Flow of Money - Fed Funds Market

[@himanshisingla1031]

This is so right explanation! Banking sector provides funding temporarily to the government to buy issuance which is then funded by deposits. During QE,the fed will then take the interest rate risk from the bank by swapping it for reserves.

[@TheBalancedAmerican]

1:03 CHIPS - Single Transaction. 2:30 Bank Net Reserve Position. 3:21 Why banks use the Federal Funds Market. 4:13 Federal Funds Market - Loan Transaction. 6:30 Bank Funding Rates. 9:11 Bank Lending Rates. 10:36 Understanding Interest Rate Spreads. 12:01 How the Federal Funds Rate influences all other interest rates. 13:22 Reserve Markets are a closed system - Banks don't _lend out_ reserves. 14:02 Markets for Reserves. 14:43 Demand for Reserves. 16:59 Supply of Reserves. 18:33 Monetary Policy. 19:26 The Fed will Defend its Target Rate. 19:46 Banks are not constrained by Reserves. 20:23 Treasury is not constrained by Reserves. 21:32 The Fed cannot control the quantity of Reserves. 22:20 There is no such thing as bond vigilantes. 23:00 China dumps all their Treasuries. 23:42 China dumps all of their Reserves. 25:20 The Natural Rate of Interest is Zero. 26:36 Government is always manipulating the rate up. 27:09 Quantitative Easing. 28:07 Paying Interest on Reserves. (post-crisis policy)

[@PoliticalEconomy101]

Cool have you seen Perry Mehrlings course on YT? Can you explain the article "In search of financial stability: A comparison of proposals for reform?"

[@PoliticalEconomy101]

Why do banks have to borrow or lend reserves since they can create accounts and funds out of thin air via computer entries?

[@IvanVesely920]

18:20 Deficit spending does change the amount of reserves, it adds them. First there is a reserve 'drain', but it's more like an asset swap - reserves for USTs. Then comes spending - crediting people's accounts, which not only drives up bank liabilities, on the other side it adds matching assets (reserves). No? And finally at maturity, USTs + interest are now reserves again.

[@TheBalancedAmerican]

*CHALLENGE QUESTIONS:* 1) If the Fed Funds Rate has been pushed to zero, and The Fed is supporting the rate by paying interest on reserves, what is the difference between a 1-Year Treasury at 0.25%, and a 1-Year Reserve Deposit at 0.25%? 2) If Treasury only printed money and drove the Fed Funds rate to a permanent zero, would inflation be driven by interest rates, or fiscal policy?

[@zaiks0105]

+Wayne Vernon Answered your challenge questions on your "Flow of Money - Treasury & Federal Reserve" video. Let me know what you think; I don't care if you tell me I am wrong. Just let me know your reasoning. 1) Interesting situation....if Fed Funds Rate is zero, - Feds want borrowing to happen but banks may not make it happened in reality - interest on reserves is also zero (since it is the lower bound). Since Feds Fund rate is inter-bank interest betw. banks, I don't think it will ever be zero. Else, banks are lending each other for free. Interest on reserves can be zero. - In this situation, - - Reverse Repo rates are probably in effect - - Feds are probably using creative other tools to get the economy out of trouble - - Economy is likely in recession or around it (going in or coming out) 1 Year Treasury is what US Treasury pays as interest to bond holders. 1 Year Reserve Deposit is what Feds pays banks for having met reserves and/or excess reserves.

[@zaiks0105]

+Wayne Vernon 2) If Feds only print money and Feds Fund Rate is zero, aka Feds injecting money by buying securities, inflation will be driven by interest rates

[@simonmayer1860]

Hi Wayne, great video! :) Couple of things I don't understand. _“When domestic banks start a credit boom, there will be more demand for reserves”_ I don’t understand why that is the case. Yes, I understand that with more inside money in the system, banks’ net outflows and net inflows of reserves (end of day) will get bigger on average. But the outflow of one bank is, in a closed system, the net inflow of all other banks combined. The first bank might be more desperate to borrow in the Federal Funds market, but all the other banks combined will be equally more eager to lend. So I don’t see how that can affect the Federal Funds rate. In my mind, the rate shouldn’t change unless the total quantity of reserves changes. Is it because of capital and liquidity requirements maybe? I guess what I don’t understand is why an increasing amount of inside money necessarily requires an increasing amount of reserves for interbank settlement. As long as there is a smooth and efficient market, a very tiny amount of reserves should suffice (I can see that there is a lower bound). What's more, I don’t even understand why banks are even dependent on reserves for interbank settlement. Even if the Fed took reserves out of the system (or it didn't add reserves even though inside money increased a lot). Whenever the Fed takes reserves out of the system, the amount of treasuries increases almost by definition because what other way does the Fed have to take reserves out of the system than to sell other assets they previously bought from the private sector back to the private sector (i.e. mainly treasuries)? Why aren’t the banks just using treasuries that are very plentiful now for interbank settlement instead and wouldn’t that eliminate all the upward pressure on the Federal Funds rate?

