Flow of Money - Treasury & Federal Reserve
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- čas přidán 1. 10. 2015
- The relationship between The Treasury and the Federal Reserve. Revised from original.
**CHALLENGE QUESTIONS:
1) What are the only two financial monetary transactions that directly increase aggregate demand?
2) What is the difference between Treasury selling bonds into the market, and The Fed selling bonds into the market?
3) The national debt is the liabilities of Treasury, but if we consolidate their balance sheet with The Fed, then Notes, Coins, and Reserves are also part of the national "debt". What is the difference between a Reserve Deposit paying 0.25%, and a Securities Deposit paying 0.25%?
*CLARIFICATIONS*
At 2:40, i mention that The Fed rolls-over principle and pays interest to treasury for a net zero affect. @bertiefigueres pointed out that this is not a legal requirement and the The Fed may decide to allow Treasury debt to expire as part of monetary policy during a tightening cycle. Its a good point, worth mentioning here. For more information on the Fed's rollover facility: www.newyorkfed.org/markets/tr...
*ERRORS*
At 10:46 the treasury's balance sheet does not balance. This is because I forgot to enter the real asset purchased from the defense contractor. In the example, Treasury purchases a $100 asset, which is should have been entered into the Asset side of the Treasury's balance sheet.
This is super important to know. The American public needs to know this in order to clear the national debt and to not have such an issue with poverty. Everyone should be balancing their books like this because this is money of account, not of substance. Thank you for this video.
This has to be the most comprehensive explanation I’ve come across yet of the relationship between the treasury and the reserve. Bloody awesome, this channel is absolutely fantastic.
As you’re reading this Wayne - would you have an email address I could reach you on to ask a few questions? I’m sure you’re a busy bloke but it would be very appreciated! Thanks - Matt
Hope all is well, Wayne. Would love to see more of your videos - maybe interbank (central bank) swaps? It's also great to see how you give detailed explanations to questions posted by your viewers. Fantastic stuff. You've definitely helped improved our understanding about Capital Flows.
0:21 Treasury auctions a T-Bill.
1:02 The Fed monetizes the T-Bill.
1:50 How Treasury _"prints"_ money.
3:35 The Fed cannot increase aggregate demand.
4:32 Fiscal policy increases aggregate demand.
6:38 Neoclassical Perspective.
7:53 Modern Monetary Theory (MMT).
Hello there. First of all I want to say thank you for all your great videos. I do like your channel. Yesterday I came up with 1 question, you had a video about how international payments work, and you told that no reall money are being transferred. And here is the question, if payment was maid by correspondent bank for example from country A to country B with a trade deficit and having a problem with foreign currency deficit, so for example what if 1 billion $ is transferred to the bank in country B while they do not have such money in their vault? How that bank will recieve that money? Or they will just decline the payment?
If i understand you correctly, your asking how does a foreign bank get paid if no actual money is transferred between countries? The bank has branches in Country A and B, so if Bank A gets paid in US Dollars, and Bank B gets an 'accounts receivable' the bank *has* been paid....in US Dollars, sitting in a US Bank. If Bank B, needs currency B, it can exchange its 'accounts receivable' for local currency. This is done mostly in forex markets, but occasionally directly with Country B's central bank.
Just because physical money doesn't get transferred in international transactions doesn't mean the net position of the bank is deficit. The bank will make its portfolio decisions based on its needs and profit.
In this example, we will assume the exchange rate for US Dollars and Indian Rupees is 1:1, to keep the math simple. Examine the 'consolidated' balance sheet for an international bank before an international transaction.
100 Dollars | 200 US Deposits
100 Dollar loans |
100 Rupee | 200 Rupee Deposits
100 Rupee Loans |
| 0 net equity
Now, look at the same balance sheet after a $50 international transaction:
100 Dollar | 50 accounts payable
100 Dollar Loans | 150 US Deposits
50 Rupee | 200 Rupee Deposits
100 Rupee Loans |
50 accounts receivable |
| 0 net equity
Notice how the net equity position of the bank doesn't change...the only things that changes is the composition of the banks portfolio...it was an asset swap for them. In all 'payments' transactions the banks net position never changes...banks make money off of interest and fees, not intermediating transactions. Banks can choose which ever assets they wish to hold, typically determined by the performance of those assets.
This video may helps answer your question as well:
czcams.com/video/ghHnZADyRQw/video.html
Thanks for watching!!!
-Wayne
Quick question. When the Fed/Treasury purchases securities from member banks, doesn't that go on the balance sheet as an asset rather than zeroing out? (11:38) How does the Fed have 7 trillion in assets if purchases simply 0 out?
Thank you for this video Wayne! Wonderful visual demonstration.
one of the best videos ever
exactly what I was looking for right now
Superb! JUST what i was looking for to fill in some of my confusion. Awesome job, I've been trying to figure this out for a week.
Coming from non finance background, not easy to understand totally but i think this video has definitely help improve my understanding on how Fed and Treasury works!
Thanks for the breakdown! Good video
Great video!! Thank you for showing this weird illusion of money creating and ownership. So clear and simple. Great great video thank you!
Fantastic video. Thank you.
This video is a Godsend thank you sir and God bless you. You have a beautiful that makes this presentation so much easier to listen to!
Great vid, Wayne 👏🏼👊🏼
I really appreciate this video. A LOT! Plz don’t ever take this down :)
Cool video. Thanks!
Hi, thank for the video
Hi Wayne. I really enjoy your videos and appreciate you taking the time to educate all of us out here.
Have you given any thoughts to making a video explaining the "Debt Ceiling" debate using the same format you used here?
Thank you
You tube algorithm sucks. Quality content is not easy to find. I am lucky that i get across this
Thanks so much.
Amazing video! Would you be able to provide sources/citations for any of those balance sheet operations?
The main argument for the separation of FED and Treasury is not control of inflation. It is a separation of POWER. FED can therefore have autonomy in decisions, and it creates a level of security if the treasury gets too crazy and want to spend into hyperinflation, FED can just say no and function as a failsafe mechanism for the economy.
Thank you
Excellent
Thanks for the video! I love your brief and to the point presentation. I have 1 question. What is the drawback of an economic model of fixed money supply and no fractional banking ? Basically i want to know why this system is preferred.
Hi Suraj,
_"What is the drawback of an economic model of fixed money supply"_
A fixed money supply can create deflationary pressure in a growing economy, and may even prevent it from growing. Essentially, a growing economy needs a growing supply of highly liquid assets (money) to achieve a zero inflation rate. There is also a strong argument that the economy benefits from a small positive inflation rate, which is why many centrals banks target 2%.
_"i want to know why this system is preferred"_
The fractional reserve system wasn't chosen by anyone, it is the natural result of what happens when people make contractual exchanges. When two people agree to settle a transaction with a debt obligation, it creates a financial asset that can be traded, that is all a bank deposit is. The first "fractional reserve" transaction occured many thousands of years before the first bank ever existed. The wheelmaker went to the farmer and said something like, "If you give me a dozen chickens today, I will come help you harvest your crop in the fall." Granted, modern banking has hyperarticulated that basic truth. The government didn't invent the system, but it did create the central banking layer on top which is where the banking reserve system came from.
A more focused question may be, "Is it possible to have a system that is _not_ similar to fractional reserve banking?" You would have to outlaw all lending and debt arrangements entirely, not just with banks, but also all private entities. I'm not sure this is possible, and it would likely destroy how a modern economy is structured. The money system is not perfect and is prone to booms a busts, but, in a sense, it is what humans have collectively chosen because it is a direct reflection of the transactions and deals we chose in our day-to-day lives.
Related to this topic, I will paste a short article i wrote at the end of this post. Also, you may enjoy "Debt: The First Five Thousand Years," by David Graeber.
Thanks for watching!
