Bank of England Paper shattering common misconcpetions

[JohnfrmClevelan]

1) that's your opinion. They leverage those reserves as a means to lend. So yes they do use them.

Banks don't leverage reserves. Banks lend by expanding their balance sheets. Reserves only come into play after the fact, and not in any sort of leveraging way. If excess reserves were low, and if the Fed didn't accommodate the banks' need for reserves based on demand, then your use of the word "leverage" might carry some weight, but reserves are simply not a limiting factor, so they are not even something that can be leveraged.

2) Banks look for the best margin of profit with least risk. If a Bank can use it's reserves which is paying .5% and get Treasuries at .5% to 2% (short term to long term), Banks are gonna make between 0% to 1.5% with NO risk. This has been the case for almost 8 years. So what you want to do is raise the cost of borrowing within the banks on excess reserves. So you hike that to squash the Bond trade ( basically 1% FFR). Banks will seek higher returns (profit margins) when Banks can't make the no risk trade (bonds). They will seek out moves (loans to those who are paying 2 plus %.

Banks have always made some safe profits on their excess reserves; before IOR, they bought Treasuries or loaned out excess reserves. But banks lend whenever there are creditworthy borrowers - and the existence of creditworthy borrowers is not something that banks can control. Can you point to a time when banks turned down creditworthy borrowers (and their higher returns) in favor of simply holding reserves/treasuries? You talk about this as if it were all a matter of tweaking bond yields in order to convince banks to release reserves to borrowers, which is wrong on many levels.

 

[JP Hochbaum]

Seriously? Issuing TSY is to raise money. If the purpose of the TSY isn't to raise money anymore.. it has no value to the holder.

What? Why would earning interest stop having value? You're not making sense.

 

[Critter7r]

Are you people really that DENSE? My point was if I had $0 dollars in my bank account and I needed money right this very second.. I could not use treasuries for that situation. It takes about a week for a sale of a treasury to take place. So they are NOT interchangeable.

Could you provide some numbers that show that there is a statistically significant number of people that run out of money and can't buy groceries but are holding $50k in bonds? The point being made is that the money put into bonds wasn't going to be used for other purposes. The idea that bonds can not be made instantaneously liquid is moot in that regard.

 

[austrianecon]

Banks don't leverage reserves. Banks lend by expanding their balance sheets. Reserves only come into play after the fact, and not in any sort of leveraging way. If excess reserves were low, and if the Fed didn't accommodate the banks' need for reserves based on demand, then your use of the word "leverage" might carry some weight, but reserves are simply not a limiting factor, so they are not even something that can be leveraged.

Banks do leverage reserves or no bank would have a leverage ratio as reserves would cover 100% of their balance sheet. It doesn't.

Banks have always made some safe profits on their excess reserves; before IOR, they bought Treasuries or loaned out excess reserves. But banks lend whenever there are creditworthy borrowers - and the existence of creditworthy borrowers is not something that banks can control. Can you point to a time when banks turned down creditworthy borrowers (and their higher returns) in favor of simply holding reserves/treasuries? You talk about this as if it were all a matter of tweaking bond yields in order to convince banks to release reserves to borrowers, which is wrong on many levels.

How about the last 8 years? You would not have $2.2t in excess reserves at the Fed if Banks were lending to creditworthy people. You are misunderstanding what banks are doing.. No, it's not about tweaking bond yield. It's about tweaking Fed Funds rate (and interbank lending) to cost more to squeeze Banks out of holding and using bond market as their cash cow. Basically, instead of having a bank borrow at .50% then buy a bunch of long term bonds at making a 1% profit margin off it.

 

[austrianecon]

What? Why would earning interest stop having value? You're not making sense.

You aren't earning interest if the Treasury can just print dollars. You are being paid for the loss of value if the Treasury can just print. Do you see the difference?

 

[austrianecon]

Could you provide some numbers that show that there is a statistically significant number of people that run out of money and can't buy groceries but are holding $50k in bonds? The point being made is that the money put into bonds wasn't going to be used for other purposes. The idea that bonds can not be made instantaneously liquid is moot in that regard.

You are assuming this. You do realize you get better return on Bonds then you do putting your money in a savings account right? For example if you buy a 5 year US Treasury, you are getting 1% a year. That $500 a year on $50,000. Deposit it at Bank of America with a .01% interest and you get yourself $5.

It could be as little as $1,000. The point still stands. Bonds do not = Dollar. Never have and never will.

 

[mmi]

You aren't earning interest if the Treasury can just print dollars.

If you aren't earning interest, why does the Treasury allow you to collect it?

return on Bonds … It could be as little as $1,000.

I thought you just said that these instruments don't allow holders to earn interest. What is this "return" you refer to?

You say it's compensation "for the loss of value" that results from a circumstance wherein "the Treasury can just print." I understand that the value of Treasury bills rises and falls and can be influenced by subsequent bond issuance, but isn't interest paid and collected on them anyway? Isn't it the market value of the bond that's being affected and not the rate of interest that's being paid?