[@TheBalancedAmerican]

Hi Simon! These are fantastic questions! I only have a little time, so I will do my best to be concise. Also, some of my answers might not have universal agreement, so I encourage you to query other economists on Twitter to get multiple perspectives. 1) _Why does a credit boom increase the demand for reserves?_ Its a good question because it doesn't _have_ to be the case. My comment assumes a federal funds market in equilibrium, which is the way it worked before QE flooded the market with excess reserves. When velocity is zero (ie flooded with reserves), a credit boom will not necessarily put pressure on the interbank rate...you are _"pushing on a string"_. However, when banks increase their demand for reserves in a scarce marketplace, they will compete with other banks for scarce excess reserves, bidding up the price (ie interest rate) of the loans. It is essentially the 'Loanable Funds' theory for the interbank market. This is why, traditionally, the CB would need to add reserves to defend their interbank rate. 2) _Why do banks even need reserves for settlement?_ This is the insight that really qualifies the 'Lender of Last Resort' function of the CB. The short answer is _trust_. If banks _always_ trusted each others federal funds loan, then there is little or no need for reserves, and as you've pointed out asynchronous settlement means reserves don't exchange at all. So long as everyone is confident they can convert their position to dollars on demand, there is no need for dollars for the system to function. However, suppose a banks balance sheet gets crushed by an asset collapse and revenue from loans dries up. The distressed bank would be in a position of having larger and larger federal funds loans at the end of each day. Other banks might question the ability of that bank to survive and might not lend at all...this is essentially what happened in 2007-8...Central Banks to the rescue as the lender of last resort! One thing we can observe to support this perspective is not all banks pay the same interbank rate. When the CB sets a target rate, the actual loans float in a range above and below the CB rate, so there _must_ be some level of risk assessment in the loan market. Hope this helps! -Wayne

[@simonmayer1860]

@@TheBalancedAmerican Thanks for taking the time to reply! It helps a lot :)

[@shubhamsingla9340]

@@TheBalancedAmerican i think i understood less incoming deposit coming from chip system to distressed bank and that bank will take federal fund loan in interbank market each day because of its distressed position and to balance chips system.

[@shubhamsingla9340]

Hello wayne somewhere you said that in 2008 interbank loans we're cause of crisis and fed rescued as lender of last resort.But as much i came through in 2008 main cause was mortgage market so i don't understand what you mean? Can you elaborate a little please.

[@IvanVesely920]

If IOR really created a floor for fed funds as well as treasuries, why have some USTs dipped below 0 in their yield in March? Or is the floor only effective at auction and the secondary market has other forces, such as scrambling for collateral and position unwinding?

[@slovokia]

Bank equity costs substantially more than 0% - it is arguably the costliest form of capital since it incurs the most risk. Now since dividends on that equity are discretionary one can argue that the cost is not a fixed interest rate. However owners of bank capital expect a return.

[@TheBalancedAmerican]

Yes! I was going to argue that dividends are not technically an interest rate, but you cover this. And you're right that banks tend to use equity financing as a last resort. good points! =) The video is about the influences of interest spreads on bank decisions...where they want/should to place their money. If the bank has acquired equity funding, but is not doing anything with the money, then the 'own rate' on equity is zero, yes? Whereas a banks 'own rate' on deposits would be the interest they pay to depositors. Your point is welcome though, regardless of less risk, banks must pay shareholders something if they want to keep having shareholder, therefore equity is not 0.00%. =)

[@slovokia]

One approach is to seperate shareholder equity from other liabilties as is done on most balance sheets. Then the liabilities section consists solely of deposits and other borrowing. The interest cost of a bank is all the interest payments that must be made on these liabilities - the equity portion of the balance sheet does not figure into the interest cost.

[@shubhamsingla9340]

Wayne don't you think this video now needs repo and reverse repo market too.

[@alexgardini]

Hey Wayne, thanks a lot for sharing your knowledge man, really impressive how you clearly understand all this! You told me once but I forgot, where did you learn all this? You were a economics professor right?

