Stablecoins increasingly replacing reserves for settlements… lol nobody needs any… RRR still 0% … btw MMT silent on this technological development … will allow Fed to continue to do their QT system reserve asset balance reduction ie “destroying money!” more than most people realize… they could probably go to zero reserves … monetarist brain dead zombies will think “no money!” … monetarist morons will be all bearish on their “M1!” or “M2!” gong to zero…
23 comments:
Stablecoins are hardly a technological development. They are just bank accounts with a lower 'know your customer' requirement. Remember that 'reserves' are a US concoction. The UK operated without any notion of reserves for hundreds of years until this century. Currently the Bank of England is trying to get back to that state of affairs.
The public nature of the stablecoin transactions are a new development… and Fed has used reeerve lending as basis to maintain policy rate… so if eventually reserves go away hypothetically FFR and IOR will go away with it…. What would govt then do to regulate the risk free rate?
Matt, I believe what Neil is referring to is a 0% reserve banking system adopted for years in UK, Canada and others. My understanding is that the CB creates reserves on the fly when needed to settle a net intrabank payment balance with the paying banks providing good assets as collateral. Neil will explain it better than I can. The US theoretically switched to a 0% system in 2020.
Yeah I get that but if reserves go to zero how is Fed going to set rate? Iow even commie MMT poobah Art degree academe people say “Fed should set overnight rate to zero!” iow Fed is still setting rates.,, just at zero… if no reserves than how set rates even at zero? Do they think the stables will set to zero ? Our monetary/settlement system is rapidly changing …
Hoe does BOE set rates if zero reserves now?
This from AI: “ The Bank of England (BoE) sets interest rates by applying Bank Rate to reserves that eligible banks hold with the central bank. Even with zero reserve requirements, banks still need balances to meet payment system settlement needs and act as a liquidity cushion, and these balances are what the Bank of England manages to influence money market rates and achieve its inflation target”… says they still use reserves in BOE system.., what they going to do if GBP stablecoins become used exclusively for settlements?
Mike used to cite a Fed study on reserves that came back and said the US system probably needed about 600B reserves to do settlements… that was a while ago so maybe it went up .. so even if it 900b now USDT has 170b and USDC has 72B … many others filing… even Trumps USD1 has 3B and it just getting started a few weeks ago… where is this going?
If Fed study correct and US system only needs about 900B for settlements and US has 32T in USTs issued then only a short period of time until stables buy only about 3% of UST float to take settlement function away from Federal Reserve System and Fed is finished.. meanwhile Powell expending all Fed resources defending fellow Fed DEI Art degree moron who can’t even fill out mortgage application from fraud charges.,,
This would save us from monetarist Fed artdegree morons from adding reserves “to lend out!” and causing crashes periodically …
Matt, regarding to the setting of the interest rate in a system with 0% reserve it's an interesting question, I think reserves do accumulate during the business day so interest rate is applied to intraday balances, Hopefully Neil can chime in.
Matt, on a second thought, I believe that in a 0% reserve banking system the Central Bank can set the short interest rate by applying it to the bank in need of "reserves on the fly" to settle a payment during the business day.
Going to be interesting… if eventually most/all settlements occur via stables and Fed loses control of rate setting function via FFR/IOR then we might see MMTs “natural rate is zero” come to fruition.., as stables compete …
"Stablecoins" are just bank accounts. They are pegged assets. That's what makes them 'stable'. A distributed ledger over a centralised doesn't change that - it just makes it more expensive and slower to clear the payment. So the question always is, where are you going to get the conversion assets when you are short and somebody else has cornered the market in them? Follow the chain up and you'll find it is the 'lender of last resort' - and they charge a fee. That's how the rate is set.
They’re not bank accounts they are stablecoins… they are a financial alternative to bank accounts… they may one day preclude the current function of reserve balances in the FRS which the Fed uses to regulate the risk free rate (monetary policy)..,
Neil you are trained to synthesize I am trained to discriminate… stable-coins are not bank accounts.,, that is an analogy..,.. ie figurative language… you can’t do this stuff via figurative language..,
Stablecoins work exactly like bank accounts. Otherwise they are not stable coins. The coin has to be exchangeable at par into another asset. Just like a bank deposit. "Coins" in a "wallet" are functionally identical to "credits" in an "account". It doesn't matter what sort of stabilisation system is used, pegging is what it always boils down to. If it doesn't the coin fails.
Neil, let's say they work as uninsured bank accounts, until they have an iron clad backstop like the government insurance in the actual bank accounts....
Use of analogies is a tip-off..
I’m with Neil.
First off, the FED doesn’t set the FFR based upon fiat. The only interest rate the FED sets by rule is the Discount Window rate and that is the true Lender of Last Resort Rate in the US.
So called stable-coins imply a conversion to some (assumed) sovereign currency. If some crisis happens, the presumed backstop is the assumed sovereign and its central bank.
The FFR is not a set rate, it’s managed on a semi-real-time basis… even if it’s need goes away because of stable-coins; the eventual backstop is still the US FED at the discount window – assuming you are correctly accounting all of the risks.
In reality, why is there a difference between the FFR and the Discount Window? To catch those small town bankers who are asleep at the wheel or who are true (small time and unknown) fraudsters? Those days are long gone.
IOR too is increasingly becoming the rate policy “tool”…
So what if you can make an analogy? That’s not what increasingly people are actually doing… real vs figurative… it’s the real that matters..
The author is making a few distinct points, some decent, some muddled:
Stablecoins are increasingly being used for settlement between parties, potentially reducing the need for reserves to flow through the Fed's settlement system
With RRR at 0%, banks already don't have a regulatory reserve requirement — so in some sense reserves are already "optional" in that narrow sense
QT is draining reserves, and the monetarist obsession with M1/M2 as causal variables misses what's actually happening
The implicit claim: if stablecoins handle enough settlement volume, the Fed could drain reserves further without disruption
Points 2 and 3 are basically correct and aligned with post-Keynesian / endogenous money thinking. Point 1 has some operational validity at the margin.
Where the post goes off the rails
The author conflates interbank reserve requirements with the settlement function of reserves — these are different things.
Your rebuttal is exactly right: stablecoins don't eliminate the need for reserves, they relocate where the reserve question lives. The stablecoin issuer (Tether, Circle, etc.) holds reserves — typically in T-bills and bank deposits — to back the coins. When a stablecoin holder ultimately exits into dollars, goods, or another financial asset, that settlement still runs through the banking system, which still requires reserve balances at the Fed to clear.
The deeper point is that stablecoins essentially create a parallel payments layer that sits on top of the reserve system, not outside it. The reserve demand doesn't disappear — it concentrates at the issuer level rather than being distributed across many banks.
The MMT jab
Probably fair but also a little lazy. MMT's reserve accounting and the state money / tax-driven demand framework doesn't really make strong claims about which instruments circulate as means of payment. Stablecoins denominated in dollars are still dollar-denominated liabilities — the state money unit of account is intact. MMT being "silent" on stablecoins is just a lag in the literature, not a theoretical contradiction.
Bottom line for your framework
From a NERF / reserve-flow perspective: stablecoin growth could theoretically reduce the velocity of reserve recycling through the interbank system, but as long as dollar-denominated stablecoins exist, there's a reserve anchor somewhere. The Fed's ability to drain reserves via QT isn't really a function of stablecoin adoption — it's a function of the demand for reserves to support settlement.
The "monetarist zombie" point is correct — M1/M2 are bad gauges — but that's been true since the 90s and has nothing to do with stablecoins.
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