He "gets it" because .... he does have a money machine in his basement called Geico (and a few other insurance businesses). Without which he would likely have been successful, but far less so. There are also other sharp minds with opinions on either side of the topic. Have a read of this:- What’s Behind the Huge Spike in Reserves, a Liability on the Fed’s Balance Sheet? by Wolf Richter • Mar 12, 2021 • 163 Comments The New Regime at the US Treasury Department. By Wolf Richter for WOLF STREET. The reserve balances that commercial banks have on deposit at the Fed have spiked by $1 trillion since July, and by $333 billion over the past four weeks, including $89 billion in the week through Wednesday, to a new record of $3.6 trillion. These are liabilities on the Fed’s balance sheet – money that the Fed owes the banks – and the Fed currently pays the banks 0.1% interest on those reserves. What’s behind this huge spike? Since March last year, the US government debt – Treasury securities outstanding – has ballooned by $4.4 trillion, to $27.9 trillion currently. The government sold these Treasury securities to borrow the funds it expected it would need to cover the deficits and stimulus packages. But it hasn’t spent all $4.4 trillion. Some of it is still sitting in its vast checking account at its bank, the Federal Reserve, specifically the New York Fed. The balance in this “Treasury General Account” (TGA) spiked from around $400 billion in January and February 2020 to $1.79 trillion at the end of July 2020, as the funds raised from the enormous debt sales at the time weren’t spent as fast as they came in. The New Regime inherited the TGA with $1.6 trillion in it. And it decided to draw down this balance to around $500 billion by the end of June, thereby reducing the balance in its checking account by $1.1 trillion. And so the government has reduced the amounts of Treasury securities to be sold at the scheduled auctions. Over the past four weeks, the balance in the TGA account has already dropped by $266 billion, including a massive $110 billion in the week ended Wednesday: The Fed, as any bank, carries customer deposits as a liability on its balance sheet. By contrast, the QE events – the purchases of Treasury securities and MBS, the repos, swaps, and SPV loans – are happening on the asset site of the balance sheet. But the TGA is on the liability side, money that the Fed owes the government. So the government is using the funds in the TGA to pay for its deficit spending, including the $600 stimulus checks that were sent out starting at the end of December. Drawing down TGA makes sense. The government doesn’t need to have all this much liquidity sitting in its checking account, while at the same time carrying this huge debt. As a result, the government’s debt has declined since March 1, to be roughly flat with mid-February; and in January, it has risen more slowly than the horrendous spike that started in March, despite the red-hot pace of spending. The insert in my Debt-out-the-Wazoo chart shows the details over the past three months. Obviously, drawing down the TGA balance represents just a minor and temporary slowdown in the incredibly spiking US National Debt: The Treasury Department is reducing its checking account balance by spending this money faster than it is raising funds through new debt sales. When the government sends out a tax refund check or a stimulus check or pays for a contract, these checks or electronic transfers arrive at the recipients account at a commercial bank. The bank then presents them to the Fed for payment from the TGA. The bank can then choose to add those funds temporarily to its reserves on deposit at the Fed. In this situation, the funds are effectively moved from the TGA account (money the Fed owes the government, a liability on the Fed’s balance sheet) to the Reserves account (money the Fed owes the banks, also a liability). And you guessed it, as the balance in the TGA has plunged, the reserve balances on deposit at the Fed have spiked to a new record of $3.6 trillion. See the first chart above. So this process of reducing the government’s TGA account balances has the roundabout effect of replacing Treasury securities on the banks’ balance sheets with reserves – sheer outright liquidity. But there are all kinds of side effects, with so much Fed-created liquidity washing through the system, and changing hands, creating these massive distortions. The current turmoil in the repo market is part of those side effects. This time around, the turmoil is the opposite of what it was in late 2019. Back then, repo rates had panic-spiked to 5%, 6%, and higher as lenders had pulled away, and forced borrowers were getting desperate. The Fed stepped in as lender of last resort to bail out these forced borrowers — such as hedge funds and mortgage REITS — which calmed down the repo market. But last week, repo rates, particularly those of recently issued 10-year Treasury securities, dropped deeply into the negative. A repo is a repurchase agreement, whereby one party lends cash in exchange for securities as collateral; and the counterparty borrows this cash and posts the securities as collateral. When the repo matures, the transaction reverses. The lender gets the cash back plus a little interest, and returns the securities to the borrower. What happened last week was that there was so much demand in the repo market – not for cash, as in the