[@alexgardini]

In one of your videos, I can`t remember exactly which one, you teach that dollars never really leave the USA (I have watched all of your videos a few times). That is something that has really puzzled me ever since. I say that because in Brazil (and many other countries), the central bank holds reserves in US dollars. In Brazil for instance it floats around 300 and 400 billion US dollars. Every now and then Brazilian central bank buys or sells US dollars according to the "entrance or exit" of dollars in Brazil as it is usually said. That happens to avoid too much and too fast variations in the exchange rate, giving this way more stability for importers and exporters to operate their contracts, among other reasons. The question I have not been able to figure out researching in Portuguese, is "where the Brazilian central bank buys and sells dollars?". And "how (where) dollars enter and leave the country influencing the exchange rate?" I read an old news saying the Brazilian government increased taxes for dollars to enter Brazil in 2008 to avoid too much dollars dumped by the FED in the US economy to enter Brazil and dis-balance the exchange rate too much. How would those dollars "enter Brazil", meaning where is they dont ever leave the US as you said? Sorry for so many questions :)

[@TheBalancedAmerican]

+RGV _"where the Brazilian central bank buys and sells dollars?"_ The Brazilian central bank has an account at the US Federal Reserve. So, it operates in America along side of domestic banks, and can invest their excess dollar reserves just like domestic banks. There are laws regulating the type of assets foreign banks are allowed to own in the US, but the asset of choice is typically US Treasury Securities. If Brazil wants to dump all of their treasuries, they do this in the secondary treasuries market in New York. Now they're holding reserves...If Brazil wants to dump all of their reserves, they will go into a Forex Market (also in New York) and find another bank that needs US reserves, and willing to give up Real. Each bank holds a branch in the US, and one in Brazil. During the forex transaction, the US branch of the Brazilian Central Bank would surrender their reserves to the US Bank (which is balanced by an accounts payable to the Brazilian branch of the US bank). Simultaneously, in Brazil, the Brazilian branch of the US bank surrenders its Brazilian Real reserves to the Central Bank. It is tough to explain the accounting, but a forex transaction is really no different than any other international transaction. I need to do a forex accounting video. =P _"influencing the exchange rate?"_ If the Brazilian central bank is trying to exchange a bunch of US Reserves, for Brazilian Real, this places a _demand_ pressure on banks holding Brazilian Real. The more orders are placed to give up Dollars, and acquire Real, the more precious Real becomes...ie, the Real would strengthen its exchange rate with the dollar. _"How would those dollars enter Brazil"_ _Entering_ means that US branches of Brazilian Banks would acquire more US dollars reserves - Brazilian branches of US Banks would acquire more Real. When a foreign bank acquires US Reserves, they have removed the US reserves from our _domestic_ money markets...this supports the value of the Dollar. Basically, The Federal Reserve would add dollars to our domestic money market to try to devalue the dollar, then foreign banks would remove the same dollars to make sure the dollar didnt devalue. Currency wars! =P How would this benefit Brazil? It makes Brazilian exports cheaper for American to buy. Nearly every country runs a trade surplus against the US...we are the _consumer of last resort_. How does raising taxes influence exchange rates? Raising taxes decreases the domestic inflation rate which makes your currency more attractive to hold by Brazilian branches of US banks. If the Real were falling in value, there is an incentive to get rid of them. Of course, the government can accomplish the same thing by cutting spending, but politicians don't like that answer! =P

[@alexgardini]

+Wayne Vernon So when we say US dollars are entering Brazil through trade surplus, or through investor looking to profit on Brazil`s high interest rate, these dollars are actually entering the accounts of US branches of Brazilian banks?

[@alexgardini]

+Wayne Vernon When Brazilian government wants to increase the value of Real against US dollar the most common action is to increase interest rates to attract investment in dollars, they say "to bring dollars to the country". Government calls these "speculative investments" (since they come to take advantage of the high interest rates but might leave at any moment if something happens). Which kind of investments are these? Brazilian treasures? Brazilian stocks? Common deposits in savings accounts in Brazil? If an american wants to make this investment in Brazil (whatever it is) these dollars stay in the US branch of a Brazilian bank and the Brazilian branch will do it in Reals in Brazil? That will influence the exchange rate because Reals will be bought with dollars in the Forex market? These dollars don`t pass through the Brazilian central bank account in the FED at any time? What about when an american company import from Brazil? Dollars go to the US branch of a Brazilian bank and the Brazilian bank pays the seller in Reals? How do these money counts and Brazilian reserves if it doens't go the the central bank account?

