Sal, you are an incredibly smart guy, but you have this whole process wrong. The Fed does not change the FFR using OMOs, and the money multiplier is a myth. This is what the actual technical literature shows, both empirically and through logic. The Fed changes the FFR purely through announcements and it always supply reserves to meet demand (bank lending isn't reserve constrained). That's what it means to have a target FFR. Too many reserves drops the FFR to 0, and too few to the discount.
@rogersat In other words, there are no discretionary OMOs, and they cannot be used to change the FFR. They are only used to defend it. Of course, this changes in a regime where you have interest on reserves, where the IOR automatically sets the FFR.
@rogersat And to reiterate, the money multiplier is a myth, so you have that totally wrong. It's archaic economics with a supremely wrong and primitive understanding of how banking works. Bank lending is not reserve constrained. It is only capital constrained. When banks want to lend and they find a creditworthy customer, they will lend. They will then go to the interbank market or the Fed, and they will find them. OMOs may be necessary. But the Fed has to supply them to maintain the FFR.
but when the fed prints money, although they are not directly stealing from your uncle, they are certainly stealing from everyone else who owns any dollar bills (or checking accounts specified in units of dollars). Inflation happens. The fed has increased its wealth without doing work, and people have lost wealth without deserving to lose its wealth.
it would be very helpful if you could show me mathematically how bank A when it recieves a loan can in the same time improve its reserve ratio and still make a lot more loans with it
i suppose you mean that bank A takes some reserves and doesnt make new liabilities out of them in order to get a higher reserve/liability ratio and then supposedly she has some left over with which she can make new liabilities at a reserve ratio of 10% like you said. but since you didn't specify any numbers and then at the end you go on and say bank A will make new liabilities at a rate of 10:1 from the new reserves but we know nothing of its former reserve ratio it made it very confusing to me
i'm not sure i understand this last bit,, if bank A has a reserve that is too low, that means its ratio of reserves/liabilities is too small, so when it takes a loan you said it can take those new reserves and immediatly make them checking accounts or whatever.. but if it were to take all the new reserves and make new liabilities in the same ratio it did before it would wind up with the same reserve/liabilities ratio as before, therefore not improving the reserve ratio but keeping it the same
To increase the Fed Funds rate, the Fed issues Treasury bills and takes bank notes (cash, money, etc) in exchange. Where does the money go? Is it essentially 'out' of the economy?
Very Very interesting. Congratulations and Thank You. On the European Central Bank web site there are some very interesting videos showing that the ECB directly lends money at minimum discount rate (they call it beat rate)
to commercial banks when they need it. Is it just a different way on how a central bank can work, or they just don't want to get too technical?
The CB doesn't do Treasuries. The Treasury does. That's why you can get absurd situations like the Bank of England printing money in order to increase liquidity, and the Chancellor issuing gilts in order to soak up the excess liquidity (because the Chancellor and the BoE disagree on the relative need for liquidity vs. the risk of inflation).
In your video Banking 12: Treasuries [10:30] at that point, you didnt explain the reverse process, rising interest rates as a result of issuing the treasuries.
But when governments needs money, almost always theres a crisis, and at that time it is not in the interest of the government / central bank to have hi interest rates, isnt it contradicting?
How does the system functions when there is no national /federal debt, then the central bank probably hasnt issued any treasuries, so what is it going to buy back (inject money) in order to lower interest rates and improve liquidity?
What are the rules, I mean, can the CB only buy treasury notes & bonds, or do they also use short term bills? Can they also buy stocks or commodities?
Hi Sal, first of all my complements for your videos, great job, I like them very much.
I have some questions though, hope you dont mind.
By selling or buying treasuries doesn't the central bank drive up or down the price of the treasuries, especially in case liquidity in the treasury market goes down?
you spent 9 minutes on this video explaining the past video :S
WilliamNaville 4 months ago
..make more loans, while making all their outstanding loans LESS valuable in real terms. The net effect being ..what?
IvanAndreevich 5 months ago
Sal, you are an incredibly smart guy, but you have this whole process wrong. The Fed does not change the FFR using OMOs, and the money multiplier is a myth. This is what the actual technical literature shows, both empirically and through logic. The Fed changes the FFR purely through announcements and it always supply reserves to meet demand (bank lending isn't reserve constrained). That's what it means to have a target FFR. Too many reserves drops the FFR to 0, and too few to the discount.
rogersat 6 months ago
@rogersat In other words, there are no discretionary OMOs, and they cannot be used to change the FFR. They are only used to defend it. Of course, this changes in a regime where you have interest on reserves, where the IOR automatically sets the FFR.
rogersat 6 months ago
@rogersat And to reiterate, the money multiplier is a myth, so you have that totally wrong. It's archaic economics with a supremely wrong and primitive understanding of how banking works. Bank lending is not reserve constrained. It is only capital constrained. When banks want to lend and they find a creditworthy customer, they will lend. They will then go to the interbank market or the Fed, and they will find them. OMOs may be necessary. But the Fed has to supply them to maintain the FFR.