fall of 2019 – but for these recently issued 10-year Treasuries. Participants (effectively the lenders) bid up the price of the Treasuries so high that their yield turned negative to -4.5% for them. In other words, they had to have the Treasuries, and didn’t care about how much they had to pay to get them. Borrowers who supplied those Treasuries as collateral then – instead of paying interest on the amount of cash they borrowed, as normal – were paid 4.5% to take the cash and post the Treasuries as collateral. If the Fed had wanted to step into the repo market this time, it would have had to sell Treasury securities into the market to create more supply, effectively borrowing from the repo market (reverse repo), to bring rates back up into the positive – rather than lending to the market by buying Treasury securities as it had done in the fall of 2019 when the rates blew out. And that sudden selling by the Fed of its Treasury securities, ladies and gentlemen, would have been a hoot to behold. And so the Fed did nothing and let things play out. The deeply negative repo rates on 10-year Treasuries have raised concerns in certain corners of Wall Street that otherwise clamor for more QE that the Fed has pushed QE too far, and that some aspects of the markets are starting to malfunction.
What you really meant, I'm sure, unless you have a crystal ball, is "They haven't yet undone what they previously did." The Fed is, most of the time, a lumbering giant, they move, except when goosed, at a slow pace. The did, as I pointed out in my response to you, start a program of "balance sheet normalization" officially in Oct of 2017. Initially they stopped, or greatly reduced, their rolling over of maturing treasuries. In other words they stopped reinvesting the principal payments. (At least that's my understanding of what they started doing. I remembered this after you politely corrected me, as i had said they had started selling.) Their action, would reduce the bonds held on the balance sheet and supply a little weak upward pressure on rates. So far as i know, they continued this program until it became clear that Covid was going to hit the service sector pretty hard. When and if the Fed does anything, chances are, unless they are responding to what they see as an emergency, they will do it deliberately and gradually. It could take years for them to normalize (whatever that means) their balance sheet. Many people, especially it seems those who spend a lot of time in chat groups and social media seem to have formed the opinion that the fed is intentionally pushing the stock market up (or down) or the fed is driving the economy this way or that. I believe it is far more accurate to think of the fed as the crew on an America's Cup Yacht constantly shifting from one side of the boat to the other to try and maintain an even keel. (Maybe most of the time it's actually more like they are the crew of a garbage scow that only has to shift their weight a little bit and much more slowly.)
This is very unlikely to happen for a few reasons: The natural rate of interest should approximate the GDP potential growth rate (underlying theory of rates is the time value of money and opportunity cost) -- unless you think GDP growth will run very hot for 5-10 years, rates rising to 5.3%+ is unrealistic See: https://fred.stlouisfed.org/graph/fredgraph.png?g=BZv1 The drivers of GDP growth are: technology (productivity), labor force growth, and capital flow. Productivity is marginally improving (+/- 2%), labor force is marginally improving (+/- 2%), which leads to most economists expecting a 2-3% average gdp growth rate over the next decade (you can look at estimates using OECD, IMF, World Bank, or Bloomberg Economics). Capital flows to whichever country is paying higher interest, which means it is relative. Guess what? The US 10-yr is paying more than the bund, gilt, or JGBs...so capital will flow to the US (driving up the value of USD as well). All this points to GDP growth in the 2-3% range through the next decade. We would need to see a major move in those factors for that outlook to change. The Fed is an unlimited buyer. Now, assuming it did happen, what would that mean for other asset classes? Well, a higher interest rate means that the market is expecting higher real rates (productivity and output) or higher inflation or a combo of both. Both cases are positive for eps. What would make rates negatively impact equities is if they moved up too quickly. When rates accelerate in a move, it causes a repricing in other asset classes (because every other asset class can be seen as a derivative of the risk-free rate). Scenario A: rates move up from 1.5% to 5%+ in a short time span Result: bad for equities, especially high multiple/high growth equities Scenario B: rates move up to 5% gradually Result: positive for equities, as it means greater EPS (better pricing and/or more volume)
I am not one of those who believe The Fed is pushing the market up or down, intentionally. I am of the opinion, based on their history, they haven't the foggiest idea what they are doing. They are the world's biggest employer of Economists yet repeatedly fail to see "what is coming down the pike." Nothing to do with steering a big yacht and everything to with their insular, academic "Ivory League PHD's" we know best, secretive nature. I had hoped Powell would change some of that. Other than window dressing, seems not.