[@alexgardini]

+Wayne Vernon "Nearly every country runs a trade surplus against the US...we are the consumer of last resort". I have an understanding about this statement that I wanted to check with you if it is right. As per my understanding one of the biggest US earnings with WW2 was the usage of USD as international currency. If any other country in the world tries to run a trade deficit so big and for so long as the US has run, their local currency would suffer a major depreciation which would make imports more and more expensive so that such country at one point would no longer be able to benefit from foreigner goods and services since it cannot actually pay back with its own goods and services (trade deficit). As per my understanding that is true anywhere in the world, expect in the US, because the US is the only country which can export its DEBT! The dollar doesn`t depreciate with trade deficit as it would in other countries because the US can simple pay it with its treasure bonds without having to actually buy foreigner money to do so (which would depreciate dollar against other currencies). As per my understanding that is why the US run such huge trade deficit for so long as still is able to have the country packed with cheap stuff from all around the world. If the US had to actually buy foreigner money to pay for their imports the dollar would depreciate making imported stuff more and more expansive which would end the cycle, as it happens in all the other countries. That is also why I don`t see any reason for the claims of most Americans for the US to run a trade surplus. That would just make things more expensive for the population! Why would any one make such claim? For any practical matter the US has the rest of the world (specially Chineses) working for them FIR FREE, or for nothing more than promises to be paid one day without further consequences for the US economy. Or am I getting it all wrong?

[@TheBalancedAmerican]

+RGV _"these dollars are actually entering the accounts of US branches of Brazilian banks?"_ Yes! =) _"Which kind of investments are these?"_ Yes, US entities who hold Real in Brazil can purchase gov treasuries, stock equities, etc. Depending on the law, they might also purchase property, or build new factories. _"dollars stay in the US branch of a Brazilian bank and the Brazilian branch will do it in Reals in Brazil?"_ Yes! _"Dollars entering Brasil"_ is a euphemism for US investors exchanging dollars for real, hopefully with the intent to spend or lend the Real in Brazil. _" That will influence the exchange rate because Reals will be bought with dollars in the Forex market? "_ Spot On! _"These dollars don`t pass through the Brazilian central bank account in the FED at any time?"_ In most cases, yes, forex transactions can occur between two private banks, and it isn't so different from a domestic transaction. Foreign banks use the private clearinghouses (CHIPS) just like domestic banks. The only time a reserves are transferred at the central bank is when a bank (foreign or domestic) has a net positive settlement position at the end of the day. _"Dollars go to the US branch of a Brazilian bank and the Brazilian bank pays the seller in Reals?"_ Yes. _"How do these money counts and Brazilian reserves if it doens't go the the central bank account?"_ It counts from a _netting_ perspective. Very little reserves get moved around central banks, but that doesn't mean banks aren't transacting...In your example, a US consumer purchases a Brazilian product, HSBC(New York) gets a receivable from CHIPS, and a payable to HSBC(Brasil). HSBC Brasil gets a receivable from HSBC(New York), and a payable to CHIPS(or whatever the Brazilian equivalent). Then at the end of the day, the clearinghouses in both countries settle the receivables and payables...if there is a net settlement, _then_ reserves are transferred in the accounts at the respective central bank. _"the usage of USD as international currency"_ You're right, the USD enjoys a seigniorage greater than other countries because it is the most widely used international settlement asset. This allows the US to run large trade deficits with no affect to its exchange rate. This is true today, but may not always be true. No one forces people to transact in Dollars, people just assume that if things go to shit, the US will be that last safe haven. As other currencies gain in prominence, the influence of the USD will wane, and our trade deficits will begin to affect our exchange rate. Until then, the US is doomed to diminishing manufacturing, and ever expanding finance sector. =/

[@alexgardini]

Doubt about the video. You said when the treasure increases spending it increases demand for reserves. So the banks can`t buy bonds with newly created money? they need to use their reserves to do so? And when you say the FED add the removes reserves to defend the target interest rate you mean by buying and selling treasure securities hold by the banks, correct? Question is, are the banks forced to trade (buy and sell) securities with the FED whenever the FED decides to do so?

[@zigamahne4636]

When you talk about Treasuries market you mean a market for gov.bonds? The rate in the Treasuries market is the bond yield? Both the Treasuries market and fed fund market are markets for reserves but what is the difference and where is published Treasury rate?