-Wayne
*THE MYTH OF THE GOLD STANDARD*
There has been much debate in economics (mostly Austrian versus everyone else) over the need to fix the exchange rate of our currency to a commodity. Some _plans_ include a basket of commodities, but gold is almost always the recommended pillar of monetary stability.
Proponents of the gold-standard draw on observable history - first the exchange of physical gold specie, and then the exchange of paper notes denominated in gold. Gold has been an exchangeable asset for thousands of years, and champions of the gold-standard are always quick to point to the security of an asset that has endured the rise and fall of great empires. The ubiquitous presence of gold in our history, and in our popular media gives it a transcendental quality - how could anyone doubt the security and stability of money backed by _gold_?
I'm here to tell you that the gold standard never existed, and the exchange of gold has only ever played a small role in the exchange of goods and services.
The standard story goes something like this: Shortly after humans adopted agriculture and specialization there arose a need for money. If I made wheels and wanted to eat one of your goats, there was a problem if you didn't want any wheels. Thus, people decided that gold would become the accepted monetary unit, and the rest is history.
Wait, so monetary market exchange only began with the adoption of gold, or some similar medium? This can't be true as many civilizations developed sophisticated market systems having never adopted gold, or the like. Even more important, some civilizations in the western hemisphere didn't even have a conception of _money_, yet established far reaching trade networks.
How can this be? How can people exchange specialized goods and services and build elaborate market systems with no _money_? The answer is, gold coins (or clay tablets, or tally sticks for that matter) were not the first type of money. In the ancient world, when the wheel-maker went to the goat herder they made the exchange with an agreement. It may have sounded something like this, "Well Bob, I don't need any wheels right now, but if you come help me during calving season I can front you the meat."
The original tool for market exchange was not a medium at all, it was a social contract...debt. You paid your debt by using your labor in the future, and default meant social exclusion from the community.
You can imagine a more elaborate scenario, "Well Bob, I don't need any wheels right now, but I promised Henry I'd help him plant his field tomorrow, if you go do that for me, we'll call it even."
What is the accounting in this primitive transaction? Bob is acquiring a goat asset by creating a liability (out of thin air) denominated in his labor. The goat herder then takes this financial asset to Henry, where he _settles_ his own debt by transferring Bob's liability to Henry. Voila, complex market exchange with no medium, no gold, no coins, just contracts.
I argue that social contracts (debt) has been the primary form of _"money"_ used in all market exchange since the beginning. Gold, or fiat currency has only played a small part, usually to settle payments across great distances, or between nations. It is reasonable to consider gold the first _reserve currency_ for international trade, but it has only ever been a fraction of the _"money"_ in circulation.
Why do we call modern finance a fractional reserve system? It is because today, just like in the ancient world, there is far more credit-money settling transactions than government money. In the modern world banks have become the intermediaries that exchange debts - we call these debts _"deposits"_. Money has always been an exchange of claims against labor - it is endogenous.
So what about the gold standard? Weren't US Dollars backed by gold throughout the 19th century? No currency has ever been _fully_ backed by gold, even if we'd like to think it was. During the 19th century credit-money expanded and contracted exactly the same way it does today, by private entities entering into contracts with each other.
There was never enough gold to liquidate the amount of debt in circulation - it was (and still is) impossible to have a commodity-backed currency. Why? Because the available quantity of a metal has nothing to do with the desire of entities to create contracts, just like the quantity of Fiat Government Currency has little to do with the expansion and contraction of bank credit. Money is not created by digging holes in the earth, it is created when people want to exchange things, and the primary means of exchange has always been debt.
What about Ancient Rome? Surely they had a full gold standard? Hardly, in the ancient world governments were notorious for diluting the purity of coinage. It is almost impossible to find a "gold" Roman coin that is actually gold. Coins were portable tick marks on a non-perishable medium, a unit of account. Gold had nothing to do with maintaining the value of Roman currency. Just like today, the value of the coins was determined only by what people could buy with them - the _real_ productive output of the economy.
16th century Spain learned this lesson the hard way - it expended enormous resources and enslaved dozens of cultures in their rush to extract gold and silver from the western hemisphere. The effort flooded Spanish markets with metal currency, but didn't result in more wealth. The growth of gold in the market had little to do with the growth of productive output - it only caused price inflation. As in Rome, the crown learned that gold had little intrinsic value - coins, regardless of their composition, were only worth what you could buy with them.
That is my case, gold has nothing to do with the value of a currency, historically, or today. Misguided attempts to _fix_ the endogenous nature of _"money"_ creation to the inelastic quantity of some random metal, has led to many problems. After causing dozens of financial collapses, culminating with the Great Depression, policy makers finally abandoned the gold standard. Why? Because The Gold Standard never existed to begin with.
I have watched hours of content on MMT and money creation and this is by the best illustration of the process I have come across.
I have been able to grasp it intuitively due to my value-investing/accounting background, however, seeing the entries is the proof I have been looking for.
BTW what do you think of Jeff Snider and the repo market? Is it the same as CHIPS or is it something else?
But i don't understand only primary dealers could do transaction with fed..any mumbo jumbo commercial bank can't do transaction with fed
Thank you for the video! I've always thought of the Fed's asset purchases differently. In your video, you clearly show how the Fed prints money for the Treasury to implement its spending programmes. In this way, you show how monetary policy allows fiscal policy to work, especially when the Treasury is short of money. However, my conception is that the main purpose of such asset purchases is to increase the lending powers of the banks, allowing them to lend out more money to big and small corporations that require liquidity.
In your examples, the lending powers of the commercial banks do not increase as a result of the Fed's purchases. In fact, the examples seem to suggest that the banks merely act as a conduit between the Treasury and the Fed and nothing more. However, consider that the initial state of the commercial bank is one with a lot of assets on its balance sheet (T bills and various other securities) that it has accumulated over its years of lending activity. These assets it holds when freed up to become reserves can greatly increase lending power. Hence, the Fed comes in to buy up these assets, turning them back into reserves for these banks. In this way, the commercial banks can then provide liquidity into the economy. Isn't this the conventional view of how QE and asset purchase programmes work?
Hi Tan Yong Boon,
Your comment is mostly correct, but I think I can help expand your understanding.
*my conception is that the main purpose of such asset purchases is to increase the lending powers of the banks*
This video was focused on the relationship between The Treasury (T) and the Central Bank (CB), but you're right that CB policy primarily tightens and relaxes bank lending. CB policy is conducted by setting the interest rate in the InterBank market. The interbank rate is that base price of funding in the banking system, and affects all other interest rates. Banks are never constrained by the quantity of reserves that exist, but they are constrained by the *price* of loans, and how that price affects the demand for loans. For example, during a recession, CBs will lower the interbank rate, which lowers the costs of borrowing, making loans more attractive to borrowers. During a boom, the CB will raise the interbank rate, making borrowing more expensive and less attractive. I have a video that explains the interbank market, if you're interested:
czcams.com/video/P3maKe7RsbI/video.html
Thanks for the comment!
-Wayne
@@TheBalancedAmerican Hello Wayne. I think that the central banks don’t necessarily lower or hike the rates. They set rate targets and adjust the supply of reserves to meet those targets. Buy assets back to increase reserves and lower rates or sell assets to lower reserves and hike rates. They do the same thing using the repo market too. Right?
Thanks for the video! How do you feel about infinite QE?
Hi Bud Step,
QE has come to mean many things, so it depends on the actual policy. Originally, QE involved purchasing government debt, which was useless if Treasury didn't use its free credit...all it did was fill banks with reserves and make the Fed Funds market less necessary.
QE then involved purchasing non-performing assets, like Mortgage Backed Securities that had gone bust. In general, this was a net positive, because these assets were killing banks and removing their burden provided relief to everyone. The bad part is the moral hazard created when the CB purchases all your bad bets.
