The only difference of opinion I have with b_b is in regards to a credit freeze. Loans create deposits but the money on the first loan has been taken and spent, they need to keep lending to pay the clip. Banks pay out a healthy dividend then go to the market and sell bonds and hybrids to raise cash. If the lending stops, the banks are in trouble. RBA will provide a backstop, a prolonged event is a wildcard result.
When the deposit is spent, the money still ends up in the banking system. It may not be with the same bank. But the interbank market allows banks to rebalance their books every day (and if they don’t, they are penalised by the RBA).
When a bank pays a dividend - same deal.
When a bank pays interest - same deal.
When a bank pays bank salaries etc - same deal.
Once the deposit is creates via the loan, it always stays within the banking system. The system is therefore always funded. That is not to say individual banks are always funded - they are not. But the system as a whole is always funded. Therefore accessing the bond market (domestic or foreign) is irrelevant for funding - only for liability management which is largely about choice.
Wolf Richter (ex-hedge fund manager and regular guest on the Max Keiser show) explains what will happen when QE unwinds. He's 100% correct. QE did not help the economy grow, it just inflated asset prices and when it unwinds t will not harm the economy, it will just collapse asset prices.
When securities are redeemed at maturity, whoever holds them gets the money. The securities become void and disappear. This is what the Fed will be doing: When the Treasuries it holds mature, the US Treasury Department redeems them, paying the Fed the money for those securities that then become void and disappear. The Fed gets the money. If it doesn’t buy anything else with it, that money disappears too. Now both the Treasuries and the money have disappeared.
Since the Treasury Dept doesn’t have the money to pay off maturing bonds (the US government runs a big deficit), it raises this money in advance by selling bonds. So the market lends the Treasury Department the money to redeem the old bonds. By redeeming the bonds that the Fed holds, the Treasury Dept gives this money to the Fed. At the Fed, this money disappears. In this manner, the Fed drains liquidity (money) from the market.
This is the reverse of what happened during QE. Whatever QE accomplished, this will have the reverse effect.
QE didn’t stimulate the economy but inflated asset prices. So reversing QE isn’t going to hit the real economy, but it’s going to hit asset prices.
Cash or in the bank it's still in Oz. We hold about 5% of our money in cash. You would have to burn it to have it lost to the system.
If you go to the café and buy a coffee for $4 then you transfer $4 from your pocket or card to the café owners pocket or bank account. Nothing changes to the vaue in the system, it just changes owner.
Edit - if the money is used to repay a debt it's lost to the banking system, as it is when it's used to pay tax, but the government also creates money when it spends, and it does spend.
???
WHAT WOULD EDDIE DO? MAAAATE! Share a cot with Milton?
Yep, but our dollars still don't go overseas. We still pay in $AUD to the foreign supplier, who can only spend those $AUD back into Australia. They have to find someone wanting $AUD to buy our goods and services. If we run a trade deficit then they have to hold our $AUD until they have a chance to buy something from us, otherwise they essentially lend to us at whatever rate they can find in our banking system.
Our money still stays in our banking system.
Take risks - if you win you will become wealthy, if you lose you will become wise
Yep, but our dollars still don't go overseas. We still pay in $AUD to the foreign supplier, who can only spend those $AUD back into Australia. They have to find someone wanting $AUD to buy our goods and services. If we run a trade deficit then they have to hold our $AUD until they have a chance to buy something from us, otherwise they essentially lend to us at whatever rate they can find in our banking system.
Our money still stays in our banking system.
Golly's chart is a bit out of date as well:
We are actually posting pretty solid / massive trade surpluses right now - including what look some record HIGH surplus quarters.
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