[@TheBalancedAmerican]

Hi, Yes, the Treasuries market is where government Notes, Bills, Bonds, and TIPS are auctioned by the Federal Treasury. All are Treasury debt issued at different maturities and yields. You can view the yields of these debt products on just about any financial website. Here are the official rates published by the Treasury Department: www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield The difference between the Treasuries market, and Federal Funds market are: Treasury securities are issued by the Federal Treasury, and is part of the fiscal budgeting process, whereas The Fed Funds Market is a market for bank reserves. The treasuries market is used by Treasury to issue debt...the federal funds market is used by Banks to acquire reserves when they are short at the end of day. The reason they are closely related is that the demands of the Federal Treasury, to acquire reserves, will affect the yield in the Federal Funds Market. If Treasury is sucking up all the reserves, this will prompt the Central Bank to monetize that Treasury debt to restore their target rate in the Federal Funds Market. I can be very confusing...but once you get it, it will make perfect sense. Hope this helps. Cheers! Wayne

[@zigamahne4636]

The gov.bonds that Fed purchased will now be rolled over by the Treasury.4.1 trillion usd is on the balance sheet of the fed but the Treasury will pay for these bonds because the Treasury issues the gov.bonds.This will result in diminishing the stock of reserves of the Treasury.

[@shubhamsingla9340]

You say that when treasury spends back those reverse it increases bank liability on deposit side with same amount of reserves as before so it can increase bank reserves demand so fed will do OMO operations again and buy new debt issued by treasury? So this is debt monetization and money creating step? Bcoz i saw somewhere else video it shows something else.Vidoe is of warren mosler.

[@rahmanrejepov4283]

Hello sir Wayne, I have watched all your videos, I do appreciate all your effort doing these videos. And after watching each of your videos, several questions come to mind. One of them: what really happens when I open a bank account and let’s say I deposit 1000 dollars into my account? 1000$ will be credited in liability side of bank in “deposit”, but what will be debited in assets side? reserves or notes and coins?

[@rahmanrejepov4283]

and 2nd question is that in 13:00 in these video you were talking about that banks get fund from different sources with lower interest rates and lend them out with higher interest rates, making a profit in a difference rates(spread). So does that mean that banks do lend out the money which I deposited into my account? And in another video “How banks create money” you were saying that banks do not make loans by receiving deposits and lending them out as how it’s written in most of the economics books. in this video 13:00 you also were saying that banks can receive funding by fed funds rate which is 0.25 and lend them out with higher rate. But you were also saying that banks do not lend out the reserves, they can do this only to other banks. Please could you tell me where I understood you wrong?

[@TheBalancedAmerican]

Hi Rahman, When you deposit $100 in physical cash (government issued money), the bank will increase its cash account (Asset), and also create a Deposit account (Liability). The "cash" asset is very similar to the banks reserve account, together they represent the quantity of government issued money the bank is holding. The only difference is, "Cash" is the physical government notes held by the bank, whereas "reserves" are the digital government notes held at the Central Bank. At the point you gave the bank the $100 government note, you stopped using government "money" to transact. The depositor uses private bank liabilities to transact. Private bank liabilities are an entirely different asset/liability, than a government asset/liability. The word "deposit" is very confusing. It is better to think of a deposit as an "Accounts Payable" account. Anyone can expand their liabilities out of thin air, all we have to do enter into an agreement with someone else. When a company issues a corporate bond, it is expanding its liabilities out of thin air, with a contract. The same is true of banks, they can expand their liabilities simply by having people sign loan agreements. The only difference between the Corporate bond, and "Deposit" is the deposit is on demand. The depositor can demand the bank convert their liability back into government notes. Hope this helps! :)

[@TheBalancedAmerican]

Hello again, *_" in another video, How banks create money, you were saying that banks do not make loans by receiving deposits and lending them out as how it’s written in most of the economics books"_* That is right, I do not agree with many economics books. Although, in recent years many mainstream economists and Central Banks have begun to see it through the perspective of Endongeous money. Here is a fairly recent example from the Bank of England: papers.ssrn.com/sol3/papers.cfm?abstract_id=2416234 Did you see the video that reconciles "Loanable Funds" and "Endogenous Money"? kzbin.info/www/bejne/aJOXoHWZecShh9k *_"you also were saying that banks can receive funding by fed funds rate which is 0.25 and lend them out with higher rate. But you were also saying that banks do not lend out the reserves"_* This is a case of my own sloppy wording. That is language that everyone communicates in, and like the word "deposit", the phrase "lend out," can be confusing. A more accurate way for me have said it would have been: _Banks retain their accounts payable by paying a rate to a another bank, the federal funds rate. Banks will create loans at a rate higher than the rate to create accounts payable. If banks are retaining their accounts payable at 0.25%, then that will lend at perhaps 1%, something higher than the cost of their liabilites_. That says the same thing without using the word "deposit" or phrase "lend out." Does that help clarify? Sorry for insufficiently wonky language in the video. =P Thanks for watching Rahman! Cheers!

