“Teach Me Daddy” – New Essay by Arthur Hayes

The terms of liquidity dollars consist of three parts:

  1. Fed balance sheet. The Fed lends money to member banks, and in return, banks sell Fed Treasuries and/or mortgage-backed securities. This is how the Fed “prints” money to fill the financial system.
  2. NY Fed Reverse Repo (RRP) Balance Federal The Reserve Bank of New York (NY Fed) allows eligible counterparties to make dollar deposits and earn income. Deposited funds become dead money as soon as they are deposited into The New York Fed account. They are dead because the Fed does not use these deposits to make commercial loans. If they used them, it would increase the amount of credit money in the financial system. Essentially, the money multiplier for RRP balances at the New York Fed is zero. But when depositing with any other financial intermediary, we have a non-zero multiplier. (Before the pandemic, the reserve ratio requirement ranged from 3% to %, which meant the money multiplier in 33x or 10x for commercial banks, but the Fed has since lowered it to 0%, which means that commercial banks can lend up to 100% of their attracted deposits.And this is without any obligation to hold any of these deposits for insurance).

    Money market funds (MMF) are funds into which retailers and institutions deposit cash for short-term profits. In my brokerage account, any free money I have is deposited in MMF and I can get my money back within one business day. MMFs may place funds in RRPs and various other low-risk, short-term lending instruments (eg, treasury bonds, AAA-rated corporate commercial paper). Leaving money with the Fed is the least risky option, and it pays about the same as the other two options, which come with some risk. Thus, MMFs prefer to place money with the Fed if they can, rather than in a leveraged financial economy.

  • The US Treasury General Account (TGA), which is on the NY FED balance sheet. This is the US Treasury billing account. When it decreases, it means the Treasury is directly injecting money into the economy and creating activity. When it increases, it means the Treasury is saving money rather than stimulating economic activity. TGA also increases when the Treasury sells bonds. This action removes liquidity from the market as buyers must pay for their bonds in dollars.
  • Summarizing, we can say that dollar liquidity increases and decreases under the following circumstances:

    Liquidity – conditions for growth:

    • Fed Balance Sheet Increase
    • RRP Balance – Decrease
    • TGA – Decrease.
    • 33

      Liquidity – conditions for reduction:

      • Fed Balance – Decrease
      • RRP balance – increase
      • TGA – increase
      • 33

        However, all three main factors do not always go in the same direction. Sometimes both the Fed’s balance sheet and the TGA grow. Thus, the increase or decrease in dollar liquidity depends on the interaction of these three factors, their direction and the degree or speed with which they occur. Tightening) in June this year. This means that they allow their balance sheet to shrink in order to fight inflation. The decrease in the size of their balance recently is outweighed by the decline in the balance of RRP and TGA. As a rule, this led to an increase in dollar liquidity, not a decrease in it.

        The Fed itself chooses the maximum size of RRP, the proposed rate of return and the institutions that are allowed to use these repositories. Therefore, the Fed can control the impact of this source of liquidity on the market as a whole. For example, they could shut down the facility entirely, forcing MMF and others to put their money elsewhere, and in doing so, releasing $2 trillion of base money supply into the system. And then it is interesting to whom they will transfer the base money supply. Depending on this, the funds can be additionally used for aggressive stimulation of financial and economic activity. RRP has gone down lately and I don’t have (and haven’t read) a compelling theory as to why this is. But for the purposes of this article, all we need to understand is that they have been declining.

        The election is only a couple of months away, and it’s no secret that many people are voting with their wallets . To maintain a positive perception of the US economy among the wallets of voters, something needs to be done before November. Yellen and the US Treasury could directly create looser monetary conditions by funneling most of the remaining $ billion dollars into the TGA, and thus into the economy (in a broader sense, it will pump the markets). Over the summer, TGA’s balance has shrunk. As with the drop in RRP, I don’t have a solid theory as to why this is. But then again, all we need to know is that it has gotten smaller.

        So the balance of RRP and TGA has recently decreased. This begs the question: Are the New York Fed and Treasury leveraging RRP and TGA good enough? After all, they declared the fight against inflation by reducing the amount of money. And if so, do they intend to continue to do so? I do not have an answer to these questions, but the ruling party always has a strong political will to create favorable short-term economic conditions before elections so that party members can keep their jobs. They are people, after all.

        When all this finally clicked in my head, I created my own chart. It depicts what I have called the dollar liquidity health index.

        USD Liquidity Conditions Index =— [NY Fed Total Amount of Accepted Reverse Repo Bids] — [US Treasury General Account Balance Held at NY Fed]

    Related Articles

    Back to top button