Today, Covid19 has created a situation where the Fed will stretch their 13(3) powers. The PPP Loans they've made to small business come with a guarantee the CB will buy them if they go bust, and they can also be treated as collateral with little or no risk. The Fed will likely start buying municipal bonds to support state governments. There is also rumors of The Fed buying equities to support prices, but we're not Japan yet!
I like policies that bypass the FIRE sectors. The PPP loans are great, they go straight to small business...about time...crank it up to $1 Trillion. Buying Municipal bonds is good...it prevents States from adopting new taxes to cover their costs. I would also support no interest, non-collateralized, direct loans to households. If we take care of our small businesses, and households, than the FIRE sector will be just fine.
Is it good The Fed does these things? In the short term, indisputably, yes. Without The Fed backstopping catastrophic events, then everyone would suffer much more. In the medium and long term, it's harder to judge. Does backstopping risk encourage risker bets? How will The Fed unwind its balance sheet once prices begin to be driven by markets again? Positive outcomes become very dependent on prudent policy following a crisis. Although I see very little moral hazard related to events surrounding Covid19, no one could have been ready for this.
- Wayne
I tried to keep up.. but thank u
So the amount in a transaction is ultimately limited by the number of reserves? But this transaction can occur over and over, thus increasing money into circulation that's proportional to but not limited by the amount of reserves?
Good explanation.
MMT can only be correct when the Fed monetizes the debt though. Otherwise, it's like your first example, where Wells Fargo buys Treasury securities from the Treasury. They could then sell those to Investment funds, IRAs, Money Market Funds, etc. and not to the Fed. Is this correct?
Hi Wayne, can you explain why (or if) a bank can only buy a Treasury with reserves? Why can't it just create credit to buy a bond, just as it extends a mortgage?
Treasury accounts are at the Federal Reserve just like a bank, and the interbank market is settled in reserves.
There are some exceptions...in the past, Treasury has used _Treasury Tax & Loan Accounts (TT&L)_ to accept payments in the form of Bank Deposits. This was used as a monetary policy tool, to prevent Treasury from draining bank reserves and affecting the base interest rate. Today, the system is flooded with reserves, so this facility isn't used much anymore.
Another, fairly rare, exception can occur between banks when they use short-term Treasury debt to settle transactions, as if it were currency.
Thanks for the comment!
Thanks for this quality video! I wanted to ask, when the fed wants to contract the money supply, they conduct open market operations right? How does the fed make sure banks actually buy these bonds? What are the incentives offered? The treasury wouldn't be involved in this process right?
Hi Sam,
It is highly unlikely that there would be no market for treasuries, since they are a risk free return. It makes sense for most portfolios to have some part In treasuries.
Also, some banks, known as ‘primary dealers’ have legal obligations to be market makers for treasuries.
Good question!
-Wayne
@@TheBalancedAmerican I didn't realize you replied earlier, but thank you so much for the response! It makes sense! Are you an economics TA or professor at an institution somewhere?
I am from Taiwan.My English is not good.But I really thank you.Because you help me understood what is [Treasury General Account] and how it works.I already read over 20 books,and still can’t get answer.😅
Wayne you said treasury debt held by fed doesn't count as fed roll over the principal and pay back interest to treasury but as we can see QT is going on that debt does matter as fed is running off its balance sheet instead of rolling over.
Have a feeling this video is gonna get more views over the coming weeks :)
Trump knows about MMT.
That is why he will enact UBI + M4A.
Trump knows how to increase the aggregate demand.
Dante Lino congress has to get over themselves first.
@@NathanRyanAllen wait before they start getting sick (and their constituency too).
@@NathanRyanAllen
Bannon literally said 'merge the ballance sheet of the US Treasury and the FED'
czcams.com/video/XpswoHa01q0/video.html
There seems to be a minor error in the arithmetic at 9:36 when the Treasury/Fed Liability total is shown as $7,400 when if you add them up they comes to $6,400. This minor error is cleared up at 9:46 but with no mention or explanation.
Then at 10:46 a different "non equal" situation arises when the two sides of the Treasury/Fed balance sheet are no longer equal.
Having said that, this is a GREAT video!
It’s excel. He didn’t click enter changing 1000 to 0
Hi Kevin, Thank you for pointing to my errors! The imbalance at 9:36 is an update error; I never hit the {enter} key in Excel, so it never updated the right side of the balance sheet. If you add up the values on the right side you will see they both add to $6400 as expected.
The error at 10:46 is a genuine entry error where I forgot to enter the real asset purchased by Treasury from the defense contractor. I'll add the error to the description!
Thanks,
-Wayne
How does the number of dollars that gets physically printed vs digitally "printed" work. Do these dollars come into existence in the exact same way? Does someone (who?) decide how much to physically print vs digitally "print"?
Hi!
Digital reserves can be swapped for physical currency at any time. Banks decide how much physical cash they need depending on the demand for physical cash. (They can also swap deteriorated notes for new physical cash)
Typically, physical cash makes up only a small part of currency, although sometimes banks request quite a bit. Eg, during the global financial crisis in 2007-08, banks held much more physical cash in anticipation of bank runs by depositors.
Thanks for the question!
The Federal Reserve also gets to deduct it's costs (labor payroll, etc...) from the money it "sweeps" back to Treasury, right?
That is correct, although I’m not sure why that is significant. If employees weren’t paid by the Fed, they’d be paid by Treasury. Paying directly from operations saves a bit of bureaucratic process.
Great explanation, Wayne. Quick question though: when the Treasury auctions a T-bill to Wells Fargo, why does "Reserves (Wells Fargo)" decrease on the Fed's balance sheet? Since this transaction involves only the Treasury and Wells Fargo, I don't seem to understand why anything would change on the Fed's balance sheet.
Hi James,
The Fed's balance sheet changes to reflect who is holding their liabilities. For example, if your mortgage is sold by Wells Fargo to BofA, you would record that on your balance sheet as a change in who is holding your liabilities. Although you aggregate liabilities didn't change, you are now paying a different lender each month.
The Fed must keep track of their liabilities the same way, so the change they record is a reserve transfer from Wells Fargo to Treasury. :)
Hopes this helps, and thanks for watching!
-Wayne
Also remember that debits and credits are backwards in meaning when referring to the privately owned bank …so when the treasury is seeing a credit it’s seen by us as a debit and visa versa…so when he says ur mortgage is a liability, understand it as actually being an asset…it’s got value….the fake money doesn’t…it’s an iou…which is what u are led to believe a mortgage is …u already paid it off when u signed the back of it to endorse it…..no property can be held as collateral for more then 4 years either and if u go to ur title company and ask to see the file…and get the entire file, on one of the 4 last pages will state this…
Do I understand you correctly that it's the same "here is a token of debt I, the gov, give you in exchange for the real product, and I'll accept it later as tax" as it was with the medieval wooden chips? So, essentially a) it's like "paying tax forward" for the tax residents b) all US national debt is created as a side effect, "borrowing from the future ourselves" and c) for foreign agents US dollar gains value from ability to buy from American sellers (who in turn see USD valuable for paying taxes)?
Hi Wayne, under what circumstances does the fed decide to monetize t-bills? a fair chunk of us govt. debt is held by the fed and since the fed cannot purchase directly from the government, it must have purchased on the open market at some point. I thought the fed purchasing t-bills is called QE? is QE different to monetizing the debt?
*_" under what circumstances does the fed decide to monetize t-bills?"_*
The Fed sets monetary policy by targeting an interest rate in the Federal Funds Market. Each day, the New York Fed intervenes (anonymously) by adding reserves to _fix_ the market at their target interest rate.
Lets assume The Fed is targeting 0.25%. If the bank demand for reserves rises, and the supply remains the same, the Federal Funds Rate will begin to creep up. However, The Fed will prevent this, by adding reserves, increasing the supply to meet the demand by purchasing treasuries.
