4 ms·

What you don't pay for in tax, you will pay for in inflation, basically. > The additional funding will be made available through the creation of a new Bank Ter

by kypro 4y ago

What you don't pay for in tax, you will pay for in inflation, basically. > The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... They're basically going to allow banks to post treasuries as collateral in exchange for cash. Making this effectively a form of QE. To understand better, banks don't hold the cash you give them. They take it and invest it in "safe" assets like treasuries and mortgage backed securities. But because rates have sky rocketed US banks are currently sitting on hundreds of billions in loses on these investments. That's generally not a huge problem though because so long as the banks can hold these assets to maturity they'll eventually get their money back. Problems only occur when a large number of customers start demanding their deposits back ASAP. If enough customers want their deposits in a short enough window then the bank will be force sell those investments at a loss so they can return cash to customers. To avoid this scenario the Fed are basically saying, if a bank is ever forced to realise loses, then the Fed will take those loses and "print cash" to make them whole again. It's probably the right thing to do given the systemic risk, but this is inflationary.

junofan 4y ago
How is allowing banks to borrow at par value by pledging assets they already value at par value to back demand deposits inflationary?
- kypro 4y ago
  Customer has $100. Customer deposits this $100 at a bank. The bank now has $100, and the customer has $0. The bank uses the $100 to purchase a treasury bill. The treasury bill falls in value and is now worth $80 on the open market. The Fed says, it's cool, just pretend it's worth $100 because it will look bad otherwise. Customer says, I want my $100 back. The bank is now forced to sell the treasury bill and admit that it's actually worth $80. Fed says, it's cool, just give us your $80 treasury and we'll print $100 and give it to you. There now exist, a $80 treasury (held by the Fed) and $100 in cash which is given to the customer. Where is this $180 of value coming from? ---- Its inflationary in two ways. Firstly, money in the economy is created via debt, and Fed in this case is creating a debt which increases money supply. Secondly, the Fed is exchanging the bank's assets at an above market price and taking the loss onto its balance sheet.
  - junofan 4y ago
    > The bank now has $100, and the customer has $0. This is wrong. Edit: I see. I think you’re missing the full accounting picture. When somebody moves $100 of petty cash into a bank, they don’t have $0. They have $100 of cash. The bank has an asset and a liability. Rinse and repeat with the bank and Fed transactions. There’s not an $80 treasury note anywhere because those aren’t MTM.
    - kypro 4y ago
      It's a simplification, but I agree, it's not fully accurate. I'm guessing what you're getting at here is that bank would technically have a $100 liability with the customer and $100 in cash on its balance sheet. The point I was trying to make is that there's just $100 of spending power in this hypothetical economy.

by kypro 4y ago

junofan 4y ago

How is allowing banks to borrow at par value by pledging assets they already value at par value to back demand deposits inflationary?

kypro 4y ago
Customer has $100. Customer deposits this $100 at a bank. The bank now has $100, and the customer has $0. The bank uses the $100 to purchase a treasury bill. The treasury bill falls in value and is now worth $80 on the open market. The Fed says, it's cool, just pretend it's worth $100 because it will look bad otherwise. Customer says, I want my $100 back. The bank is now forced to sell the treasury bill and admit that it's actually worth $80. Fed says, it's cool, just give us your $80 treasury and we'll print $100 and give it to you. There now exist, a $80 treasury (held by the Fed) and $100 in cash which is given to the customer. Where is this $180 of value coming from? ---- Its inflationary in two ways. Firstly, money in the economy is created via debt, and Fed in this case is creating a debt which increases money supply. Secondly, the Fed is exchanging the bank's assets at an above market price and taking the loss onto its balance sheet.
- junofan 4y ago
  > The bank now has $100, and the customer has $0. This is wrong. Edit: I see. I think you’re missing the full accounting picture. When somebody moves $100 of petty cash into a bank, they don’t have $0. They have $100 of cash. The bank has an asset and a liability. Rinse and repeat with the bank and Fed transactions. There’s not an $80 treasury note anywhere because those aren’t MTM.
  - kypro 4y ago
    It's a simplification, but I agree, it's not fully accurate. I'm guessing what you're getting at here is that bank would technically have a $100 liability with the customer and $100 in cash on its balance sheet. The point I was trying to make is that there's just $100 of spending power in this hypothetical economy.