion is really coming from the way bond pricing works, not anything to do with central banking. The price of a bond is determined by a pretty simple formula, P = M / (1 + i)^n, where P is the market price, M is the redemption value at maturity, i is the interest rate per period, and n is the number of periods at which interest is paid. Since interest rate is in the denominator, this means a higher interest rate bond has a lower market value and vice versa. Thus, boosting the market value of a US Treasury instrument by buying them decreases the interest rate they need to offer to sell them. But, boosting the market rate also increases the capital gains of current owners of the bonds who sell them to you. The "yield" on a bond is only fully determined by the interest rate if you actually hold it to maturity. Some of the mechanisms at play here overlap with cryptocurrencies, but a lot of them don't. Cryptocurrencies have no maturity value or coupon payments, so the yield on holding them is entirely determined by capital gains. Nothing else. This isn't the same thing as an "interest rate" in the sense that it means with bonds. The Fed is decreasing the interest rate of new Treasury offerings, but also increasing the capital gains of current owners of Treasuries. So the interest rate decrease is a bad thing for people who want to buy new debt, but a good thing for holders of current debt.

seibelj 4y ago

All fiat currencies are backed by the USD. All commodities that matter are priced in USD. Countries must acquire USD to buy oil. Therefore we increase interest rates, makes USD-denominated debt harder to manage, increases demand for dollars, weakens other fiat currencies, dollar is strengthened. What USA business can do now is swoop in and buy all foreign capital assets at pennies on the dollar. Go to Sri Lanka and buy whatever factories and industrial capacity they have. Emerging market crashes are great for the USD money printing country.

boppo1 4y ago
>Countries must acquire USD to buy oil Not anymore!

bjt 4y ago

The Federal Reserve doesn't print money. The Treasury does that. The Fed does two things: 1. They lend money to banks through what's called their "discount window". https://en.wikipedia.org/wiki/Discount_window https://en.wikipedia.org/wiki/Discount_window 2. They buy and sell US Treasury Bonds on the open market until interest rates hit the target that they've set. https://en.wikipedia.org/wiki/Federal_Open_Market_Committee https://en.wikipedia.org/wiki/Federal_Open_Market_Committee Today's announcement is about using that second mechanism.

boppo1 4y ago
"print money" is a colloquialism for increasing the money supply, which the Fed does do. Before you argue that all banks increase the money supply: there is a limit to the maximum possible amount of money as long as the reserve ratio isn't 0. That maximum limit was raised by the Fed with bond buying. When people complain about printing money, this is what they are complaining about. It absolutely causes asset inflation (very easy to observe with some DCF modeling or checking P/E ratios). I would also argue it is a strong contributor to increasingly binary wealth stratification. It's a legitimate complaint and pedantically pointing out that the Treasury literally prints money is either ill-informed or arguing in bad faith.
- piperswe 4y ago
  Reserve requirement ratios are currently 0: https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm

thesausageking 4y ago

This article by Lyn Alden is the best on the dollar as the US Currency Reserve I've read: https://www.lynalden.com/fraying-petrodollar-system/ https://www.lynalden.com/fraying-petrodollar-system/

paulpauper 4y ago
the articles promoting gold and btc in late 2020 and 2021 as a hedge aged well too, I see.
- thesausageking 4y ago
  Her Bitcoin take (which was at $19k at the time) is that "Scarce assets, particularly industrial commodities, are historically cheap... Alternatives like Bitcoin also offer asymmetric outcomes even with small allocations." She's also talking about the "longish" timeframe, so it's early to judge.

nonameiguess 4y ago

This is the exact opposite of what the Fed does. They have many instruments by which to influence interest rates, but mostly what they do is target the federal funds rate. This is the rate at which banks lend to each other overnight. The Fed mostly hits the target rate in two ways. One, by directly lending at the top of band rate and borrowing at the bottom of band rate, so banks will never lend to each other outside of the band. Second, by engaging in open market operations, which is primarily the buying and selling of US Treasury notes. Buying them increases the demand, which in turn increases the price, which decreases the interest rate. Selling them increases the supply, which in turn increases the interest rate. To buy treasuries, they simply create money from nothing, thus inflating the money supply is what lowers interest rates. When they sell treasuries, they simply destroy the proceeds, thus deflating the money supply to increase interest rates. The Fed doesn't offer anyone yield on holding dollars. You get yield from holding treasuries and interbank commercial paper. The Fed influences the yield on these instruments by buying and selling them using a theoretically infinite supply of its own dollars.

nonameiguess 4y ago
Reading my answer after posting, I think your confusion is really coming from the way bond pricing works, not anything to do with central banking. The price of a bond is determined by a pretty simple formula, P = M / (1 + i)^n, where P is the market price, M is the redemption value at maturity, i is the interest rate per period, and n is the number of periods at which interest is paid. Since interest rate is in the denominator, this means a higher interest rate bond has a lower market value and vice versa. Thus, boosting the market value of a US Treasury instrument by buying them decreases the interest rate they need to offer to sell them. But, boosting the market rate also increases the capital gains of current owners of the bonds who sell them to you. The "yield" on a bond is only fully determined by the interest rate if you actually hold it to maturity. Some of the mechanisms at play here overlap with cryptocurrencies, but a lot of them don't. Cryptocurrencies have no maturity value or coupon payments, so the yield on holding them is entirely determined by capital gains. Nothing else. This isn't the same thing as an "interest rate" in the sense that it means with bonds. The Fed is decreasing the interest rate of new Treasury offerings, but also increasing the capital gains of current owners of Treasuries. So the interest rate decrease is a bad thing for people who want to buy new debt, but a good thing for holders of current debt.