If the bank demand for reserves is low, the Federal Funds Rate will begin to fall if the supply remains the same. But The Fed will prevent this, by _not_ adding reserves, or removing reserves, to defend their target interest rate.
So, the decision to purchase a T-Bill is depends on what the market is doing. The Fed sets a target interest rate, and then _responds_ to the ups and downs of market by manipulating the total amount of reserves circulating between banks.
*_"is QE different to monetizing the debt?"_*
The Fed doesn't have to buy treasury securities to inject new reserves, it can purchase private assets as well. QE was a reserve add that was focused on supporting longer-term interest rates. The Fed purchased a combination of longer-maturity treasuries, and private mortgage-backed securities. The idea was, if we remove the quantity of Bonds & MBSs the scarcity will support the price. After 2007, the MBS market was a particular problem.
To answer your question directly, _some_ of QE monetized the public debt, other parts monetized private debt.
I am slightly uncomfortable with the idea of _monetizing the debt_. I do not consider Federal debt the same as private debt - there is a very fine line between cash/reserves and T-Bills - i consider both to be 'money', as least in the realm of finance and banking.
Thanks for the questions Ben! =)
when you say 'reserves', reserves are always just cash only?
my understanding is that when the fed fixes a federal funds rate of 0.25% (the overnight rate), the way they go about this is to create unlimited amounts of money available to be borrowed at this rate to member banks, while also providing interest on unlimited deposits at this rate (I think the deposit rate is actually a quarter of a percent lower). This way the rate is fixed by loans and deposits between the fed and member banks, rather than by trading government bonds. am I missing something?
If the fed does buy and sell government bonds in order to influence the amounts of cash held by banks, then how do they chose the duration of bond they want to trade? (ie. would they trade in both 1 month bonds and 10 year bonds?)
My understanding of QE is that it involves the fed purchasing government bonds in order to flatten the bond yield curve, bringing longer term bond yields closer to the overnight rate. Once these government bonds mature into cash, the fed reinvests into more bonds so that the cash is never returned to the treasury. QE can involve private sector asset purchases as well in order to increase their value, but at maturity the cash is returned to the treasury.
ben sharkey
*_" reserves are always just cash only?"_*
Reserves are different from 'vault cash' - physical notes held by banks. Reserves are electronic deposits that banks hold with the Federal Reserve. 'Vault Cash' is not a part of the settlement system between banks, but reserves are. Reserves never leave the banking system, and the quantity is controlled by The Fed.
*_"they go about this is to create unlimited amounts of money available to be borrowed"_*
Really good question. The Fed has several tools it can use to influence monetary policy - 'Open Market Operations', 'The Discount Window', and very recently 'Interest on Reserves'.
'Open Market Operations' is the primary tool The Fed uses to set The Federal Funds Rate. Each day the New York Fed intervenes in 'open markets' by purchasing or selling T-Bills. If the Fed Funds Rate is creeping up, The Fed will purchase treasuries to add reserves, which suppresses the rate. The Fed will purchase or sell as many T-Bills as it needs to achieve its target rate.
The 'Discount Window' rate is what you described in your post - it is the lender-of-last-resort function of the Fed, who tpically sets the rate about 100 basis points (1%) _above_ the Federal Funds Rate. Meaning, if The Fed is targeting a FFR of 0.25%, it will likely set the discount rate at 1.25%.
The idea behind the two rates is that they force banks into a narrow range between the two rates. Hypothetically, a borrowing bank can not get a loan (from other banks) cheaper than the FFR, and lending bank cannot charge more interest than the Discount Rate.
In reailty, we've seen loans significantly less than the FFR, and significantly more than the Discount Rate. But the two fixed rates _do_ provided fairly strong anchors.
The important distinctions to make is 1) 'Open Market Operations' are the _primary_ tool used by The Fed to target the FFR, and 2) you can think of the Discount Rate as an emergency measure. Banks will only use the Discount Window (borrowing from The Fed) if they are in real trouble. There is a stigma attached to borrowing from The Fed, if a bank uses the discount window, everyone knows they're in trouble and might move their capital to another bank. For example, 2008 was the first time the discount window had been used since 1987.
The Fed's new tool, paying interest on reserves, is a extraordinary measure that was needed to support the FFR while undergoing QE, which dumps reserves on banks. Here is my video on the FFR, which might clarify some things. =)
czcams.com/video/P3maKe7RsbI/video.html
*_"how do they chose the duration of bond they want to trade?"_*
It depends what part of the yield curve The Fed is targeting. Typically they target the short end by purchasing 1-month and 3-month T-Bills. If they wish to target the middle of the yield curve they will purchase 5 and 10 year treasury notes. Long end? They will purchase 30 year bonds.
QE was focused on the long end of the curve, but monetary policy is typically focused on the short-end because markets are more sensitive to fluctuations there...it is the place The Fed has the best information and control, whereas manipulating rates 30 years into the future involves much more guessing and unpredictable market behavior.
*_" bringing longer term bond yields closer to the overnight rate"_*
Yes! =)
*_" the fed reinvests into more bonds so that the cash is never returned to the treasury"_*
When the Treasury Bond matures The Fed has two options, 1) it can allow the security to mature, which reduces the reserve balance of Treasury effectively destroying money, or 2) it can roll-over the principle into a new security, which does _not_ reduce Treasury's reserve balance. In special circumstances, The Fed may decide to retire some Treasury debt but 99% of the time The Fed will roll-over the principle, which is very close to direct-financing to the Treasury, the only distinction being Treasury doesn't get to decide how much is rolled-over. =P
Really good questions! =)
+Wayne Vernon
Thanks! I enjoyed your answers .... my brain grew a little :)
Isn't the MMT view kinda tautological? Like if you assume Securities are Deposits then they are the same thing? But wouldn't that fall apart if something happened to the securities? Like the Federal reserve/ treasury decided not to buy them back? I don't know much about this stuff at all, so hopefully I used the right terms.
Hi Wayne,
I am coming from Croatia, which is in Europian Union. We cannot print our money like USA can, or take a loan from our central bank like US treasury does with FED. We rather go to capital markets and debt our country in euros or dollars. Th interest expense is rather hight 5-6%., and sum of debt and interest to be paid is increasing every year. Why couldnt Croatia just take a loan from its own Central bank like Japan does, but rather in euros which is far more harder to pay off? (i know for the Mastricht agreement) but why is that so?
+zvone40 Because at its core, ECB limits Euro money supply or acts like it is limited. That's is why Croatia couldn't easily obtain the loan as you said. That also contributed a lot to Greece crisis.
EU should be re-structured.
Wayne i have a important question to ask in this...what if primary dealers or banks don't have enough reserves in first place to buy it..then how fed can monetize it? In your example you assume banks have enough reserves to take leftover auction after private players done with buying...but what if primary dealers don't have enough reserves to buy it in first place??
Hi Shubham,
I think you have enough info to answer this for yourself. If banks have little/no reserves to buy treasury debt, what would happen to the interest rate on Treasury debt?
If banks can’t lend to Treasury, they can’t lend to each other. What would happen to the interbank interest rate?
How would the central bank respond to these changes in the interest rate? ;)
(TLDR, this is why MMTers say gov/cb must spend first before borrowing currency)
@@TheBalancedAmerican i understand cb will defend thier target rate for these changes.
But i don't understand one thing you say here if thier is not enough reserves in system banks can't lend reserves to each other but mostly banks enter into private contracts with each other to create money keeping loan contract as collateral.Where reserves here comes into picture when they don't even transfer reserves to each other.Like now in india we have 4 percent liquidity ratio and 19 percent SLR (statutory liquidity ratio ).I really don't understand reserves play in all this.If you could help me with an example how they comes into play into all this will be helpful.Thanks.