The Fed stopped "normalizing" or reducing their balance sheet way before covid. Remember the repo crisis at the end of 2019? Not only did they stop but they reversed the normalization by quite a bit at the end of 2019. If i remember correctly their official response was something along the lines of "demand for dollars had increased too much so reducing the balance sheet would tighten fin conditions too much". No shit the demand for dollars would increase after you pump 4T into the system. Makes one wonder if the Fed is 1)completely incompetent and clueless as to the consequences of their asset purchases or 2)fully aware that the only way out is a reset so let''s devalue as slow as possible no matter the pain level at the end.
I have to respectfully disagree, not with the data of course, but with some, not all, of this analysis. Let me first point out that not only treasury bonds but also our fiat money represents treasury liabilities, so that when the fed buys treasuries on the secondary market and credits bank reserve accounts they are substituting one kind of Treasury liability for another. If you could examine the consolidated Fed and Treasury books, it would be clear that the Treasury never "borrows" before it spends. It always spends and then "borrows". Consequently, the Massive Treasury spending, so far as it exceeds revenues, represents newly created fiat money that is spent into the economy, i.e., an injection of "outside money" into the economy. That money's first stop will be in bank reserve accounts. The Treasury will later get around to auctioning new issues of bonds. In the meantime, the Fed has purchased large numbers of bonds on the secondary market and credited bank reserve accounts, exchanging, as I said, one type of Treasury liability for another... This swells reserve accounts and puts downward pressure on short term rates. I know that the Treasury auctioning bonds following massive deficit spending has the appearance of borrowing to fund a deficit and of taking on more federal "debt". However here is a case, if ever their were one, of something that walks like a duck and looks like a duck but not quacking quite like a duck! So call me crazy; I know you will, but I have more pressing matters (my tax return!) than spending hours writing what has already been written on this topic. Here is by far the best scholarly explanation of these Treasury and Central Bank Operations that, to my knowledge, exists: Chapter 4, "Government Spending, Deficits and Money," in L. Randall Wray's, now classic, 1992 Book, "Understanding Modern Money."
I suppose your right. I think the U.S. first learned of the Covid threat in Dec of 2019, so that would be a little after the "repo crisis" ? Thanks for correcting me. Between you and Sun Trader I might get it right eventually.
Uhhh Understanding Modern Money written in 1992. Pre Greenie and Helicopter Ben. Not what I would call modern. Anyway get to your tax returns. Mine are already filed couple of days ago. Helps to have a brother-in-law retired accountant, who use to work for the Feds. Not IRS though lol. He thinks similarly to yourself on the topic. No surprise there.
This was what we saw in a 50 year chunk of time before the Fed (3rd column is duration of recession, last column is time since last recession). Compare that to the last 50 years. We also haven't completely cured cancer yet, despite having thousands of the smartest medical minds working on it. That's not because of "their insular, academic "Ivory [sic] League PHD's" we know best, secretive nature.", although they are also a bunch of Ivy League (and other top school) PhDs who went to the same schools and took many of the same courses as the economists. It's because it's damn hard. And they're pretty happy and should be proud that they've greatly reduced the incidence of cancer and dramatically increased survivability. Which is exactly what the Fed has done in greatly reducing the incidence of recessions and significantly reduced recovery time. Don't let the perfect become the enemy of the good. While the Fed can do better and should always strive to, they certainly beat the laissez faire alternative. To paraphrase Churchill on democracy, "it has been said that the Fed is the worst way to manage recessions except all those other forms that have been tried from time to time."