 

[austrianecon]

If you aren't earning interest, why does the Treasury allow you to collect it?

You seem to be confused here.. I am talking about MMT theory Government can just print money and I am saying nobody would buy treasuries because they wouldn't get to interest for holding US debt then. But rather inflation protection for holding it. So they'd get a ROI of 0%.

I thought you just said that these instruments don't allow holders to earn interest. What is this "return" you refer to?

You say it's compensation "for the loss of value" that results from a circumstance wherein "the Treasury can just print." I understand that the value of Treasury bills rises and falls and can be influenced by subsequent bond issuance, but isn't interest paid and collected on them anyway? Isn't it the market value of the bond that's being affected and not the rate of interest that's being paid?

No.. two separate issues of which JP knows what I am talking about.

If treasury just prints, there is no reason to issue bonds, and if treasury issues bonds, the interest paid loses it's loan aspect (i.e Bank loaning to make a return or you loaning government money to make a return as it is now). But changes it to a loan in which interest is paid to match inflation so it's not an investment but rather to get ZERO ROI.

Yes, when a bond is issued, it's issued at that rate. But Treasury offers what is know as TIPS (inflation protection). So if your bond pays 2% and inflation is .5%, you will get 2.5% in interest payments.

 

[JP Hochbaum]

You aren't earning interest if the Treasury can just print dollars. You are being paid for the loss of value if the Treasury can just print. Do you see the difference?

If you are earning interest, you are earning interest. Right now most Tbond purchases are down to not lose value do to inflation. So that wouldn't actually change anything.

 

[Critter7r]

You are assuming this. You do realize you get better return on Bonds then you do putting your money in a savings account right? For example if you buy a 5 year US Treasury, you are getting 1% a year. That $500 a year on $50,000. Deposit it at Bank of America with a .01% interest and you get yourself $5.

It could be as little as $1,000. The point still stands. Bonds do not = Dollar. Never have and never will.

Which is tangential to, and still doesn't change the original point of discussion, which was that dollars invested in bonds are dollars that weren't going to be otherwise utilized.

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[mmi]

You seem to be confused here. I am talking about MMT theory

Well, I'll agree that one of us is confused.

>>JP knows what I am talking about.

He's a lot more knowledgeable than me on this, and I figure that allows him to untangle confusion related to it.

 

[austrianecon]

Which is tangential to, and still doesn't change the original point of discussion, which was that dollars invested in bonds are dollars that weren't going to be otherwise utilized.

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No, they are being utilized when they are invested. US Government is using those dollars for something..

 

[austrianecon]

If you are earning interest, you are earning interest. Right now most Tbond purchases are down to not lose value do to inflation. So that wouldn't actually change anything.

No, you aren't. Interest is above inflation (positive return). Interest below inflation is a (negative return). Actually bond rates are not in a position to beat inflation right now.

 

[Critter7r]

No, they are being utilized when they are invested. US Government is using those dollars for something..

Right, but the people buying bonds weren't going to utilize that money for anything else. So they bought bonds and the govt utilized the money. If the bonds hadn't been purchased, that money would have sat around as excess reserves, doing nothing.

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[austrianecon]

Right, but the people buying bonds weren't going to utilize that money for anything else. So they bought bonds and the govt utilized the money. If the bonds hadn't been purchased, that money would have sat around as excess reserves, doing nothing.

No, that's your assumption. Bond = CD. Bond is giving a loan to Government to spend, a CD is given a loan to the Bank to spend as it pleases. Both are loans. One to the public sector and one to the private sector.. same concept, same type of payment system.

 

[JohnfrmClevelan]

No, that's your assumption. Bond = CD. Bond is giving a loan to Government to spend, a CD is given a loan to the Bank to spend as it pleases. Both are loans. One to the public sector and one to the private sector.. same concept, same type of payment system.

Govt. bonds =/= CDs. Bond issuance leads to deficit spending, which adds net financial assets to the private sector. Bank transactions, including CDs, do not.

 

[austrianecon]

Govt. bonds =/= CDs. Bond issuance leads to deficit spending, which adds net financial assets to the private sector. Bank transactions, including CDs, do not.

Wrong. Are locked time deposits in which Banks can lend from with 0% reserves.

 

[JohnfrmClevelan]

Wrong. Are locked time deposits in which Banks can lend from with 0% reserves.

They still don't add net financial assets to the economy, though.

 

[Critter7r]

No, that's your assumption. Bond = CD. Bond is giving a loan to Government to spend, a CD is given a loan to the Bank to spend as it pleases. Both are loans. One to the public sector and one to the private sector.. same concept, same type of payment system.

That assumption was the only poiny being discussed. Not sure why you brought up the difference between a CD and bonds.

Either way, people aren't sinking their grocery money into investment vehicles like bonds OR CDs.

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