[@rahmanrejepov4283]

Hello Sir, Thanks so much for quick response! It really helped me to understand. And could you please explain to me about Fractional reserve system. It says that if for example, the min reserve requirement is 10% then when I deposit 1000 dollars into my bank account, a bank will have to keep at least 100$ of 1000 in reserves. So in this case what happens with remaining 900$? When I deposit 1000, bank credits its liability (deposit) in 1000$ and debits 100$ in reserves, and there is 900$ remaining to be debited. So what bank does with this 900$? I am a bit confused because as my textbooks say that fractional reserve requirement constraints banks on the amount they are being able to lend out. But as I know from your videos and other sources banks are not constrained by that. So my main questions are - 1st What banks do with remaining 900$, and the 2 do banks really care about fractional reserve requirement it is 10% or 100%. I will be very happy if you make a video showing about what banks do with our deposits, about fractional reserve system and the money multiplier. And the most confusing thing is my professor in banking at my university who is Ph.D. in banking and finance who said that banks will not be able to make any loans if reserve requirements are 100%. He really believes that banks lend out the money we deposit into the banks. -_- But thanks to your videos we all know how it is in reality. And the only thing that we don't know is that how did he really got Ph.D. :D

[@TheBalancedAmerican]

Hi Rahman, The "Fraction Reserve Banking" perspective is synonymous with the "Money Multiplier" perspective. The Central Bank injects some new reserves (by buying bonds), and then that money is "lent out" and then deposited in another bank. Imo, the "Money Multiplier" perspective is antiquated...a hold over from economics written for the gold standard, and before modern payment systems. The "Money Multiplier" perspective would be correct if all loans and payments were conducted in physical government notes. This assumes that every person makes payments by withdrawing physical cash from the bank. In the modern world, most transactions are digital, we pay with our debit or credit card. It is the "network effect" of digital payments, and private bank clearinghouses, that allow for endogenous money theory to be accurate. In the modern world, reserve ratios mean very little. Again, they are a hold over from the gold standard, when having a buffer of physical gold was necessary to clear balances occasionally. Today, the buffer of fiat reserves is infinity, because there is no limit to quantity of reserves the Central Bank can create. This effectively means that required reserves are meaningless, 0% required reserves will affect the system the same way as 99% required reserves. The reason is, "required reserves" don't circulate in the Interbank Market, they sit idle. So the only government reserves that really count are the "excess reserves" floating around in the system. "Excess" reserves set the Federal Funds Rate, "Required" reserves do nothing, and some Central Banks, like the BoE, have reduced their reserve requirement to 0%. I wouldn't be too hard on your professor, the perspective he is teaching isn't entirely wrong, and it is fair to say that some degree of what he is saying is happening in reality. But the mass majority of the settlement process is as I describe it, banks create deposits from thin air. Fun! =D -Wayne

[@BrunoWaronig]

Great video as all the others Wayne, thank you very much for your insights. I'm sure you know it and I can imagine you were just waiting for this comment so here it is... :D Due to all the logic, IOR is supposed to set a floor to FFR, but instead, it has set a ceiling that has held 99% of the time since 2008. I have some explanations for that but I'd still love to hear how would you explain it in case you catch a couple of minutes. :))

[@TheBalancedAmerican]

Hey Bruno, This is a really good question, and I don’t have a good answer. Here is a series of charts we can use to communicate: fredblog.stlouisfed.org/2021/02/visualizing-the-feds-new-monetary-policy-tools/? You are correct, rather then IOR acting as a floor, the effective federal fund rate fluctuates above and below the IOR rate. In fact the IOR rate acts more like an anchor…representing the center of the Feds target range. But why would the FFR ever go below IOR rate? I don’t know. It could have something to do with the fact not all institutions have access to over night interest on reserves, and must use the reverse repo facility to park their idle reserves. I could have something to do with a much reduced need for Federal Funds Loans. QE flooded the banking system with reserves, which in turn cause a significant decline in the activity in Federal Funds markets. I have not put enough research into this topic to give a smart answer. I’d love to hear your perspective?!

