4 ms·

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.

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.