The money system is set up at all times to supply whatever amount of money the banking system requires so that the cash rate remains as close as possible to the central bank target rate.
If the banking system wants more money to avoid borrowing it from a reluctant cash rich bank at the hoarders required interest rate, the banking system simply gets it more cheaply in microseconds via established procedures from the central bank.
By your theory the central bank would have to raise the cash rate to get more money for government spending. In reality the central bank reduces the cash rate and more money for the private system is automatically created so that the cash rate is forced down.
The reality of the start of the financial crisis was the banking system was intensely short of borrowable money, where normally all excess money in the system was borrowable down to the tiniest amount on an overnight basis. Rates began spiking up very rapidly. In the UK, very quickly, all automatically pledgeable securities to get extra money to repay interbank loans - that could not be renewed in the new climate of lack of trust - were very quickly exhausted, while simultaneously the large amount of securities pledged to the BOE meant there was now a large excess reserve balance in the system, but there were still insufficient borrowable balances actually available to those banks in a weaker position to borrow.
The only rate the central bank controls is the O/N rate.
The central bank is there to guarantee payments between banks, it's not loan on request. It's only a loan given if one bank hasn't got the money pay what it owes.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
The only rate the central bank controls is the O/N rate.
The central bank is there to guarantee payments between banks, it's not loan on request. It's only a loan given if one bank hasn't got the money pay what it owes.
Yes it is a basic principle that the central bank is lender of last resort rather than first resort.
Excess reserves rose in the banking system because the cash rate is targeted by the central bank and the central bank provides automatic facilities for credit worthy banks with collateral to enable banks to get money on demand to make it easier for the central bank to manage the cash rate!! so that the real time payment systems that require reserve balances do not fail!
Therefore excess reserves will be increased automatically if one or more banks find they have insufficient reserves during real time settlement. If the banks who receive these reserves are not willing to lend them, then more and more reserves will automatically be supplied as necessary until the required collateral is exhausted.
In the usual case a surplus of excess reserves would cause the cash rate to fall but if nobody wants to lend money the cash rate stays higher or is at least at the target
newjez
20 Dec 2013, 06:55 PM
I'm much more interested in the long term effects rather than the intricacies of what is. You can call it a cat or a dog. I want to know if it bites.
The only relevant issue i can see is whether or not they will control the deficit spending. Everything else seems like hysteria. Potentially even the deficits could be left to build for decades to come before there is a crisis that cannot be resolved with the current money system
For example how many stupid pages of text have been written since this crisis began about hyperinflation exploding in the next few months??
The money system is set up at all times to supply whatever amount of money the banking system requires
Whatever amount of money? Any amount?
Supply? (I was in the bank today, the bank manager was wandering around, I should ask him to supply me)
How a particular central bank supplies liquidity to the market varies with the bank. They might buy foreign reserves, they might buy treasuries.
In the case were they lend money to smaller cash poor banks on longer terms than O/N, these loans have to be approved. The FED buys MBS. The RBA only acts as an intermediary between the AOFM and some targeted smaller banks like BoQ, ME, etc. In which case it's a repo style arrangement with the MBS as security. The ECB seems to do something similar to AUS.
As for longer term interest rates the central bank could influence them but ultimately not control, it has no published targets for rates beyond the O/N.
The central bank controls O/N rates because this is very much the province of retail banks and their central bank. The rest of us borrow for longer terms.
There a lot of difference in lending a few hundred million to a bank for 24 hours and doing it for 30 years. For you it seems to be the same thing.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
Supply? (I was in the bank today, the bank manager was wandering around, I should ask him to supply me)
How a particular central bank supplies liquidity to the market varies with the bank. They might buy foreign reserves, they might buy treasuries.
In the case were they lend money to smaller cash poor banks on longer terms than O/N, these loans have to be approved. The FED buys MBS. The RBA only acts as an intermediary between the AOFM and some targeted smaller banks like BoQ, ME, etc. In which case it's a repo style arrangement with the MBS as security. The ECB seems to do something similar to AUS.
As for longer term interest rates the central bank could influence them but ultimately not control, it has no published targets for rates beyond the O/N.
The central bank controls O/N rates because this is very much the province of retail banks and their central bank. The rest of us borrow for longer terms.
There a lot of difference in lending a few hundred million to a bank for 24 hours and doing it for 30 years. For you it seems to be the same thing.
???
You know that the number of so called overnight reserves is going to be increasing for probably the next year at least even while tapering is in progress but you still feel compelled to come up with stupid comments about the big importance of overnight money like it means something more than a tiny amount of interest rate difference.
Yes it is a basic principle that the central bank is lender of last resort rather than first resort.
Excess reserves rose in the banking system because the cash rate is targeted by the central bank and the central bank provides automatic facilities for credit worthy banks with collateral to enable banks to get money on demand to make it easier for the central bank to manage the cash rate!! so that the real time payment systems that require reserve balances do not fail!
Therefore excess reserves will be increased automatically if one or more banks find they have insufficient reserves during real time settlement. If the banks who receive these reserves are not willing to lend them, then more and more reserves will automatically be supplied as necessary until the required collateral is exhausted.
In the usual case a surplus of excess reserves would cause the cash rate to fall but if nobody wants to lend money the cash rate stays higher or is at least at the target
The only relevant issue i can see is whether or not they will control the deficit spending. Everything else seems like hysteria. Potentially even the deficits could be left to build for decades to come before there is a crisis that cannot be resolved with the current money system
For example how many stupid pages of text have been written since this crisis began about hyperinflation exploding in the next few months??
Inflation doesn't seem to be a problem for the western world at the moment.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
Inflation doesn't seem to be a problem for the western world at the moment.
They exported their inflation to China. For example Chinese wages have tripled over the decade. However our official inflation statistics don't take into account rising asset prices. They only count the wages of the poor man and the price of a cheese sandwich as inflation.
Andrew Judd
20 Dec 2013, 08:41 PM
???
You know that the number of so called overnight reserves is going to be increasing for probably the next year at least even while tapering is in progress but you still feel compelled to come up with stupid comments about the big importance of overnight money like it means something more than a tiny amount of interest rate difference.
The FED reserve balances are at call. Currently at 2.5 trillion and 2 trillion 6 months ago. A year ago they were 1.5 trillion. All this means is the US banks have nothing better to do with 2.5 trillion than give to the FED for under a 0.25% pa.
They exported their inflation to China. For example Chinese wages have tripled over the decade. However our official inflation statistics don't take into account rising asset prices. They only count the wages of the poor man and the price of a cheese sandwich as inflation. The FED reserve balances are at call. Currently at 2.5 trillion and 2 trillion 6 months ago. A year ago they were 1.5 trillion. All this means is the US banks have nothing better to do with 2.5 trillion than give to the FED for under a 0.25% pa.
Whatever.
Your theory makes no difference anyway and therefore has no ability to predict anything different to what the market expects.
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