[@BrunoWaronig]

​@@TheBalancedAmerican Wayne, I scrolled through my ''very good watched'' videos playlist and found this. I didn't see your reply. I had the exact two reasons you mentioned in mind back then and still haven't found any additional ones, what about you? I guess it's Fannie & Freddie and the GSE crew that don't get IOR. Hope all is well on your side.

[@alexgardini]

Still intregued here with "if every country across the world can dump every bond they got and wouldn't affect the rate on our treasuries". Let`s assume USD is no longer taken as the international currency, now countries use something else. SO let`s imagine a more realistic scenario where all the countries started gradualy dropping their bonds and FED bought it all to defend its interest rate. Now countries have their reserves accounts getting full of dollars. So they decide to spend one part and buy other currencies with the other part. As you said FED would sell all the bonds in order to rescue the extra dollars into the economy. 1st question - sell to who? who would have that amount of dollars to buy them? 2nd question. Let`s say the private sector somehow are buying them all. The amount of money/demand in the economy gets back to normal and the interest rate is defended. But now big part of the production capacity for many years (until their reserves finish) will be dedicated to produce for foreigner countries and the standard of living of population would be severily harmed. The value of dollars would depreciate with the purchase of other currencies. The US would become a net exporter and prices of everything would increase due to decrese in supply of products inside the country. Agree? Well, if you agree I believe US would just close these country`s accounts in the FED and go to war if this happened.

[@TheBalancedAmerican]

+RGV _" 1st question - sell to who?"_ The New York Fed buys and sells in the Treasuries market just like other banks, or you and me. Often when someone purchases a Treasury from The Fed, they don't even know the Fed was the seller. In your example, Foreign banks dump their reserves on Domestic Banks...the reserves used to purchase Treasuries from The Fed comes from this source. When Foreign Banks dump treasuries, they suck reserves out of the domestic system, when they dump reserves, they flood the domestic system with reserves...which is why The Fed would be _selling_ Treasuries in the first place. =P _"dedicated to produce for foreigner countries and the standard of living of population would be severely harmed"_ Hmm, depends on how you view international trade. Most countries _try_ to run a trade surplus...they want their citizens to have jobs producing goods for export. You correctly write that foreigners dumping dollars would affect the exchange rate of the US Dollars, and US exports would increase. You are also correct to say that this would, from a _purely_ material standpoint, lower the standard of living of Americans. But their are other things to look at also. Because America has lost its manufacturing base to foreign competitors, our population has become _dumber_ - less skilled. Our material standard of living increased, but our Human Capital has declined. Right now, America is being split between the Super-Skilled, and the Non-Skilled...those in the middle, skilled professions, have largely disappeared. =/ So the American trade deficit "party" has as many negative consequences as it does positives, and most countries, including Brazil, are happy to accommodate our insatiable consumption because it creates jobs and skills in _their_ country. _" I believe US would just close these country`s accounts in the FED and go to war if this happened"_ Why would The Fed close their accounts? There is no solvency issue to pay everyone their dollars. A dollar _collapse_ is highly unlikely, and your scenario is likely to play out over many decades. One reason people trust US Dollars is our legal system that protects private property - if the US ever abandoned the rule-of-law (refused to pay, and went to war), it would be the end of the US - corruption kills. =/ A huge indicator that a country is struggling (or manipulating trade), is borrowing in foreign currency. Currently the US has zero foreign currency obligations. When you start seeing the US borrow Yuan, you will know that dollar supremacy has ended. But, again, this is highly unlikely any time in the near future. Japan, for example, has a debt/gdp ratio 2.5x the size of the US, yet, they still don't have to borrow in foreign currency, and their interest rates are now negative! =P

[@matveyshishov]

It is always fascinating how the best videos on YT have a few thousands of views in years, while the lowbrow stuff accumulates billions in hours.

[@alexgardini]

If a given government has a debt of $100 billion, and decides to issue $101 billion in securities by the end of the year, which get all monetized by the central bank. What happens to this country debt? In the balance sheet it still appears as treasure liability as you have shown, but since liability to the central bank doesn`t really count, this government will be consider to be running a surplus of 1 billion?

[@TheBalancedAmerican]

Yes, except it isn't the gov running the $1 billion surplus, it is the domestic private sector, or foreign sector. :)

[@shubhamsingla9340]

Now they get interest rate on reserves too

[@TheBalancedAmerican]

That’s correct! I cover this at 27:09

[@shubhamsingla9340]

@@TheBalancedAmerican Yes i commented before listening that lol.I loved your content! Are you on twitter?