@@TheBalancedAmerican i don't understand main part is how thier can be scarcity of reserves when reserves are not even needed for creating money! I am surely missing something sorry for confusion.how reserves even keep rates effected when they don't even need reserves...i have read few white papers on this too but not sure what they mean...they also say same things reserves keep interest rate intact.
Would it be too much to ask you to share this Excell sheet you use in your videos so that I can play here while I watch? :P
+RGV Try this link...let me know if it doesn't work. =)
drive.google.com/file/d/0BzBgxNrSWMA9a2ZuLUhXX0xneEk/view?pref=2&pli=1
+Wayne Vernon thanks a LOT! :D
Wayne, your balance sheets did not balance for half of the video (6,500 vs. 6,400). Please explain - there seems to be a missing piece of the puzzle here.
Nice catch Shadsky! My error was not recording the inventory entry on Treasury's balance sheet. When treasury purchased the aircraft from the Defense contractor, I should have recorded a $100 Aircraft on the asset side of Treasury, which would have balanced the accounts. =)
Why do the treasure needs a commercial bank to intermediate the t-bill transaction with the FED? Why can`t the treasure to issue the bond and the FED to buy it directly with new money, since that is what actually happens after the second transaction is finished?
+RGV
Aha! Great question!
Technically, Treasury must issue securities into the open market, and The Fed must buy them in the same open market. Why? Because that is the way the law is written, but you're smart to recognize that it is essentially the same thing as direct financing from The Fed. It is like money-laundering! =P
Neoclassical thinkers will tell you it is about a separation of powers, keeping politics out of monetary policy. The Central Bank is like the fourth branch of government. Independent within government, but not independent of government, just like Executive, Judicial, and Legislative branches. I'm a huge supporter of an independent central bank.
MMT would tell you that it is all a farce, and the law was written to accommodate the perceptions of politicians. Many in congress were afraid that a central bank would seize control over the private sector. The hokey-pokey accounting was put in place to calm their fears.
I tend towards the MMT perspective.
"Neoclassical thinkers will tell you it is about a separation of powers, keeping politics out of monetary policy" The think is that I don`t see how it "separate" anything! I don`t know if I miss something, but I don`t see any difference from the FED directly monetizing the treasure. But as I said, there might be something I am missing here. In Brazil there was hyperinflation until 1994, and Central Bank was allowed to monetize the treasure directly. In 1994 a new government plan called "Plano Real" established several new rules to control inflation (it worked) including to put banks in between central bank and treasure in the "bond transaction" like it is in the US. The explanation was that this way the government can`t use new money to finance its debt generation inflation, but it is what still happens, just now with this commercial bank intermediate transaction. I don`t know how that changes anything, specially because in Brazil the central bank is not independent, it is run by the government.
RGV
_"The think is that I don`t see how it "separate" anything!"_
You're absolutely right, for all practical purposes, indirect Fed financing doesn't separate anything.
_"The explanation was that this way the government can`t use new money to finance its debt "_
I remember reading an opinion on this very issue, I think it was Samuelson. He basically admitted that it was a farce, but had value nonetheless, because it confused politicians. Even though indirect financing is no different than direct financing, politicians (and the public) don't know it - they think government spending is constrained. This creates a _" political culture"_ that influences policy - it works to restrict government expansion.
Very interesting, and I agree with Samuelson, but the truth is esoteric - watching the charade makes me smile (and cry)! =P
hahaha, this is too awesome to be true. If I understood what you said, this separation does make a difference, because politicians will think there is a difference and therefore they won`t count with free money (that they do have) to expand expenses? :O
+RGV Yes! Spot on ;)
Would it be fair to say that the Treasury and Fed, jointly, just create money when the government needs to deficit spend, that the deficit spending has no consequence as long as consumption does not exceed productive capacity of the economy, and that the bonds are simply a tool for the government to regulate interest rates/debt?
There isn't always reserve creation when Treasury deficits spends, but yes, The Fed will always supply the appropriate quantity of reserves to target their policy rate. From an interest rate perspective, The Fed treats Treasury deficits the same way it treats Bank deficits...i think it is helpful to think of Treasury as a member bank; Treasury expanding debt is same as Banks expanding debt.
Key differences are, The Fed primary shops Treasury debt to implement policy, which means there is always a high demand for Treasury issuance; this guarantees that Treasury's rates will always be very close to the lowest base rate. Whereas banks might be borrowing reserves at rates significantly above the base rate, if they have a bad rep.
The other key difference, obviously, is that The Fed is a fiduciary of Treasury, so all its profits are returned to Treasury...meaning, T debt held by The Fed might as well not exist.
For more on interest rates, check out: czcams.com/video/P3maKe7RsbI/video.html
Thanks for watching!
-Wayne
@@TheBalancedAmerican great video. So let me ask you this. How should I value the true value of a treasury security compared to a corporate security or stock. Should look at the interest paid? Or my power to burrow against it? Ex: where rates stand today I'm able to burrow around 93% of a T-Bill or T-Note at 1% compared to 75% of a stock I hold in a portfolio, yet for ex that stock might return a 5% dividend. I guess what I want to know should look at these assets intrinsic value from how much I can loan AGAINST it and not necessarily the price/rate relationship and prevailing interest rates?
2:50. I dont understand why treasury liability, and fed asset cancel out when printing money. For example when the treasury pays off the debt, ehy do you say that then the fed gives principle and interest back to treasury ??
Yes, when Treasury retires a T-Bill with The Fed, The Fed rolls-over (issues new credit) to Treasury, and all Fed profits are returned to Treasury.
The Fed doesn't "have to" roll-over the principle, it can also purchase a different T-Bill in the open market, which accomplishes the same thing. =P
Fiscally, it is safe to consider The Fed and The Treasury as a single entity, although there are some legal barriers in place that give a degree of independence to The Fed. The Fed has the power to set the base price of reserves (Federal Funds Rate), which Treasury does not control. =)
Thank you for answer. So actually at the end of a day treasury will have to pay it off to the Fed, in ohter words when the fed prints money, it actually is done by increaing the National debt. In other words like you said assuming that treasury will spend that money in a real market, will result in increasing a money supply?
Zvone st There is a bit more to it, but yes, increasing debt, increases nominal demand (i.e. increases the quantity of broad money circulating in the _real_ economy).
one more question as ive gone through it again. For the MMT theory, when you at the end of the video canceled out -100, isnt that actually a debt for treasury (government), and therefore only possibility they could pay it off is to raise taxes and collect the sam 100 they previously injected into system when spending on a aircraft?
Zvone st
The point of the consolidated government balance sheets is to demonstrate that assets and liabilities paired between The Fed and Treasury _don't really exist_ for all practical purposes. You can't 'owe' yourself money.
When Treasury is holding a reserve 'asset', The Fed must be holding a reserve 'liability.'
If Treasury is holding an overdraft 'liabilitiy,' than The Fed is holding the overdraft 'asset.'
The MMT perspective can be a bit mind-twisting if you're new to it. It is like an autostereogram, a complete mess until you focus just right, then a beautiful picture emerges. =)
Does anyone know what happened to Wayne? I love his explanations, but the most recent videos here are years old.
I don't get it. Why even have the Treasury? Government can just tell the banks to loan deposits to the defense Department.
Wayne, thinking here, every time the treasure deficit spend x dollars they have to issue equivalent x dollars bond (like you described in this video)? Or it can simply credit Wells Fargo by $100 in reserves without a bond?
In the real world, assuming the treasury is deficit spending and decides to make that $100 payment to the defense contractor, will it necessarily issue a $100 bond? If yes, considering everything else unchanged, how much of that $100 will the FED have to monetize in order to defend the target interest rate? The treasury issues the $100 bond, drains that $100 in reserves from the banks but then spends it back therefore the amounts of reserves in the banking system hasn't changed. However the deposits increased by $100 (endogenous money) so if the required reserves is 10% I assume the FED will have to provide $10 in reserves by buying a $10 bond from the bank with newly created money. So this $100 defict spent dollars introduced into the economy $100 in endogenous money plus $10 in reserves and $90 in bonds. Is this correct?
