Treasury has been accruing Reserves in the General Account to record high levels... here on Tuesday the account closed at $958B:
A few thoughts on this new policy:
Looks like what SOT Mnuchin has worked out is that he is allowing the Fed to acquire assets with new Reserves BUT he is "draining" them from the Depositories by increasing the TGA $4$ with what the Fed is doing and protecting the Depository System's Leverage Ratio from a catastrophic collapse...
Its actually kind of a nice work around quick fix.. its a good way to get thru this and save the regulatory reform for later... so we should see the TGA increase just track the increase in the Fed H.4.1 as Fed adds Reserves...
Then he will probably just keep the TGA elevated until the Fed programs start to roll off.... he will just bring the TGA down at the same time the Fed brings the H.4.1 down $4$....
I dont think we have to worry about "debt ceiling" until 2022 sometime... so SOT can just issue as many USTs as he has to to offset the Fed Reserve add during this virus shutdown causing a lot of liquidations in shares and bonds...
Its not fully ideal and we should expect some volatility (perhaps some short term bearishness from time to time as TGA may fall from day to day) but I think SOT has it figured out enough to avoid GFC2 for now... its not a bad play...
Fiscal is starting to accelerate but it appears SOT is not going to let the TGA drop it appears he is going to increase issuance to keep the TGA elevated even while net withdrawals increase...
We need to monitor this to make sure the TGA doesn't drop... it would be catastrophic.. or if we see the TGA keep increasing beyond Fed Reserve additions it would then add additional support to the Depository System which seems like it is right on the edge of regulatory limits...
We have to see which way it goes from here... up, down or unchanged...
TGA bottomed on Friday March 20th at 388B... Stock market then bottomed Monday March 23rd.... now TGA is at 958B so SOT has drained about $600B since market bottom on March 23rd....
Equity prices have bottomed in response...
Now last 2 days the fiscal finally coming in... nobody else knows that...and importantly SOT seems to be 'sterilizing' the fiscal via the TGA so no harm there...
Fingers crossed... not a recommendation....
14 comments:
How does Mnuchin just take out reserves from private banks and put into the TGA? Like what is the procedure for doing this? Anyone else would be rather concerned if an asset account of theirs just got suddenly reduced (asset from bank's pov). Does the tsy have a corresponding liability acct (liability account from the bank's pov) that the government is just transferring to their TGA, something like the TT&L accounts, ie the tsy is just transferring their own funds from their own accounts in private banks to their TGA at the Fed? (But I had read the govt did away with TT&L accounts after the GFC, I'm unsure if that's true though) Sorry for the question being rather rambling..
“ How does Mnuchin just take out reserves from private banks and put into the TGA?”
US Treasury issues Treasury securities (Bills/Notes/Bonds)... Treasury increases the rate of issuance...
Asset is reduced but also a Liabilty is reduced in the same transaction ... so (A-L)/A is increased ... is adjusted up and away from regulatory minimum...
TTLs not used for same reason, if Treasury eg used ttls now, and xferred the $1T in the TGA into ttls,(by ceasing issuance of UST securities) the whole thing would crash... this is why back when they used the TTLs and Treasury would get into a surplus it eventually causes a recession... the surplus was stored at Depositories (UST bonds in net redemption under surplus) and would retard credit creation... probably that is what caused the big crash blamed on LTCM in late 90s... we were in surplus late 90s...
OK, I'm thoroughly confused now.
"Asset is reduced but also a Liabilty is reduced in the same transaction ... so (A-L)/A is increased ... is adjusted up and away from regulatory minimum..."
Ok, I get the math of that, if A and L go down an equal amount the ratio goes up, but why is an asset and a liability both reduced?
If a bank buys a t-bond, it loses x amount of reserves but gains x amount of treasuries, where do liabilities come into play?
If a bank customer buys a tsy, their deposit account goes down but the tsy account goes up. The bank's reserves went down but didn't a different asset account go up?
Previously you explained
"So if Fed buys USTs, they increase both A (Reserve Assets) at the Depositories and L (Deposit Liabilities) at the Depositories... former USD savers in USTs are left with USD savings in bank deposit accounts... (no figurative language)
the two Accounting entries at the Depositories when Fed does asset purchases are credit Reserve Assets (LHS) and debit Deposit Liabilities (RHS)... (no figurative language)"
What they're doing currently is the opposite of that.. I just don't quite get where the liabilities come into play.
" but why is an asset and a liability both reduced?"
Double entry accounting... each entity in the transaction has to exhibit a debit transaction (the LHS) and a credit transaction (the RHS)...
For banks the transactions are
Debit Reserve assets by negative X and credit Deposit Liabilities by negative X...
So the transaction balances...
Sure, but why are liabilities involved at all, if you decrease one asset acct by x and increase another by x, then stuff stays balanced with no liabilities necessary.
Which liability account?
To a bank, your deposit balance is a Liability... its your Asset... but the banks Liability...
So if you have USD balances in a savings account at a bank and you decide to instead put the USD into a UST securities account, you tell your bank to buy you a UST security and the bank has to do a Debit and a Credit so the transaction balances for them...
So say you want to buy 1000 USD of a 90 day UST security and you tell your bank to buy you a $1000 of UST bills...
Bank:
Debit Reserve Assets for -1000 (LHS) and Credit Deposit Liability for -1000 (RHS)
banks assets reduce by 1000 and bank liabilities reduce by 1000
You:
Your assets and liabilities remain unchanged
You Debit Bank Deposits by -1000 and Debit your UST Securities Owned by +1000
Your assets remain unchanged... USD just in different accounts...
So I buy a tsy, the bank's books look like
Assets | Liabilities
---------------------------
-100 reserves| -100(my deposit)
+100 tsy | +100(my tsy)
and the tsy's books are
Assets | Liabilities
---------------------------
+100 reserves| +100 bonds
or if the bank itself by a tsy
Assets | Liabilities
---------------------------
-100 reserves|
+100 tsy |
?????
30 Second Bachelor of Science Accounting Degree: "Debit means on the left and Credit means on the right..."
(there is really a bit more to it....)
the system stripped out all my pretty whitespace
here:
So I buy a tsy, the bank's books look like
Assets | Liabilities
---------------------------
-100 reserves| -100(my deposit)
+100 tsy | +100(my tsy)
No the bank washes their hands of you... if you buy a treasury THEY ARE YOURS... NOT the banks...
your bonds are THE US TREASURY'S liability then...not the banks the banks are OUT OF IT...
The bank transaction is just this part of what you wrote:
So I buy a tsy, the bank's books look like
Assets | Liabilities
---------------------------
-100 reserves| -100(my deposit)
Ah, bingo, my error illuminated. Perfect. Thanks! Much appreciated.
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