[@alexgardini]

"if every country across the world can dump every bond they got and wouldn't affect the rate on our treasuries" ok, I see that, the FED can create as much money to as it takes to monetize it all. But the second assumption, if these countries decide to spend it all, considering the huge amount involved, can the FED simple sell ALL THOSE BONDS without any inflationary effect at all? Theoretically yes, but lets assume all countries for some crazy conspiracy reason would really decide to do that, would it really pass through with no side effect? If the answer is yes there would really bey no limit for US to expend its debt and really live out of foreigner production forever, no?

[@TheBalancedAmerican]

+RGV Sorry for taking a while to reply...i'm seen your questions, but am swamped at work at the momment. I've decided to do a Forex video specially for you! =D Anyway, I'll answer this because it is fairly easy...and i'm procrastinating work! =P _"can the FED simple sell ALL THOSE BONDS without any inflationary effect at all?"_ Typically, when the Fed sells bonds it deflationary, not inflation...they are removing reserves from the system. If every country dumped all their US Dollars, the interbank base rate would fall...so selling bonds would support the rate in that scenario. _" no limit for US to expend its debt"_ Welllll, technically the answer is yes...any sovereign currency issuer (including Brazil) has the ability to control the price of their domestic currency _in the domestic money market_. However, there are at least two obvious constraints. 1) If the government deficit outpaces productive capacity, it will cause inflation, as is the case in Brazil. 2) If every country dumped all their US Treasuries, and then all their Reserves, it would not affect the _domestic_ base price of dollars, *_but_* it would affect the Dollar _exchange rate_ with other currencies. So, even though the US has a special position as world reserve currency, if everyone dumped their reserves, it would be a wholesale rejection of dollars as a reserve currency, and there would be severe exchange rate consequences.

[@alexgardini]

+Wayne Vernon Wow, awesome, thanks so much for the Forex video, looking forward!

[@alexgardini]

+Wayne Vernon "Typically, when the Fed sells bonds it deflationary, not inflation". Let me paraphrase my question, "can the FED really sell unlimited amount of bonds to rescue such big amount of money dumped in the economy avoiding all the inflationary effect THAT MONEY would cause in the economy?" but i see you already answered below "If the government deficit outpaces productive capacity, it will cause inflation". so the limit is defict = GDP? Well, I guess you didn`t mean that. Here in Brazil our whole debt is around 60% of GDP and already inflation is rampant. I assume it also has to do with the interest rate, US debt is big but interest rate is low, on the other hand Brazilian debt is not as big in comparison to GDP but interest is very high. I think this is way the usual remedy for inflation (to increase interest) dont really work here anymore (even though that is what they are still doing to try to control inflation).

[@alexgardini]

+Wayne Vernon By the way, where did you get the other time so fast and easy macroeconomic numbers about Brazil and US (inflation, unemployment, total government spending, total taxes collected, etc)?

[@TheBalancedAmerican]

+RGV _"avoiding all the inflationary effect THAT MONEY would cause in the economy?"_ This really depends on the situation - monetary policy can affect the aggregate money supply in different ways. To determine if the policy will be inflationary you'd need to look at a variety of factors. What is the interbank rate? If it is at zero, then increasing the monetary base will _not_ be inflationary. If the rate is above zero, than lowering it _may_ cause inflation if it encourages more people to take out loans. The two key concepts to understand are 1) Reserves do not circulate in the economy, so increasing reserves can only translate into prices if people take out loans...if no one is borrowing, the monetary base means very little. 2) On inflation, it is more important to compare the size of the national deficit to GDP...if you see a trend of accelerating deficits, but output is accelerating along side (stable deficit/gdp) then you will not see inflation no matter how big the deficit gets. However, if the deficit/GDP is accelerating, but output is stagnant, then inflation is on the way. My sources on Brazil are: www.tradingeconomics.com/brazil/indicators www.bcb.gov.br/?INDICATORS data.worldbank.org/country/brazil But also, I will read popular newspapers...often economists get bogged down in data, when just listening to average real people can give better insight. For example, the drought or energy instability in Brazil may not be obvious from staring at numbers, but it they have clearly caused supply-side shocks.

[@marjorielloydwaluye6338]

its all a big scam.. thanks for explaining.

[@shubhamsingla9340]

Thier is one flawed in this fed only do transaction with primary dealers.

[@TheBalancedAmerican]

Primary dealers buy in the primary market for treasuries…directly from Treasury during auctions. The Fed buys/sells treasuries in the ‘secondary’ market. Anyone can list their treasuries for sale in this market. Could be banks, investment funds, or average citizens.