+RGV
_" it can simply credit Wells Fargo by $100 in reserves without a bond?"_
Under current law, not _really_. If the Treasury spent reserves without having them in their account at The Fed, this would be an overdraft. However, Treasury can suspend those rules under certain circumstances, war powers, for example. Also, even though there is a _rule_ saying Treasury should not overdraft, I highly doubt The Fed would ever bounce a payment from Treasury.
If Government decided to change the law, and allowed Treasury to issue US Dollar Reserves, this would eliminate the Treasury Securities Market...eventually, Treasury would drive the interbank interest rate to zero, which is why Govt Debt is a tool to manipulate the rate *up*! =P
Under a gold standard, there was a _real_ scarcity (of gold) that drove interest rates. Rates were determined by the available quantity of a commodity. Under the current Fiat system, there is no such thing as scarcity, so Central Banks must set interest rates through policy...meaning, they create artificial scarcity! This is why govt is always manipulating the rate *up*, because the _natural_ rate on Fiat is _zero_. ;)
_"will it necessarily issue a $100 bond?"_
It doesn't have to, it can also tax citizens for the reserves. The example was meant to explain how Treasury issues _new_ money into consumption. Treasury can run a deficit (adding money), a balanced budget (adding nothing), or run a surplus (remove money from consumption).
_" how much of that $100 will the FED have to monetize in order to defend the target interest rate?"_
This depends on the private market for Treasuries. If private entities are eager to purchase Treasuries, then The Fed has to add few reserves to meet their target. If Treasury decides to run a very small deficit, then the Fed has to add few reserves. However, if private entities reject Treasuries, then The Fed must add a lot of reserves. Or, Treasury could run a huge deficit, like during wartime, and the Fed would have to add a ton of reserves.
The point to understand is, The Fed will defend the rate regardless of what the private sector, or Treasury does. Hence, they don't _really_ have a lot of control, other than setting the target.
_"if the required reserves is 10% I assume the FED will have to provide $10 in reserves by buying a $10 bond from the bank with newly created money"_
Spot On! If Treasury pumps banks full of Treasuries, forcing them to leverage, then The Fed will provide the reserves. WWII was a good example of this...the US treasury took the deficit up to 50% of GDP, typically it runs 3-5%. However, interest rates never climbed because The Fed defended Treasury. ;)
@@TheBalancedAmerican hello Wayne little confusion here what do you mean by "private sector" isn't private sector is also part of total reserves in banking sector? Little confused here.
@@TheBalancedAmerican but if thier are not so much reserves in first place in banking sector then?
3:30 Federal Open Market Committee. One thing I really don`t understand is how monetary policy can be decided by a private institution in the US. Why would the FED do monetary policy to the best interest of the population and country`s economy if it is a private institution ? When the government decides it wants to issue new bonds and wants it to be bought by the FED to get "free money" to rescue the economy in a recession, or to pay for government debts, how can that be a decision of a private institution and not the government? Does the government issues the bond and cross fingers hoping the FED to buy it in exchange for nothing besides inflation? Why would the FED cooperate with that? In 2008 for example, how could be FED`s decision to create and inject that much money into the banks, if FED is mostly owned by bankers (as far as I`m concerned)? I am surely missing a big piece of information here to understand this. :)
+RGV
_"private institution in the US"_
The Fed is not a private institution in any practical sense. When Central Banks were first created, most nations operated under a gold standard, so central banks had to actually raise gold reserves to create a monetary buffer. Central Banks _forced_ all member banks to give-up a portion of their gold, and in exchange their would receive a certificate of equity in their regional reserve bank proportional to their contribution. These equity shares is were all the confusion comes from, but they have little resemblance to actual ownership.
It is more like government coming in and seizing half your money, giving you a receipt saying they did it, and then never giving it back. Although, The Fed does pay a 6% dividend on member equity shares, which is less than 1% of the profit generated by The Fed. This policy is antiquated and used because fed membership was not mandatory at the beginning.
Today, membership is mandatory, equity shares can't be bought, sold, or traded, and 99%+ profit and principle on Fed Operations is returned to Treasury. The conspiracy theorist have it backwards - it wasn't private banks seizing control of government, it was government seizing control of private banks. =P
+RGV
_"how can that be a decision of a private institution and not the government?"_
I would argue that it really _is_ a decision of government, but politicians don't know it. In my opinion, The Fed has little or no _real_ control_ over the quantity of reserves in the system, or how much treasury debt they monetize. Watch my video on The Federal Funds Market to see why! Weee. Now we dive a little deeper! =D
czcams.com/video/P3maKe7RsbI/video.html
+Wayne Vernon thank, I watched the other video. If I understood correctly, the monetary policy will be a decision of the government only because when the treasure issue the bonds the central bank will HAVE to buy ALL of them to defend its rate. Is that correct?
+RGV yes! So long as the CB targets an interest rate, it is forced to add reserves if banks create loans, or treasury spends a bunch. So they don't really have control...it is more about the decisions of Treasury and private loan creation. :)
Quick question: your video starts with Treasury selling a bond (Tbill) to Wellsfargo first, and then Fed buys it back from Wells fargo to “print money” and give to treasury. Why can’t Treasury just directly sell the bond to Fed?? Just one transaction and boom. Money is printed.
Can someone please answer? Or Wayne please help me bro! I really loved your video ❤
While you talk about MMT, you said FED and Treasury balance stays the same but in the end of transaction cycle Treasury & Fed Assets goes to 6,400 while Liability is 6,500 So balance is not balanced out - can you explain please ?
Hi Ričardas,
You are the second person to catch my mistake! My error was not recording the inventory entry on Treasury's balance sheet. When treasury purchased the aircraft from the Defense contractor, I should have recorded a $100 Aircraft on the asset side of Treasury, which would have balanced the accounts. =)
Thanks for watching!
Wayne
I'm related to Einstien and i'm still confused what a load of polarva only in America
Thanks for watching. Monetary theory is some pretty esoteric stuff. The process described in the video isn’t unique to the US, this is how all central bank systems work across the globe.
@@TheBalancedAmerican but how emerging markets can work like this? They must print money seeing thier fx reserves isn't it???
But fed has not been given the Authority per constitution.
What gives the t bill value that the fed will hand out paper money for? Ur signature! It’s what creates value! And u don’t need the fed to pay bills! This is what the accepted for value process does….u give them the value by accepting the transaction from u to them it not creating anymore paper money to owe a debt on
Fed takes a 6% kickback, if I remember correctly.
Hi Robgoren,
I've encountered questions about this before, and since I have nothing to do this Saturday morning, I'll take a few minutes to clarify the 6% dividend.
First some background. When the Federal Reserve was created membership was not mandated by law, so the Central Bank (CB) had to attract member banks by paying a dividend on investment. This makes a lot of sense, the CB was asking its members to give up 10% of their gold to be held in reserve. Without the dividend this would reduce the potential profits of the bank, and banks would be reluctant to invest in the CB. This is important to understand because some believe the dividend was created by a corruption of the the CB charter by bankers. There are plenty of reasonable arguments against the advantages the CB gives to banks, but i don't believe the dividend is one of them.
If we dig deeper we find a lot of restrictions on how the dividend is paid, and how it can be used:
1) The dividend rate paid is the lesser of 6%, or, the 10-year Treasury. So the rate paid today is 1.5%, not 6%.
2) Dividends cannot be distributed to shareholders, and must be placed in the reserve account of the bank to boost excess reserves (excess reserves are those held above the required reserves). The dividends can never leave the CB.