rogersat 6 months ago
@rogersat So your whole story falls apart.
rogersat 6 months ago
i dont understand whats the worth of treasury?
juliusreea 10 months ago
but when the fed prints money, although they are not directly stealing from your uncle, they are certainly stealing from everyone else who owns any dollar bills (or checking accounts specified in units of dollars). Inflation happens. The fed has increased its wealth without doing work, and people have lost wealth without deserving to lose its wealth.
notme98 1 year ago
That line "i will SEE YOU in the next video" is becoming epic
JackoWacko0087 1 year ago 9
GOOD INFO
GETyourFUNDSin30DAYS 1 year ago
This has been flagged as spam show
ur video is rather uninformative and i did not enjoy viewing it
8Kole8 2 years ago
it would be very helpful if you could show me mathematically how bank A when it recieves a loan can in the same time improve its reserve ratio and still make a lot more loans with it
Myrkul1029 2 years ago
i suppose you mean that bank A takes some reserves and doesnt make new liabilities out of them in order to get a higher reserve/liability ratio and then supposedly she has some left over with which she can make new liabilities at a reserve ratio of 10% like you said. but since you didn't specify any numbers and then at the end you go on and say bank A will make new liabilities at a rate of 10:1 from the new reserves but we know nothing of its former reserve ratio it made it very confusing to me
Myrkul1029 2 years ago
i'm not sure i understand this last bit,, if bank A has a reserve that is too low, that means its ratio of reserves/liabilities is too small, so when it takes a loan you said it can take those new reserves and immediatly make them checking accounts or whatever.. but if it were to take all the new reserves and make new liabilities in the same ratio it did before it would wind up with the same reserve/liabilities ratio as before, therefore not improving the reserve ratio but keeping it the same
Myrkul1029 2 years ago
Sal but does all this printing money to buy treasury bonds generate any inflation problems?
justpem 2 years ago 6
maximumfunFX, I believe Sal just uses Paint in his videos. Guess you don't always need the fanciest tools to be effective.
JanamDJ 2 years ago
keep them up plz
jackuy12345 2 years ago
What tool have you used to create this series? Great series, BTW.
maximumfunFX 3 years ago
Why does uncles deposit go to na asset site? Hhoudn't it go to liabilities site?
mborsuk 3 years ago
To increase the Fed Funds rate, the Fed issues Treasury bills and takes bank notes (cash, money, etc) in exchange. Where does the money go? Is it essentially 'out' of the economy?
HumanistDad 3 years ago 2
Very Very interesting. Congratulations and Thank You. On the European Central Bank web site there are some very interesting videos showing that the ECB directly lends money at minimum discount rate (they call it beat rate)
to commercial banks when they need it. Is it just a different way on how a central bank can work, or they just don't want to get too technical?
Many thanks.
Pinna74 3 years ago
So, the government / CB has two ways of doing things
a) When CB needs wealth (to lower interest rates) it can print notes/money.
b) When CB needs wealth (to finance new infrastructure or war) it can issue treasuries.
Is the CB free to choose, do they have any rules to follow?
By doing a or b resulting in:
a) Lower short term interest rates - when no wealth/GDP is generated also inflation.
b) Higher interest rates no inflation, probably deflation
Is this correct?
HamiDjoukou 3 years ago
The CB doesn't do Treasuries. The Treasury does. That's why you can get absurd situations like the Bank of England printing money in order to increase liquidity, and the Chancellor issuing gilts in order to soak up the excess liquidity (because the Chancellor and the BoE disagree on the relative need for liquidity vs. the risk of inflation).
ThatIsNotDeadWhich 3 years ago
In your video Banking 12: Treasuries [10:30] at that point, you didnt explain the reverse process, rising interest rates as a result of issuing the treasuries.
But when governments needs money, almost always theres a crisis, and at that time it is not in the interest of the government / central bank to have hi interest rates, isnt it contradicting?
HamiDjoukou 3 years ago
How does the system functions when there is no national /federal debt, then the central bank probably hasnt issued any treasuries, so what is it going to buy back (inject money) in order to lower interest rates and improve liquidity?
What are the rules, I mean, can the CB only buy treasury notes & bonds, or do they also use short term bills? Can they also buy stocks or commodities?
HamiDjoukou 3 years ago
Hi Sal, first of all my complements for your videos, great job, I like them very much.
I have some questions though, hope you dont mind.
By selling or buying treasuries doesn't the central bank drive up or down the price of the treasuries, especially in case liquidity in the treasury market goes down?
HamiDjoukou 3 years ago
Same here.
woodenjaw 3 years ago
I love you Sal, you make me smart.
armpitpuncher 3 years ago 2