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Australia interest rates to go lower, for longer
Topic Started: 5 Aug 2013, 07:13 PM (9,980 Views)
b_b
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Sydneyite
8 Aug 2013, 04:41 PM
b_b
8 Aug 2013, 04:25 PM
Banks can not "lend out" or spend reserves. The reserves simply shuffle between the banks to settle transactions on behalf of customers (and in some instance, on the account of the bank).
b_b - are we 100% certain that the payments made from the Fed to the trading banks under QE in exchange for bonds are classified as reserve funds? Is it possible that it counts as capital? In which case the banks can do with it as they please right? At least within the regulatory constraints.
It is 100% reserves. No new equity. We know this because
- for a US bank to issue equity it required an SEC filing (Which there are none)
- For a bank to issue equity, it must disclose the issue price and terms (none)
- share on issue would increase (thry have not)
- The reserves balances are increasing in line with the asset purchases




Elastic
8 Aug 2013, 04:45 PM
I'm of the same mind given that the Fed constantly complained that the banks were not prepared to lend out these reserves.
The Banks can not lend out reserves. It is an operational impossibility. Reserves shuffle between the banks or the Fed or Treasury.
Edited by b_b, 8 Aug 2013, 04:47 PM.
(S – I) + (T - G) + (M - X) = 0
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Gazo
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This get's even more interesting!

Especially for the bulls here.

I might add though, that the UK and US housing markets have undergone much more significant corrections than here, so the argument for will this happen in Aus is questionable.

Re: his forecasting success, I've been following his stock forecasts since 2009 and he has been spot on.

Here are some snippets:

"However, it's not all bad news for ordinary home owners, for one of the consequences of debt and money printing is that for the inflation of a new housing bubble. Today's policy announcement for 3 more years of zero interest rates will put added upward pressure on the housing market as sentiment acts in advance of future expected demand, this should not come as any surprise to my readers, as following the end of the UK housing market depression into the start of 2012, I been flagging how the then much hated housing asset classes in the UK and US were presenting a once in a decade opportunity as the embryonic bull markets of 2012 HAVE morphed into the new bull markets of 2013 that I expect will run for virtually the whole of the remainder of this decade, because all the Bank of England and Government can do is print ever more amounts of Debt and Money which inflates asset prices that cannot be printed."

Here's the link: http://www.marketoracle.co.uk/Article41769.html

A while ago I commented on the impact of stealth inflation on asset prices and I was laughed at. It could turn out to be the only sound answer as to why asset prices continue to defy fundamentals.
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Elastic
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This isn't making sense.
The banks end up with excess deposits as a result of government spending.
The banks use these excess deposits to buy government bonds.
The Fed buys the bonds off the banks for cash which is now classified as excess reserves.




Only a rat can win a rat race.

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b_b
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Elastic
8 Aug 2013, 04:57 PM
This isn't making sense.
The banks end up with excess deposits as a result of government spending.
The banks use these excess deposits to buy government bonds.
The Fed buys the bonds off the banks for cash which is now classified as excess reserves.




Deposit is an asset of a household or business, and a liability of the banks

Reserves is an asset (liquid) of a bank

Reserves increase by the same amount as deposits when governments spend (assets and liabiiltiy of a bank increases by the same ammount).

A Bank swaps its excess reserves for a bond (asset for asset)

The reserves end up back with the Treasury.



QE simply reverses the process
Bank gives up an asset (bond) for an asset (reserves). No impact on a banks liability side which is where all of the deposits sit.
Gazo
8 Aug 2013, 04:54 PM
This get's even more interesting!

Especially for the bulls here.

I might add though, that the UK and US housing markets have undergone much more significant corrections than here, so the argument for will this happen in Aus is questionable.

Re: his forecasting success, I've been following his stock forecasts since 2009 and he has been spot on.

Here are some snippets:

"However, it's not all bad news for ordinary home owners, for one of the consequences of debt and money printing is that for the inflation of a new housing bubble. Today's policy announcement for 3 more years of zero interest rates will put added upward pressure on the housing market as sentiment acts in advance of future expected demand, this should not come as any surprise to my readers, as following the end of the UK housing market depression into the start of 2012, I been flagging how the then much hated housing asset classes in the UK and US were presenting a once in a decade opportunity as the embryonic bull markets of 2012 HAVE morphed into the new bull markets of 2013 that I expect will run for virtually the whole of the remainder of this decade, because all the Bank of England and Government can do is print ever more amounts of Debt and Money which inflates asset prices that cannot be printed."

Here's the link: http://www.marketoracle.co.uk/Article41769.html

A while ago I commented on the impact of stealth inflation on asset prices and I was laughed at. It could turn out to be the only sound answer as to why asset prices continue to defy fundamentals.
No QE in Australia, yet asset prices have increased too...

No QE in the US from 1980 to 2007, and asset prices increased too...

Lots of QE in Japan from 2002 to 2011 and asset prices in the toilet

perhaps something else is going on.....
Edited by b_b, 8 Aug 2013, 05:18 PM.
(S – I) + (T - G) + (M - X) = 0
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Gazo
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Yeah, fair points b_b.

It's an interesting theory though. One I hope isn't too accurate.
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b_b
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Gazo
8 Aug 2013, 05:20 PM
Yeah, fair points b_b.

It's an interesting theory though. One I hope isn't too accurate.
It's not.
(S – I) + (T - G) + (M - X) = 0
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Elastic
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My point is that the money must have been deposited in the bank to start with before it was used to buy bonds.
So these excess reserves must actually be liabilities rather than money that is owned by the bank.
Only a rat can win a rat race.

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b_b
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Elastic
8 Aug 2013, 05:23 PM
My point is that the money must have been deposited in the bank to start with before it was used to buy bonds.
So these excess reserves must actually be liabilities rather than money that is owned by the bank.
No.

At any one time, a banks balance sheet always balances. For example

Assets
Reserves 10
Loans 90
TOTAL ASSETS 100

Liabilities
Deposits 50
Bonds 40
Equity 10
TOTAL LIABILTIES 100

Now assume the government spends $10 into the economy. Household deposit the money, and tresury settles the spending by transfering reserves to the Bank. The Banks balance sheet lools like this

Assets
Reserves 20
Loans 90
TOTAL ASSETS 110

Liabilities
Deposits 60
Bonds 40
Equity 10
TOTAL LIABILTIES 110

If there are too many reserves in the banking system, the RBA / Treasury will reduce these reserves by issuing a bond. No the Banks balance sheet looks like this

Assets
Reserves 10
Govt Bond 10
Loans 90
TOTAL ASSETS 110

Liabilities
Deposits 60
Bonds 40
Equity 10
TOTAL LIABILTIES 110

It is that Simple.
(S – I) + (T - G) + (M - X) = 0
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miw
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Sydneyite
8 Aug 2013, 04:18 PM
Having said that, I also think it is quite possible that a bank may choose to deploy excess reserves as it sees fit on short term asset (FX, equities, commodities and so on) plays? Are there any rules / regulations that explicitly disallow this?
Basel I would say. You have to have Tier 1 capital (equity, essentially) of a certain percentage of risk-weighted assets. Your reserves are risk-weighted at 0 and have no equity requirement. As soon as you acquire risky assets, your equity requirement goes up.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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Elastic
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Thanks b_b for your patience.
I now realise what I was missing.
Only a rat can win a rat race.

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