3) There is a threshold of excess reserves, above which any dividend earned is returned to Treasury. Recently, Quantitative Easing flooded banks with so many excess reserves that most large banks exceeded their thresholds, and their entire dividends are currently returned Treasury...the rate of many large banks today is zero.
Finally, I think there is a reasonable case to get rid of the dividend today. Banks of a certain size are now required by law to join the CB, so there is no need to incentivize membership. Also, currency today is fiat, so there is no specific need for the CB to acquire gold to provide services to banks during liquidity bottlenecks. Essentially, the dividend today provides no tangible benefit to the banks (who already have endless credit with the CB), or to the core mission of preserving the payments systems. Eliminating the dividend wouldn't do much, but it would make the system more transparent to the public, who often wonder by the CB is paying banks anything at all.
Hopefully this helps clarify the CB dividend. Thanks for the comment, and thanks for watching!
-Wayne
@@TheBalancedAmerican Yes, you're right. The percentage is irrelevant compared to the Fed's role lobbying for the big banks, as Prof Michael Hudson says.
@@robgoren8628 I really like Michael Hudson's work! :)
I want a finance degree
...God willing.............
..
.
*CHALLENGE QUESTIONS:*
1) What are the only two financial transactions that directly increase aggregate demand?
2) What is the difference between Treasury selling bonds into the market, and The Fed selling bonds into the market?
3) The national debt is the liabilities of Treasury, but if we consolidate their balance sheet with The Fed, then Notes, Coins, and Reserves are also part of the national "debt". What is the difference between a Reserve Deposit paying 0.25%, and a Securities Deposit paying 0.25%?
I am surprise nobody answers your questions after more than 2 years. I hope we can have great discussion.
2) Treasury selling bonds to the market:
- To raise money for the gov't spending, for i.e defense contract
- Taxes collected are also pooled into gov't spending
Feds selling bonds to the market:
- Unlike Treasury, primary purpose is to contract money supply from economy
- Any profit earned by Feds, doesn't mean anything and turn over to Treasury
1) Here are mine, one from Gov't while the other from private sector. I am talking financial perspective.
- US Gov't spending is the biggest source of increasing aggregate demand
- Loans put out by the banks also increases aggregate demand. Federal Reserve has control over this type. But this type is secondary to the 1st one.
In a sense, for both branches of gov't, Treasury and Feds, the purpose is to stimulate the economy
3) "What is the difference between a Reserve Deposit paying 0.25%, and a Securities Deposit paying 0.25%?" You trying to throw off by saying same interest %, 0.25%? :D
Reserve Deposit:
- Only banks can directly deal with Feds, not the general public
- Interest rate is single most powerful force that Feds has control over. This interest you are referring to (0.25% in this case) is called IOER (Interest on Reserve and Excess Reserve) and it serves as the lower bond for Feds Fund rate. Uppoer bound is Discount Rate. Basically, Feds Fund Rate is how Feds contract or inject money into economy
Securities Deposit:
- This is interest on Treasuries, by US Treasury. Banks, people, general public can buy them
- Interest earned by holders is the money created (through interest payments) in the economy
1) gvt. spending and private sector spending
2) treasury will eventually inject new reserves, fed can only drain reserves
3) no difference (Stevie Kelton - green and yellow dollars)
The example you have about money printing is wrong. The Fed never participates in Treasury auctions. The Fed purchasing treasuries would never impact the Treasury’s TGA account. QE creates money because it purchases treasuries through PDs from non-banks.
Hi zonnins, thanks for comment. here is my response:
*_"The example you have about money printing is wrong."_*
The accounting i present in my videos has been peer reviewed multiple times. I make some presentation errors sometimes, but nothing related to what you mention here. If you can point to a specific mistake i've made, i'd be happy to issue a correction and credit you for the finding.
*_"The Fed never participates in Treasury auctions"_*
The video doesn't show the fed buying directly from Treasury, it shows the fed buying from banks in the secondary market.
*_"The Fed purchasing treasuries would never impact the Treasury’s TGA account"_*
The Fed does not _'directly'_ impact the Treasury's TGA account (other than remittance), but it certainly affects it indirectly. Surely you recognize that every reserve held in TGA is a liability of The Fed? Moreover, the fed targets an interest rate...if treasury borrowing begins to affect the interbank rate, the Fed will supply whatever quantity of reserves is needed to maintain its target rate. In this context, the Treasury is no different from a Bank, neither is reserve constrained, and monetary policy acts on the margin. I explain this in my Federal Funds video if you're interested.
*_"QE creates money because it purchases treasuries through PDs from non-banks."_*
QE purchased a lot more than just treasuries, but that fact doesn't change much. QE changed the aggregate saving portfolio of the financial sector by increasing dollar liquidity, and reducing savings assets circulated. How do these actions affect prices? It will have very little affect on broad-based prices because monetary policy targets savers, not consumers. Prices of financial assets are likely to rise as a result of QE (which we saw), whereas prices of real good and services will remain largely unaffected (we saw this too).
Monetary policy affects broad-based prices through the investment/borrowing channel.. I.e. companies or consumers need to borrow to purchase real goods and services in order for financial markets to affect the price of real goods and services. So, the Fed lowers rates to make borrowing cheaper...encouraging real investment and consumption. What happens if the rate has been pushed to zero (which QE did), and people still aren't' borrowing? At that stage, the quantity of reserves produced will have no affect real prices.
When the target rate reached zero, the Fed began paying interest on reserves to support its target rate. What is the difference between a reserve balance earning 0.25%, and a treasuries balance earning 0.25%? Nothing, they are both highly liquid cash equivalents earning the same rate. So no amount of swapping one for the other (monetary policy) will affect the broader market. This why Keynes called it "pushing on a string".
Hope this clarifies some things. Thanks!
-Wayne
how can re live in a system that no one agrees on the functioning of, except that it is fixed to bail our large vested interests...what a joke
Markets and money developed endogenously, economists try to understand how that happened, and what factors influences outcomes. It is not easy to wrap all the possibilities that can occur into a unified model. Factors, like money, will have entirely different affects depending on the scenario...good economics in one case, could be disastrous in another. I wish there were clear-cut answers, but the truth is, we don't know.
am I a moron? I guess so
Sorry Wayne. You made a mistake.
At around 2:40 you make a critical mistake. The Treasury issues bonds which are bought by the market. When the Fed buys them, the Treasury still owes the owners, the Fed in this case. The Fed may or may not be paying back the coupons, but the Treasury still owes the Fed the face value of the bond. So the Treasury still owes money to the Fed.
Crucial mistake there on you part.
You also don't make clear that the bonds were mostly bought at a premium to face value, so there will be a loss when they expire. So if the Fed paid $200 for the bond, and when it expires it pays back $100 face value, you have a loss.
The Fed will not be getting back the full amount of money they paid for the bonds when they expire. So who foots that bill? Treasury, right? So sooner or later the Treasury needs to pay the Fed for those loses. You conveniently forgot to mention this hanging liability.
Hey @bertiefigueres
Thank you for the intelligent comment! Here is my response:
*_the Treasury still owes the owners, the Fed in this case_*
I mention that the Fed rolls over principle payments from Treasury, which is true, but it is a fair point that probably deserves an entry in the description. Under normal operations, The Fed _does_ roll-over treasury debt automatically, but this is decision of monetary policy; there is no legal requirement that they roll-over principle. Why does the Fed do this? Because a Treasury principle payment to the CB would represent a reserve drain on the system, which is no different from standard monetary policy of buying and selling Treasuries. The Fed rolls over principle, because if they didn't, they just have to purchase the same Treasuries in the secondary market.
