Things seem to be calming down in financial markets, which could be interpreted in one of two ways. The benign interpretation is that a few weak banks failed, but the rest of the financial system is in decent shape. The paranoid interpretation is that crises occur in stages, with pauses between the key failures. So far, I lean towards the benign interpretation — there are some areas of weakness, but not a lot of visible credit failures in the real economy. Things will deteriorate as the cycle ages, but such is the fate of capitalist finance.
So aside from loan repayments outpacing new loans, QT destroys deposits because the Treasury is still having to fund principal payments to the Fed (including selling to non-banks) whilst the Fed isn't reinvesting all of the proceeds (fewer payments to non-banks)? I.E. deposits decline because of this new mismatch in transactions taking place between non-banks and the Treasury/Fed?
Hi Brian, when you say a bank buys UST by swapping them for reserves, do you mean the bank first creates a deposit to buy the UST, and then the Treasury transfers that deposit to the TGA, resulting in a swap by the bank (UST for reserves)? I mean, if a bank buys a corporate bond it creates a deposit, end of story right?
So aside from loan repayments outpacing new loans, QT destroys deposits because the Treasury is still having to fund principal payments to the Fed (including selling to non-banks) whilst the Fed isn't reinvesting all of the proceeds (fewer payments to non-banks)? I.E. deposits decline because of this new mismatch in transactions taking place between non-banks and the Treasury/Fed?
Hi Brian, when you say a bank buys UST by swapping them for reserves, do you mean the bank first creates a deposit to buy the UST, and then the Treasury transfers that deposit to the TGA, resulting in a swap by the bank (UST for reserves)? I mean, if a bank buys a corporate bond it creates a deposit, end of story right?