When would the Fed decide to _not_ roll-over Treasury debt? During a tightening cycle the Fed may decide to allow treasury debt to expire with the explicit purpose of draining reserves from the system. Of course, they could also drain reserves by selling treasury debt to the market, but this is exactly the same result as not rolling over principle. It is six-of-one-half-dozen-of-another. Here is a link describing the roll-over facility at the New York Fed. www.newyorkfed.org/markets/treasury-rollover-faq
_* So who foots that bill? Treasury, right?*_
The Fed doesn't always make a profit on its operations, especially during turbulent times (GFC, Covid), but lets examine the data. Does the Fed ever post a loss to Treasury? www.statista.com/statistics/1386557/federal-reserve-earnings-remittances-to-treasury/#:~:text=The%20Federal%20Reserve's%20earnings%20remittances,percent%20lower%20than%20in%202021.
Great comment! I'll add your name to the description and post a clarification on roll-over operations.
-Wayne
Thanks@@TheBalancedAmerican .
The only other note I would make on second viewing your video, at about 1:20, you created money by creating an $100 Asset and a $100 Liability. This type of money is broad money (accounting money). Technically I am referring to broad money less narrow money, so let's just call it Credit for short. I think the US technical for this is M2 less M0, I think. So you created Credit.
Credit doesn't increase the bank's Net Assets because the Asset cancels out the Liability.
Credit only lives in the accounting system where it is created. If one bank wishes to transfer money to another bank, they need to do it by converting the broad money (Credit in the system) into narrow money (notes, coins and reserves only) and then doing the transfer that way.
This automatic transfer from Money to Credit and back again is a very common operation for banks to perform. It's what they do. You are well aware of making a deposit at the bank. You walk in to your branch with $100 note (narrow money), hand it over to the cashier, who Credits your account and then pops the $100 in their cash draw. They have just silently converted your $100 actual money (narrow money), into a $100 Credit in the system. The money itself, the $100 note, now belongs to the bank. The Credit in their accounting system is purely electronic accounting money, not notes and coins you can actually touch (narrow money). They do the automatic swap when you withdraw Credit as well, where they reduce the credit in your account and hand you a $100 note (narrow money) out of their drawer.
Now that we understand narrow money and Credit (broad money), I would mention that as I understand it, the QE money created is narrow money. The money you created in your video is broad money (Credit). They are not the same thing. It may be a technicality, but technically a dog is not a cat, and I am sure you would agree the two animals are quite different.
MMT, as I understand it, asserts that the government "spends into existence" money. To me, that means narrow money, because broad money is created by creating an Asset and a Liability. The Asset, the money, is linked to a corresponding Liability. So if the government is relying on broad money for the "spend into existence", they are in actual fact just "borrowing to spend" because of the corresponding Liability associated with broad money.
By the way, I like the way you presented your T-Accounts in your video. They come out very nice, and it makes it clear to see what you are getting at.
If you wish to get back to me on an easier platform for chatting, you can find me on X/Twitter and on Mastodon at @BertieFigueres.
im so fucking lost
This video may help! czcams.com/video/FTj4oEidjn0/video.html
Economist piss me off because they usually are content with private central banks charging citizens interest 🖕
I think economists give that impression because we do our best to evaluate objectively, not placing specific biases on our observations. We worry if we assign an 'attitude' towards something it will cloud our ability to observe it. Its why this video places no judgement on the system, it only describes how it works...the facts.
All that said, economists do have personnel perspectives, and many are not favorable to Central Banks. Check out Richard Werner, he is a very smart guy who holds a perspective similar to yours. I am also a heavy critic of the system, highlighting the side-effects of QE and low interest rates. I certainly believe there are better ways to implement monetary policy.
Thanks for your comment!
-Wayne
@@TheBalancedAmerican Thanks for that response. Yes I understand describing the situation as is. I will check Richard out. My comment is out of frustration that economist have the biggest voice, and don't make it a point to say the central bank used in the US using the federal reserve system cannot end well from it's inception. I could be completely wrong, but just seems like one day someone will have to pay for that kind of system. My suspicion is the central banks just end up owning everything in the end. But thanks for the video and detail!
@@TheBalancedAmerican Looking into Richard and you were spot on, I'm hearing him talk about things I found myself. Thanks for the recommendation.
I don't understand one thing wayne as you say... primary dealers first buy government them right? Then they resell it to thier clients? As most of treasury debt is buyed by primary dealers from where they get money in first place even before they get money from clients? Do you have any idea? I hope you understand my question!
Wayne i really don't understand one thing i thought fed only deal with primary dealers to buy and sell treasury etc! But you saying they transit straight with memeber bank.
Most primary dealers are banks. Here is a current list. www.newyorkfed.org/markets/primarydealers.html
Fed buys treasury debt in secondary markets, not the primary market. Primary dealers are the entities who are responsible for making a market for treasury securities.
@@TheBalancedAmerican wayne what is your opnion about this mosler way how debt is monetised.Here is link to video where he explains.
czcams.com/video/480sGei5ZsA/video.html
This is wrong to say too treasury always has zero reserves! What about TGA account of treasury at fed? They have tax collected money in it!
1) I clearly state that the consolidated gov balance sheets is a theoretical framework.
2) I *do* show TGA drain reserves before spending, exactly as I do in the separated balance sheets.
3) go look at TGA balance history on FRED, it shows the balance doesn’t change much except during crisis. So you can set the TGA balance at any level, including zero, and it will not have meaningful influence on the quantity of reserves in the systems.
Typically the Treasury draws down its account throughout the day, and then fills it back up to the level it started with…Ie the net reserve position of treasury is nearly always zero!
@@TheBalancedAmerican but during April tax season TGA do fill up.Draining reserves from banking sector to TGA
@@shubhamsingla9340 taxes are collected on a weekly, monthly, and quarterly basis. April deadlines are for individuals filing their tax documents, and very few owe taxes at that time. You may see a small bump in tax revenue but not likely, since many get tax rebates.
Either way it wouldn’t indicate that Treasury is draining reserves in any meaningful way. So long as Treasury is running a deficit, tax revenues are never enough to cause a reserve drain.
Treasury would need to run a surplus to have a meaningful impact on the quantity of reserves. But remember, if Treasury drains enough reserves to impact the interbank rate, the CB will just add reserves to offset the drain and defend their target rate.
@@TheBalancedAmerican i still don't understand if thier are abundant reserves why asset prices are going down with QT going on.I see QT as marginal buyer as federal reserve is now selling assets who we're buying once ( during QE) that's why asset prices are going down.
@@shubhamsingla9340ey thanks for this video and I had a question an MMTer is saying this vid proves their statement that our tax revenues are not carried forward to the treasury and we just delete the tax money and just poof money and print T bills to pay for our govt obligations, is that accurate and this person thinks your agreement in how mmt thinks about the treasury and fed together equalling a balance of zero always is actually how they do things but you are saying that's just your opinion and not actually how it works. Which the facts point to us showing tax revenues going to the treasury but that would mean the treasury and fed wouldn't together equal zero then disproving you saying mmt gets the conceptionalization right.
The major reasons why I don't think the mmt claim is accurate that we just delete the tax revenues and just poof money/issue debt to pay for obligations is bec that makes it so confusing as to how do they determine how much debt/how much poofing of the money to do for their day to day obligations for the year when it makes it so much easier to carry the money forward and have that run through and now you take the rest out that you need by issuing debt. And the fact we have articles showing record breaking tax revenues in the treasury disproves that bec if we just deleted the taxes we collect then we wouldn't carry them forward to the treasury to then just delete it so that MMTers don't look incorrect. And is there any way we finance govt obligations (ie military Healthcare govt spending bills) by increasing the money supply or do we just use money already in the system like with tax revenues and issueing T bills? Because I know QE we basically print money that then goes to banks to encourage lending and if it gets loaned out we have increased the money supply. There has to be other ways we increased the money supply before we implemented QE but in what ways do we do it now?